IQVIA Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 10, 2023

There are 11 speakers on the call.

Operator

And gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA 4th Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer As a reminder, this call is being recorded. Thank you.

Operator

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.

Speaker 1

Thank you. Good morning, everyone. Thank you for joining our Q4 2022 earnings call. With me today are Ari Boosby, Chairman and Chief Executive Officer Ron Bruleman, Executive Vice President and Chief Financial Officer Eric Sherbit, Executive Vice President and General Counsel Mike Fedock, Senior Vice President, Financial Planning and Analysis and Gustavo Perron, Senior Director, Investor Relations. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast.

Speaker 1

This presentation will also be available Following this call, in the Events and Presentations 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, we'll 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 ks 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.

Speaker 1

I would now like to turn the call over to our Chairman and CEO.

Speaker 2

Thanks, Vinik, and good morning, everyone. Thanks for joining us today to As we close 2022, we are very proud of what we've achieved at IQVIA. It was a record year for our R and D business. We achieved bookings of $10,800,000,000 which was the highest ever. Our backlog stands now at a record $27,200,000,000 and the business added over 275 New customers in the year.

Speaker 2

We improved access to clinical research. We've expanded our decentralized Clinical trial capabilities by launching the 1st self collection safety lab panel for U. S. Clinical trial participants in collaboration with Tassos. Our DCT program achieved GDPR validation in Europe, marking the first time a DCT offering received this data privacy validation.

Speaker 2

And our connected devices business We added 50 new customers, including wins with 2 top 10 pharma companies. We made significant advancements as well in our real world business. We increased the number of our active data sources by more than 30% across more than 50 countries, and we enhanced access to real world data for European and U. S. Regulators through our partnerships with the European Medicines Agency and the Real World Alliance.

Speaker 2

We expanded our digital marketing capabilities with the acquisition of Lasso Marketing, which offers a technology purpose built for health care marketers to execute digital campaigns. We deployed capital of $3,700,000,000 during the year. This included $1,300,000,000 in acquisitions, $1,200,000,000 in share repurchase, dollars 700,000,000 in CapEx and repayment of $510,000,000 of debt. At the same time, we were able to reduce our net leverage ratio to 3 0.45 times adjusted EBITDA. 2022 also marked The end of our Vision 22 3 year strategic plan.

Speaker 2

No one could have predicted the volatile macro environment we would have to operate in during this period. Despite the many headwinds we have faced since 2019 when we set these goals, We, in fact, exceeded our Vision 2022 goals. I am proud of the resilience, resourcefulness And the success and creativity that our employees around the world demonstrate every day in support of IQVIA's mission. It is these attributes that allowed our company to deliver on the commitments we made to you in 2019. As you know, since the beginning of 2022, the industry has been reporting a slowdown in demand for clinical and commercial services caused by reductions in biotech funding as well as the higher interest rate environment and macroeconomic uncertainty.

Speaker 2

As we've discussed before, while we've, of course, seen anecdotal evidence of these concerns, we, at IQVIA, We remain confident that the fundamentals of our industry and the demands of our clients remain healthy. And in fact, we remain confident in our ability to deliver on our 2025 goals. As we begin 2023, there are more molecules in development than at any other time in history. Our RFP flow was up 13% for the full year. We, in fact, saw acceleration in Q4 to 22%, with double digit growth in all three segments, Large, Midsides and EBP segments.

Speaker 2

Our net new business reached a record $3,100,000,000 in Q4, which is up 29% versus prior year. For the full year, we achieved bookings of $10,800,000,000 despite the large COVID bookings we had in 2021 that didn't repeat in 2022. And yes, in our commercial business, while we are Seeing some short term fluctuations in discretionary spend categories, such as, for example, consulting, Demand for our commercial services nonetheless remains on a favorable growth trend. Finally, Let me just acknowledge and congratulate our employees around the world for the nice recognition the company received last week. IQVIA was named to Fortune's list of the world's most admired companies for the 6th consecutive year.

Speaker 2

Importantly, once again, we So ranked number 1 in 7 out of 9 categories, including innovation, people management, Use of corporate assets, social responsibility, quality of products and services, Global competitiveness and long term investment value. Turning now to the results for the quarter. Revenue for the Q4 grew 2.8% on a reported basis, 7% at constant currency Compared to last year and excluding COVID related work from both periods, we grew the top line 10% at constant currency On an organic basis, 4th quarter adjusted EBITDA increased 11.1%, reflecting our strong revenue growth and ongoing cost management discipline. 4th quarter adjusted diluted EPS $2.78 grew 9%, driven by our adjusted EBITDA growth. Few highlights of business activity this quarter.

Speaker 2

In our technology business, IQVIA recently entered into a milestone agreement with Alibaba Cloud to collaborate in China. Through this collaboration, IQVIA will be the 1st company to make its sales force based products available on Alibaba Cloud and the only life sciences provider to have a full sales force based ecosystem of products hosted locally and designed to be compliant with China's data residency and privacy regulations. Through our partnership with Alibaba Cloud and Salesforce, IQVIA will continue to extend the OCE suite, delivering innovative capabilities tailored to meet China's specific market needs. As you know, IQVIA's Human Data Science Cloud offers clients a combination of extensive data networks, data integration and embedded intelligence, all of which help our clients deal with the challenge of increased data complexity and volume. The top 10 pharma awarded IQVIA our largest ever commercial managed services deal, where we will take responsibility for managing the end to end commercial analytics for all their commercial brands globally.

Speaker 2

Personalization of care is becoming a focus of our customers' commercial strategies. This quarter, IQVIA was awarded a major patient support program by a top 10 pharma for their kid cardiology product, displacing the incumbent vendor and once again validating IQVIA's uniquely differentiated integrated domain expertise, services and technology platform. As I previously highlighted, demand from our EBP customers has remained high, despite the funding levels returning essentially to pre pandemic levels. As an example, A U. S.-based emerging biopharma company recently selected IQVIA to be their end to end clinical to commercial partner.

Speaker 2

IQVIA was selected due to the breadth of capabilities, our domain expertise, strong resources and technologies such as OCE. IQVIA will support all aspects of their first commercial launch, as well as provide clinical trial services for their future indications. In another example, Biostage, which is a biotech company developing regenerative medicine treatments, Selected IQVIA to manage its first clinical trial of their esophageal implant products. Current treatment options for patients diagnosed with esophageal cancer result in only 20% survival at 5 years. In the first use of the implant, the trial demonstrated that the product was able to successfully regenerate tissue to restore the functionality of the esophagus.

Speaker 2

IQVIA was selected due to our dedicated gastrointestinal team and our ability and expertise running the most complex cutting edge cell and gene therapy trials. Within our NDS, we also signed a long term collaboration with Clalit, the largest health services provider in Israel, to launch the 1st prime site in the region. The collaboration combines IQVIA and Clalit's capabilities in clinical trial delivery, Real world research data and genomics. Trelit operates a network of 14 hospitals and more than 1600 primary care clinics with special expertise in oncology, pediatric rare disease and genomics. In oncology, which remains the largest therapeutic area for R and D outsourcing, We continue to experience strong double digit year over year growth in bookings.

Speaker 2

As an example, We expanded one of our preferred partnerships with a top global pharma, which awarded IQVIA a large early and late stage trial in multiple oncology indications. We were selected because of our analytics to optimize protocol development, So overall, the R and D business continues its strong momentum. You saw we achieved new bookings of $3,100,000,000 In the quarter, the highest in our history, this translated into a quarterly book to bill of €151,000,000 including pass throughs And excluding Parseus, the business delivered almost $2,000,000,000 of total net new business in the quarter with a book to bill ratio of 1.30. For the full year, our contracted book to bill ratio was 1.36, including pass throughs, and 1.33, excluding past rooms.

Speaker 3

I will now turn it over to Ram for more details on our financial performance. Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. 4th quarter revenue of 3,300,000,000 excuse me, $739,000,000 grew 2.8% on a reported basis and 7% at constant currency. In the quarter, COVID related revenues were approximately $190,000,000 which was down about $150,000,000 versus the Q4 of 2021.

Speaker 3

In our base business that is excluding all COVID related work from both this year and last, Organic growth at constant currency was 10%. Technology and Analytics Solutions revenue for the Q4 was $1,499,000,000 up 0.2% reported and 4.7% at constant currency. Excluding all COVID related work, organic growth at constant currency in TAS was 7%. R and D Solutions 4th quarter revenue of $2,058,000,000 was up 5.9% reported a 9.3% at constant currency. Excluding all COVID related work, organic growth at constant currency and R and D was 14%.

Speaker 3

Finally, contract sales and medical solutions or CSMS 4th quarter revenue of $182,000,000 declined 7.1% reported, but grew 2% at constant currency. Excluding all COVID related work, organic growth at constant currency in CSMS was also 2%. For the full year, revenue was $14,410,000,000 growing at 3.9% on a reported basis And 7.8 percent at constant currency. COVID related revenues totaled approximately $1,000,000,000 for the year. In our base business, again that's excluding all COVID related work, organic growth at constant currency was 13%.

Speaker 3

For the full year, Technology and Analytics Solutions revenue was $5,746,000,000 up 3.8% recorded an 8.7% in constant currency. Excluding all COVID related work, organic growth at constant currency in TAS was 10% for the year. Full year revenue in R and D Solutions was $7,921,000,000 growing 4.8% reported and 7.7% in constant currency. Excluding all COVID related work, organic growth at constant currency and R and Ds was 17%. Full year CSMS revenue was $743,000,000 which was down 5.2% reported, but grew 2.7% at constant currency.

Speaker 3

Excluding all COVID related work, organic growth at constant currency in CSMS was 4% for the year. Now let's move down the P and L. Adjusted EBITDA was $920,000,000 for the 4th Quarter representing growth of 11.1 percent, while full year adjusted EBITDA was $3,346,000,000 which was up 10.7% year over year. 4th quarter GAAP net income was $227,000,000 and GAAP diluted earnings per share was $1.20 Full year GAAP net income was $1,091,000,000 or $5.72 of earnings per diluted share. Adjusted net income was $524,000,000 in the 4th quarter and adjusted diluted earnings per share grew 9% to $2.78 For the full year, adjusted net income was $1,937,000,000 and adjusted diluted earnings per share was $10.16 up 12.5% year over year.

Speaker 3

Now as Ari reviewed, R and D Solutions delivered another outstanding quarter of bookings. Our backlog at December 31 stood at a record $27,200,000,000 which was up 9.6% year over year on a reported basis and 11.6% adjusting for the impact of foreign exchange. Without that impact of foreign exchange year over year backlog would have been about $500,000,000 higher. Full year net new business increased 10,800,000,000 dollars growing 6.2% year over year on a reported basis, it increased to $10,800,000,000 I should Growing 6.2% year over year on a reported basis despite the significant amount of COVID bookings we had in 2021 that didn't repeat in 2022. Okay.

Speaker 3

Reviewing the balance sheet, as of December 31, cash and cash equivalents totaled $1,216,000,000 And gross debt was $12,747,000,000 and that resulted in net debt of $11,531,000,000 Our net leverage ratio ended the year at 3.45 times trailing 12 month adjusted EBITDA. 4th Quarter cash flow from operations was $560,000,000 and CapEx was $171,000,000 which resulted in free cash of $389,000,000 for the quarter. Now as we shared on the last earnings call, early in the Q4, we $510,000,000 of variable rate U. S. Dollar term loan that was scheduled to mature in early 2024.

Speaker 3

At the end of the year, we entered into a $1,000,000,000 or $1,000,000,000 of Floating to fixed interest rate swaps to further limit our exposure to changes in interest rates and with these changes our debt structure at year end with 66% fixed and we expect this to drop to about 58% fixed at the end of Q1 when as you know we have A $1,000,000,000 swap expiring. December 31 Mark the end of our Vision 2022 3 year plan and as Ari mentioned, we exceeded our commitments and here are a few highlights. We achieved a compound average growth rate for revenue of 9.1% reported and 10.2% adjusted for the impact of foreign exchange. This achievement exceeded the high end of our goal range of 7% to 10%. Our 3 year CAGR for adjusted EBITDA was 11.7 Exceeding our goal of 8% to 11%.

Speaker 3

And for adjusted diluted earnings per share, the average growth rate was 16.7%, consistent with our goal of double digit growth. Finally, our net leverage ratio exiting 2022 of 3.4 times Okay. Let's turn now to 2023 guidance. For the full year 2023, we Expect total revenue to be between $15,150,000,000 $15,400,000,000 representing year over year growth of 5.1% to 6.9%. This revenue growth includes about 100 basis points of contribution from M and A activity and a very slight FX tailwind of approximately 10 basis points versus the prior year.

Speaker 3

Adjusting for the COVID related work step down, which we anticipate to be approximately $600,000,000 The contribution of acquisitions and the FX tailwind, our guidance implies 9% to 11% underlying organic revenue growth at constant currency. Our adjusted EBITDA guidance is $3,625,000,000 to $3,695,000,000 or growth of 8.3% to 10.4%. Our adjusted diluted EPS guidance is $10.26 to 10.5 Our EPS guidance includes about $615,000,000 of interest expense, just under $550,000,000 Operational D and A, an effective income tax rate of approximately 21%, which is about a point higher than it otherwise would have been because of the increase in the UK corporate tax rate from 19% to 25%. And finally, our EPS guidance assumes an average diluted share count slightly above 190,000,000 shares. Adjusting for the year over year impact of the one time step up in interest rates and the higher UK tax rate, Our guidance implies adjusted EPS growth of 11% to 14%.

Speaker 3

This guidance assumes about $2,000,000,000 of cash deployment split evenly between acquisitions and debt retirement. Regarding the latter, we expect to retire remaining term debt During March 2024 towards the end of the year, that is the end of 2023. Based on these assumptions and our guidance, our net leverage ratio should drop to below 3 times adjusted EBITDA by the end of 2023. Finally, our guidance assumes that foreign currency rates as of February 8 continue for the balance of the year. Now, I know there are a lot of moving pieces in our guidance.

Speaker 3

So let me share some additional color on the revenue and adjusted EPS dynamics in 2023. As I mentioned earlier, we anticipate that COVID related revenue will Stepped down by approximately $600,000,000 versus 2022. And I should highlight that about 40% we project revenue to grow between 9% 11% organically at constant currency, excluding COVID related work. As I also mentioned previously, our full year guidance includes about 100 basis points of M and A contribution and a very slight tailwind from foreign exchange of 10 basis points. Now that said, it's important to point out that we will actually experience a headwind from FX in the first half.

Speaker 3

Now at the segment level, we expect TAS Revenue growth to be 6% to 8% reported. This includes a year over year step down in COVID related work. Underlying organic growth for TAS that is adjusting for the step down in COVID work, FX and acquisition impacts will be 7% to 9%. R and D revenue will grow 5% to 7% reported. This reflects an even more significant year over year step down in COVID related work.

Speaker 3

Underlying organic growth for R and D S, again adjusting for COVID related work, FX and acquisition impacts, will be 10% to 12%. And finally, in CSMS, revenue growth is expected to be flat reported and approximately 2 percentage points Organic excluding COVID related work and FX impacts. On adjusted EPS, we will experience The year over year impact of the step up of interest rates and an increase in the UK corporate tax rate that I mentioned, Together, these non operational items are expected to impact growth by approximately 10 percentage points year over year. Excluding these items, we expect to deliver strong results with 11% to 14% adjusted EPS growth. It's important to note that the year over year increase in interest expense step up will be most pronounced in the first half, while the operational tailwind from our cost cutting and Productivity initiatives will be skewed towards the second half of the year.

Speaker 3

And these timing issues are relevant to our Q1 guidance. The Q1 will be the toughest comparison versus the prior year, primarily due to 4 factors. Number 1, the largest headwind from FX despite FX being a tailwind for the year. Number 2, The largest year over year COVID related step down. 3rd, the toughest interest expense comparison.

Speaker 3

And finally, 4th, The phase in during the year are the benefits of our productivity initiatives, which will increase as we progress through the year. As a result, in Q1, we expect revenues to be between $3,570,000,000 3.640 $1,000,000 or growth at 2.4% to 4.3% on a constant currency basis and 0.1% to 2% on a reported basis. Adjusted EBITDA is expected to be between $835,000,000 $860,000,000 which is up 2.8% to 5.9%. And finally, adjusted diluted EPS is expected to be between $2.35 $2.46 declining 4.9% to 0.4%. Excluding the step up of interest expense and the tax rate in the UK, We expect adjusted diluted EPS to grow between 6% 10% in the Q1.

Speaker 3

Again, our guidance assumes that foreign currency rates as of February 8 continue for the balance of the year. So to summarize, Q4 was another strong quarter capping a successful year. The full year revenue grew 13% organic at constant currency excluding COVID related work and adjusted EPS was up 13%. Underlying demand in the industry and our business remain healthy, with RFP growth Accelerating in Q4 and record bookings in R and Ds. During 2022, we repurchased almost $1,200,000,000 of our shares and retired 500 $1,000,000 of variable rate term debt while reducing our net debt leverage ratio to 3.4 times.

Speaker 3

We exceeded our Vision 2022 commitments despite the volatile macro environment. And lastly, we're projecting strong Operating performance again in 2023 with 9% to 11% organic revenue growth at constant currency excluding COVID related work an 11% to 14% adjusted EPS growth excluding non operational headwinds. And with that, let me hand it back over to the operator for Q and

Operator

A. And the number 1 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 and A roster. Your first question comes from the line of Dan Leonard with Credit Suisse.

Operator

Your line is

Speaker 4

open. Thank you. So I'll just start off. Ari, you mentioned continued confidence in the 2025 goals. You're guiding 5% to 7% of revenue growth in 2023.

Speaker 4

I think the CAGR through 2025 was a double digit number. So could you bridge from the 2023 result to the acceleration anticipated thereafter? Thank you.

Speaker 2

Yes. Thank you very much, Dan. Look, when we say we are on The same trajectory we were on when we set our 25 goals, it continues to be true. Operationally, obviously, we assumed foreign currency rates that were different. I think we lost, I don't know the exact number any longer, but we probably lost $500,000,000 in revenue just in 2022, So to FX.

Speaker 2

So look, I don't know about revenue. It will be close, Maybe not 20%, but it will be close. On EBITDA and on earnings per share, we're very confident that we will achieve those goals. Again, what we are facing, first of all, you're seeing that EBITDA is certainly clearly on that trajectory, Unchanged despite everything else. And EPS is just, as we said in our introductory remarks, a One time step up that hopefully you want to replicate.

Speaker 2

If anything, I think the world expects rates to either stabilize or start Clining afterwards in 2024 and 2025. So that will be even a tailwind. But certainly, the step up is one time. And after that, we We expect to resume very strong double digit as we experienced. I remind you, we delivered over 16% compound Earnings per share rate growth rate over the 2022 3 year period.

Speaker 2

Thank you.

Operator

Your next question is from the line of Eric Coldwell with Baird. Your line is open.

Speaker 5

Thank you. Good morning. So I wanted to hit on R and D's bookings first. Difficult to ask the question in a way that's easy to answer, but I'd like you to step back and think about your 4th quarter strong bookings, your 2022 bookings. Do you have a sense how much was, If you will, normal opportunities versus, say, competitive takeaways, rescue wins or incremental share capture that you might have gained through Higher hit rates through the year.

Speaker 5

Just trying to get a sense of

Speaker 6

where the market was

Speaker 5

versus what IQV did Additionally, on top of that, if that makes sense.

Speaker 1

Yes. Yes. Well,

Speaker 2

It's really hard because we don't have the perspective of time and clear data from competitors yet. We will know a little bit more after we read your report on how CROs did When everyone has reported, so I'm looking forward to that, Rene. But, look, we've been on a momentum Certainly, since the merger to gain market share, and I think it's clear that we have been gaining market share. We know we are getting market share because we are displacing competitors. I don't think RESCUE studies played a role.

Speaker 2

Of course, we have the anecdotal Here and there, but not more or less than in history. And Things happen and the study doesn't go well with a certain approach. And at some point in time, the sponsor decides that they want to switch As CROs, it's a very difficult and cumbersome exercise and no one wants to do that. But it does happen. I don't think it's happened more than in the past, unless you include in rescue studies that were at the beginning And that for a reason or another response, we decided to switch CROs that I would include in the category of market share gains.

Speaker 2

The market continues to be strong. The underlying demand, all the indicators that we see and we kept repeating it ad nauseam During 2022, despite everyone else being on the other And suggesting that the world was falling apart because of Biotech funding levels returning to what I consider to be very Strong levels, but nevertheless lower levels than they were during the pandemic. We haven't seen any Delays in decision making, we haven't seen any signs that demand was slowing down, quite the opposite. I mentioned that our RSP flow is very strong. I can give you even more.

Speaker 2

I've got some more data here on the If you'd like, the

Speaker 5

answer would always be yes.

Speaker 2

We'll take more data. So I kind of I guess that. Again, overall RFP flow was very strong. We said 13% for the full year and over 20 In the Q4, so if anything accelerating, our qualified pipeline at the end of the year was up over 20%. That is really the pipeline that we consider real.

Speaker 2

The awards, by the way, which is kind of An early indicator of what will happen in the future awards, I remind you, is stuff that we have essentially won, But we have not yet contracted for and not booked for the awards or up actually, the Absolute number, the Q4 in the Q4 was the highest ever, and it was up 9% year over year. We mentioned the book to bill ratios, the backlog, which itself is up just under 10% Year over year and 11.6 percent excluding FX. So I mean, I don't know What else to share? We've got hard solid numbers here that support healthy, healthy demand for clinical trial services. And then on top of that, you can add our market share gains, and I think that explains it.

Speaker 5

And Ron, if I could just Ron, if I could just have one quick technical item here. Can you confirm that there are no Share repurchases built into the guidance and I know you've talked about the $2,000,000,000 capital deployment in the split between That's an M and A, but is there any current thinking on taking some advantage of that authorization that you have on the repurchase side?

Speaker 3

I can confirm that there is no share repurchase baked into our guidance. We're right now assuming $2,000,000,000 of capital deployment split evenly between M and A And debt reduction, look, might we repurchase some shares during the year? Sure. That's our Our assumption going in and the guidance that we gave is that we're not and we'll devote the capital to debt reduction instead, but

Operator

Your next question is from the line of Ann Samuel with JPMorgan. Your line is open. And Samuel O with JPMorgan, your line is open.

Speaker 2

Okay. Next question, please.

Operator

Your next question is from Justin Bowers with Deutsche Bank. Your line is open.

Speaker 7

Hi, good morning, everyone. Just pivoting from RDS. Ari, you talked a lot about Some strong momentum in commercial managed services. Just want to wondering if you could expand about some of the strength there? And also is that isolated just in TAS or is that also in the CTMS business?

Speaker 2

You mean CSMS, right? Sorry, CSMS. Yes. No, I mean, CSMS is a relatively slow grower. So I mean, I'll put that aside.

Speaker 2

The TAS growth has been consistent. We're pleased obviously to see that it continue to grow. You saw that excluding the COVID step down and we had a fair, I would say, a large share of COVID work During the pandemic, so that's stepping down and excluding that, we had growth of 7% in Q4 and 10% for the full year. Quarter to quarter, it could vary. I think the first half It was more or less around 10% growth.

Speaker 2

3rd quarter was 12%. We had the activity that was That came in earlier than we thought and the 4th quarter was 7%. So overall, very good growth in Q4, we guided 7% to 9% for next year. Again, this is consistent, again, excluding COVID acquisitions and FX, It is consistent with the underlying operating momentum that we've had in TAS And that we've guided to, which is high single digit. So the real the fast growers in this Businesses are technology and real world, and that's where I mentioned a few Very significant achievements and a few significant awards with clients.

Speaker 2

Both continue to be strong drivers of growth As we continue to find innovative ways to utilize real world evidence for clients and deploy more of our technology solutions. The piece of the business that is perhaps more exposed To the economic wins and budget expansions or restrictions by clients is The more discretionary spend like analytics and Consulting work, we saw usually at the end, I must just to share a little bit more color, We usually have at the end of the year, an acceleration in this business and we didn't See that in December. And the reason for that is historically clients like to spend more Towards the end of the year and they do kind of last minute purchases and they kind of Utilize our budgets, if you will, and we didn't see that so much this year. And again, I don't know whether So short term and more discretionary. But the underlying growth is driven by real world And technology, both of which are longer term decisions and are not so subject to cyclical Economic changes.

Speaker 2

And then of course, the last piece is the data business, which is flat and continues or flat to Low single digits, 1 ish percent, and that continues where it is. And when you do the math, basically, that's what yields your high single digit growth for the segment. Thank you for your questions.

Operator

Your next question is from the line of Jack Meehan with Nephron. Your line is open.

Speaker 6

Thank you. Good morning. So now you sound bullish around the funding trends that you've seen over the last year. I wanted to ask about funding in a different way. Just What were you seeing in terms of cancellations around year end?

Speaker 6

Was there anything notable about that relative to kind of the last couple of years?

Speaker 3

Nothing.

Speaker 6

Short and sweet. Yes. Has there been any rumbling around restructuring at any of your important clients? I guess, just like how are you building Just sort of the macro into your outlook for the R and D segment this year?

Speaker 2

Okay. Once again, in terms of the demand, No signs that we can see that our clients are somehow delaying, Canceling, postponing, clinical trial development work that was planned before. So we don't see anything. No unusual cancellation activity, no unusual postponements, Nothing. We've been saying this essentially for 12 months exactly.

Speaker 2

In terms of factoring the macro environment, if you want to expand Question then that's a different discussion. We've got we are a large powerful ship Navigating extremely stormy waters. The engine continues to be very strong. That's the demand. And certainly, our operating momentum in our organization, but the wins in the form of Interest expense in the form of wage inflation, in the form of wars in Foreign theaters that affect our ability to do work in certain sites in the form of continued COVID issues in China, which affected delays, returned to normal operating mode in clinical sites.

Speaker 2

All of those and more These winds that I'm winds and stormy waters that I'm referring to that are Macro factors, some of which we can do something about, for example, wage initiatives by looking at maintaining and accelerating our cost cutting discipline, And we've launched to that effect towards the end of last year a new program to again bring forward many overhead rationalizations and Economies of scope and outsourcing and offshoring decisions that were scheduled to occur over the 2022 to 2025 planning period, and we are accelerating all of that into 2023. So as Ron mentioned, the benefits of those will begin showing towards the latter part of the year, but the work is ongoing. So that's how we are trying to address those Macro factors that are not that are somehow that we can offset with action on our side. With respect to interest, Shailesh, the one time step up in the interest expense, we're kind of limited in what We can do, but we certainly, as you saw, started reducing our debt levels and we entered into swaps. We are trying to address that in Capital Markets.

Speaker 2

We will probably, towards the end of the year, retire another $1,000,000,000 Of debt, the tranche that would normally turn out in 2024, We'll do that in the latter part of the year. And for now, as Eric reminded us, we do not have any share repurchase plan this year Because we're diverting our cash flow. Now if our cash flow is very strong and circumstances were to change, obviously, we will adjust Those decisions, but that's what we're doing to address the macro factors.

Speaker 3

Thank you

Speaker 2

very much, Jack. Thank you.

Operator

Your next question is from the line of Luke Sergott with Barclays. Your line is open.

Speaker 8

Hey guys, thanks. Can you one clean up here on the COVID. Can you give us a sense of the how you're expecting that to roll off in 1Q between the two segments between TAS and RDS, just from a modeling perspective?

Speaker 3

Yes. Jack, it's I think I said overall of the $600,000,000 COVID step down year over year, about 40% of it would be in Q1. There will be Fairly substantial impacts in both of the segments there. Yes. And I

Speaker 1

would say about a 3rd of the impact will be in CAS, jack and about 2 thirds in R and D. That's kind of how you should think about it by quarter and for the full year. It's It's about that, roughly.

Speaker 8

All right, great. Thanks. That's really helpful. And then lastly here on another front on the free cash flow. So I mean, I understand a ton of moving parts here for the year.

Speaker 8

But can you give us a sense of what you're targeting for 2023 and as a percentage of EBITDA conversion?

Speaker 3

We always talk about it as a percentage of adjusted net income and We target typically between 80% 90% free cash flow to adjusted net income. That's where we were for the full year 2022. And Look, the only thing I would caution on that is that in any given year, it could vary from that because cash flow is based on point to point of the balance sheet. It's not like An accrual concept or anything like that. So of course, you could be higher or lower.

Speaker 3

We were substantially higher than that in 20 21, and we're right in the range in 2022. And I would say just as a kind of A target you should think of us being in the 80% to 90% of adjusted net income range, but recognizing that We could deviate from that in any given year.

Speaker 8

All right. Thank you.

Operator

Your next question is from the line of Sandy Draper with Guggenheim. Your line is open.

Speaker 7

Thanks very much. A question for you Ari to sort of have you gaze near crystal ball a little bit Longer term because I know you're talking certainly to a lot more of the biopharma CEOs than I am. When I look back at Sort of what I heard out of JPMorgan, Davos, just other things around how pharma is looking at the next 3 to 5, even 10 years, Especially with the Inflation Reduction Act, I hear sort of conflicting messages from about are people going to invest more, Hey, we want to get away from or be more diversified and not so concentrated in 1 or 2 blockbuster Drugs and so we want to get more drugs out there. We're going to and so there's more trials we're going to pull back. I'd just love to hear what you're hearing or what you're thinking about, What your customers are looking at, not really from the economic perspective about the current macro environment, but with how their portfolios are, how concentrated they are in a few really big drugs and what the Inflation Reduction Act means.

Speaker 7

Would love to hear your thoughts on that. Thanks.

Speaker 2

Yes. Thank you. Yes, I mean, look, the Inflation Reduction Act, just Similar to what they decided to name it, it's very it's in flux Right now, there's a lot of work to be done in finalizing the details of the legislation. We actually spend a lot of time with our clients trying to explain to them what's in it. Not that we understand it entirely because many of the provisions, first of all, haven't been detailed enough Not specific enough, and we don't know how it's going to work, and a lot of it is still subject to negotiations.

Speaker 2

Many of the provisions anyway won't kick in until later in the decade. And Again, some parts of the legislations are undefined. Many of the rules and regulations are still under discussion. So Generally, the statements from pharma CEOs, when I speak to them about this is that It's harmful to innovation and to patients because anytime you start curbing The economics or you try to start curbing the economics for drug development, Even if it's long term and even if it's the effect, if any, before any other administration changes these things, It will be seen 15 years from now. It could, At least conceptually, you need pharma companies to decide, well, it's not as attractive, so I'm going to drop this program or that program when I Factor in different types of pricing and so on and so forth or reimbursements.

Speaker 2

But again, this is not how pharma works. Despite the bad press, pharma is motivated by healing people. And the R and D all of the R and D heads at pharma companies that I know and that My colleagues speak to day in and day out. Their motivation, what makes them come to work every day is they are going to come up with a drug to cure Pancreatic cancer and to cure breast cancer and to cure diabetes, etcetera, etcetera. So this is the underlying motivation And the model is predicated on pharmaceuticals doing good for society.

Speaker 2

So That's the notion that people are going to cancel a program because the economics don't look as attractive, yes, at the margins. That's a general observation. 2nd observation in my conversations with clients is that a lot And that's a trend that's independent of the Inflation Reduction Act. A lot of the focus is on trying to address More specific diseases, rare diseases, Subcategories within subcategories in oncology, I mentioned before, oncology is probably it is continues to be the largest and strongest Grower in our business in terms of the demand for clinical trial and drug development work. So That's just not going away.

Speaker 2

Until the diseases go away, which we all hope for, drug development is yet to stay and pretty much in the same model. Again, the focus on addressing previously Untouched. Obviously, much smaller markets, that continues. And that, as you know, plays to our strength and capabilities. So I mean, that's a little bit of color on my conversation.

Speaker 2

So yes, I mean, it's a general cloud and at a Conference like Davos, you could expect to hear such things, but in practice, it is not changing very much day to day how

Operator

Your next question is from the line of Elizabeth Anderson with Evercore ISI. Your line is open.

Speaker 9

Hi, guys. Thanks so much for the question. I was wondering if you could comment on sort of the degree Saying that you're sort of getting on new contracts and that are going into bookings and also sort of the degree of wage inflation you're currently Experiencing ITU labor force. Thank you.

Speaker 2

Okay. I'll take the second part of your question first. Yes, we are experiencing significant wage inflation. The skill sets that we are looking for are scarce and in high demand. We're looking for people who have healthcare expertise, who have data science expertise, We have software development expertise or a combination of all 3 and that these skills are in very high demand.

Speaker 2

Secondly, frankly, we are a hunting ground for competitors of all kinds In the healthcare sector, in the tech sector and in the data science sector. And as a result, we are compelled to raise our compensation programs and that is So you have the general inflation out there, plus reasons that are specific idiosyncratic to our business and to our company. Now I mentioned before that despite that, you can see that we are growing our margins. So We are addressing it and that's through essentially cost management programs, meaning we do more work In lower cost areas, etcetera. Now I lead into the first part of your question, which is pricing.

Speaker 2

Are we able to offset those cost increases with pricing generally in the commercial sector for shorter cycle Businesses theoretically, yes, and we are when we can, but it's always a negotiation with clients And it's a competitive market out there. You got a lot of smaller competitors who are fighting for the slice of the pie. And often, we got to defend against that. And so our pricing flexibility is limited. It does exist in theory on the commercial side.

Speaker 2

In R and D, I think for clinical trials, yes, of course, rates have to reflect What the labor cost is, and again, that's also subject to negotiation, but we do Transfer at least a portion of those wage raises to our clients in the form of rates that are applied to determine pricing for a clinical trial. But I remind you that the clinical trial business is a long term, A long cycle business, meaning that what we book today, which may reflect some level of price increase, Won't be realized into revenues until the next 1 to 5 years. So what we are delivering in revenue Today and tomorrow was sold several years ago, at different under different labor cost assumptions. So there is a delay, if you will, in the clinical trial business because of the long cycle nature of the business. There are contracts where we have escalation clauses for inflation, but they never envisioned the type of inflation that we are facing in some of the markets.

Speaker 2

So that's the picture on pricing. Thank you very much, Elizabeth.

Speaker 9

That's very helpful. Thank you.

Speaker 1

We'll take one more question.

Operator

Your final question comes from the line of Charles Rhyee with Cowen. Your line is open.

Speaker 10

Great. Thanks for taking the question. Maybe Ron, just I might have missed it, but when you talk about the impact to EPS from these buckets, can you kind of break down for us The relative contribution between the higher tax rate, interest expense, etcetera, that makes up sort of that delta on EPS growth? And then if you think about for this year, yes.

Speaker 3

For this year. Yes. Yes. Well, Look, the U. K.

Speaker 3

Corporate tax rate increase added about Expense in 2022, we told you about $615,000,000 in 2023. So you can do the math on that You know at 190 roughly 190,000,000 shares and figure out what the impact is. It's principally coming out of that. And that's why We excluded those two items and showed you that absent those are our EPS growth rate underlying operational was still Very strong double digit.

Speaker 10

And that assumes the debt pay down assumptions and Going into swap agreements or is that

Speaker 3

Yes. If you do those things according to

Speaker 10

the year.

Speaker 3

Yes. All that is baked into our assumptions.

Speaker 2

All right, great. Thank you.

Operator

I will now turn the call back over to Mr. Childs.

Speaker 3

Okay.

Speaker 1

Thank you everyone for joining us today. We look forward to speaking to you again on our next earnings call. Myself and the team will be available the rest of the day for any follow-up questions you might have.

Operator

This concludes today's conference call. You may now

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Earnings Conference Call
IQVIA Q4 2022
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