Good morning, everybody. Welcome to day two of the Barclays Global Healthcare Conference. I'm Luke Sergott, covering life science tools and diagnostics. It's my pleasure to have Ron Bruehlman from IQVIA, CFO, with us this morning. And obviously, thanks for making it.
Absolutely. Thanks for having me.
All right. So let's start off with the top-down macro, topic du jour, biotech funding you guys talked about. We're seeing the data start to improve there, but just kind of walk us through what you saw from RFPs on that side of the business, obviously smaller part, but just the good vibes that that's kind of bringing in through 1Q.
Right. Well, look, the first thing I would say is that, unlike some others, we never really saw a big effect from the downturn, if you will, in biotech funding. What we saw, of course, was it was a big uptick in 2020 and 2021 due to the COVID-related funding, and then it came back down to more normalized pre-pandemic levels. And we've seen growth off of that level, and we had growth, at least according to the sources that we follow, of emerging biopharma funding that was up double-digit in 2023 to over $70 billion for the year, and it seems like it's continuing fairly strong. So in our RFP flow and even going further back in our pipeline, it's been really very solid throughout. And you saw that in our bookings in 2023 where we consistently had a book-to-bill high 120s, low 130s.
I think 128 was our trailing 12-month book-to-bill for the entire year. A lot of that was driven by strength in EBP. It was stronger. The bookings growth was stronger throughout the year in EBP than it was in large and mid-pharma, and we expect that trend to continue. We're feeling good as we go into the year about the trends that we're seeing there and don't expect any fundamental change in the bookings or the RFP flow or the pipeline, at least so far as we can see that we have visibility to.
Just get a sense of on the RFP flow, just digging into that a little bit more. I want to talk about why you guys are so insulated. But from a large pharma and a biotech, just what does a normal RFP rate from large pharma look like in a quarter for you guys? And then talk about what that was up in the quarter, any trends that you're seeing.
Well, look, our overall RFP flow in the quarter, I believe, was up double digits, and it was strongest in the emerging biopharma sector, for sure. That's where we saw the strongest growth. But actually, in the quarter, it was up in both large pharma and emerging biopharma. Mid-pharma was down a little bit. But I wouldn't focus too much on any given quarter. Quarter- to- quarter, it tends to bounce around a lot, and it depends on the comparison that you have to prior year. I'd say about, well, call it a little less than a quarter of our overall revenues tend to be emerging biopharma, but the flow that we're getting, the bookings are somewhat higher than that because emerging biopharma is growing faster than that. And our RFP flow is even more weighted towards emerging biopharma than it is towards mid and large pharma.
That's just indicative of that's where the strongest growth is in the industry. We're still predominantly, in terms of revenue, a large pharma customer. Probably 60% of our overall revenues are large pharma and just over 20% in emerging biopharma, and the balance is midsize pharma. But the trend is definitely towards the faster growth among the smaller EBP companies.
Yeah. And that's part of it, it's a good segue into my question or topic about the top three CROs seem to be insulated from especially you guys, we're insulated from most of the downturn in biopharma or the biotech funding environment. Now that that's starting to turn, my feeling was that you guys, obviously mostly a large pharma company, more shifted in towards that leaned more into that segment. And then now as the funding cycle might start to turn, why wouldn't you if you were insulated from the downside, why wouldn't you be insulated from the upside? Talk about.
Well, I think the reason we were insulated from the downside, if you will, to a greater extent than some other companies is where we tend to participate, which is a little bit later stage, phase II and phase III. We don't do anything in the preclinical area, and we do comparatively little work in phase I, but comparatively little there. So we're tending to catch companies that already are well-funded and have good prospects for their molecules and are well along. And so I suppose in that sense, you don't necessarily see the volatility when you get a big uptick in funding and very early development work. We're not going to be as affected by that. But if you take a look at the overall backdrop, why are we taking more of that sort of business?
It's because of our capabilities in running the type of trials that emerging biopharma does, oncology trials, neurology, some of the more complicated immunology, some of the more complicated longer-cycle sorts of things. The great part about that too, and I'm sure I'll get the question a number of times today, is that tends to be full-service work rather than FSP work. FSP work is almost exclusively concentrated in mid and large pharma, and EBP is about as close to 100% full-service work as you can get. So if your overall point is, yeah, we don't go through the big ups and downs, I would agree with that. But I think overall, we as a company and even some of our large competitors are taking share in the smaller part of the market from some of the smaller CROs.
Yeah. That makes sense. And then a great lead into the FSP conversation. So the pendulum has been swinging more towards FSP over probably the last five years, as you guys have talked about. So more hybrid trials. Talk about the push there and what the reasoning is. And really, how has FSP for you guys changed? I imagine that the margin differentials, that gap has closed for what it was where it was just like, "Oh, we just need 1,000 bodies.
Well, look, the FSP right now represents about 15% of our overall R&DS revenue. If you look at just service revenues that exclude all the pass-through work, it's about 20%. It has been creeping up over time as large pharma has had a trend towards more FSP work away from full-service work. But it's a gradual shift that's happening. It's not a dramatic shift that's happening. And the partial offset to that is what I already mentioned, which is that EBP is growing R&D work at roughly twice the rate that large pharma is. So as we shift more towards EBP sort of work that's full-service, that's a bit of an offset to the trend we have towards FSP. And excuse me, yeah, towards FSP work.
The one thing I would caution about FSP is we found that over time, these trends don't tend to be. It's like a pendulum. You'll get a swing that'll happen over multiple years and then, towards, say, from full-service towards FSP, and then it'll swing back the other way. It's pharma trying to optimize their resources, optimize cost. I think sometimes there's an impression that pulling work in-house saves money to a greater degree than it actually does. It's harder to track what the costs are when you're doing work in-house versus when you sign a contract to outsource your full-service work. We think the pendulum will swing back the other way as clients realize that they can do the work more efficiently with CROs than they can in-house.
But for right now, we participate in both sectors, which is actually a change from when Quintiles and IMS merged. Quintiles was tending to eschew the FSP work in favor of full-service work, and you saw some weakness in their bookings back in the kind of 2015 timeframe right pre-merger as a result of that. And when we merged, we decided, "No, we're going to go after everything. FSP, full-service, doesn't matter. We'll do any in both.
No, that was.
Hybrid. As you mentioned, there are hybrid trials where you're doing some of each.
Yeah. So talk about how the FSP work has actually changed, how much more sophisticated it is now versus when it was, and type of that margin or incremental margin or contribution margin differential.
Well, look, FSP work is still largely you're renting CRAs and project leads and so forth to the pharma companies. But what we found is that we'll sign an FSP contract, and then the client will come back to us and say, "Oh, but we'd like you to do this X, Y, and Z as well. Help us out there," which are all components of what we would do in full-service work. And so you will end up picking up some margin as a result of that as you go through because you have to price more for the additional sophistication you're bringing. Now, of course, our clients would like to be able to have it be FSP pricing throughout, so we have to be very careful to make sure that we charge appropriately when we have change orders and the sophistication of the trial changes.
Look, FSP work is still comparatively low margin, and the pricing is keen on that. We prefer full-service work, but we're not going to walk away from FSP work even if it doesn't give us that hybrid margin bump.
Yeah. That makes sense. And as you think about pricing, right, and this has been a key topic of conversation, how much of the move towards FSP is a result of you talked about pharma trying to think they could do things a lot more cost-effectively. But how much of this is a result of the capacity constraints among the industry and the resulting pricing that you guys have been able to get?
I think what's implicit in your question is we've been getting premium pricing because of capacity constraints. And I wish that were the case, but I don't really think it's happened. It's still a competitive market out there. And I don't think there's a case that we've been able to charge we, the industry, has been able to charge a premium as a result of the capacity constraints. People are still hungry for business, the CROs, for full-service business, and they still go after it, and then they figure out how to staff it after the fact.
I think it's, once again, pharma companies looking at it and saying, "We think we can save if we manage the projects ourselves internally, and we're going to try to do that and drive down the outsourcing cost to the maximum extent possible." But what we find is even clients who say they're going towards full FSP, if you will, end up contracting out on a full-service basis for certain trials because they decide, "Look, we just don't have the expertise to be able to do a particular trial or the bandwidth to be able to do a particular trial." So that's why they'll still end up coming back to us.
In fact, one of the reasons we made the decision from the old Quintiles day to start producing or start going after FSP work was because, in many cases, our sponsors who will contract out a mix of FSP and full-service work will only give you the full-service work if you agree to do the FSP work as well. You have to play in both arenas.
Depending on the indication and the types of trials, that's perfect. Yeah, that makes total sense. So on the pricing environment, what are you seeing in the RFP market right now from competitors? Is there a potential headwind here on upcoming bookings from lack of pricing that you're able to get versus last year?
What I would say is that the FSP market is pricing is keen there, and we have to look for ways to try to improve margins there because you have to price very tightly on that. The full-service market, we haven't seen any degradation in pricing, and it remains pretty much as it was. We always will price conservatively or estimate our margins conservatively, and usually, we'll pick up a few hundred basis points between when we sign a contract to estimate the margins and what we actually complete at. It's a little tougher to do that in FSP because you have a lot fewer levers to pull. You have, okay, maybe you can try to get better utilization rates on your CRAs or have fewer supervisory people per CRA and do some things along those lines.
It's just, like I say, very many fewer levers to pull to improve your margins than there are on full-service work.
Yeah. On margins, I guess, as you guys are thinking about the year progressing, your guide for 1Q has a pretty big step down, more than what we've seen in season in the past. Kind of walk through the dynamics there. We're talking about pricing. We're talking FSP growth and negative mix. So what kind of levers do you have? What's the bridge from 1Q and then how that goes from 1Q all the way for the year?
I think there are two things I would focus on when you look at our Q1 margins, which are basically flat. We're implying for that's implied in our guidance for Q1. Then for the full year, you're looking at a guidance range of 30-50 basis points of margin expansion. Clearly, what's implied in that is we'll have better margin expansion in the out part of the year than we're expecting in Q1, which is the basis for your question. There are a couple of things to consider there. One is we have about $300 million of step down on COVID-related projects, and that's affecting our volumes more in Q1 and in the out quarters. The other thing is you still have the TAS business, some of the higher margin parts of the TAS business, and consulting and analytics where we're anticipating a second-half comeback.
In Q1, we still expect growth to be weak. There's a mixed impact there for sure. Also, we've initiated a lot of cost reduction programs, and the benefits of those tend to phase in over time. You can't, for instance, when you're reducing positions in certain parts of the world, you can't take the cost out immediately. It happens over a period of time, or there are things that you're doing that just, let's just say, automation projects and things of that nature that just take time to put in place. You're going to just naturally have greater benefits one, two , three quarters out than you're going to have in the current quarter.
So if you add all those together, the volume leverage, the mix, and the delayed benefits of some of our cost reduction programs, that would explain why we see margins being better in the back part of the year than in the front part of the year.
Gotcha. And on the TAS, on the mix side of it, kind of walk us through the, it seems like things are stabilizing for you there. Not ready to call the recovery or reflection, but the commentary seemed pretty, like, you're not seeing the headwinds that you've seen. Walk us through what you guys are hearing from customers and kind of the different dynamics that are going on within TAS across the discretionary spectrum.
Sure. Well, look, in Q4, we did see a little bit of recovery in the growth rate of the consulting and analytics, which was actually net negative in Q3 and very slightly positive in Q4 in terms of growth. So that was encouraging. We saw a little bit more of customers spending their budgets at the very end of Q4, which was a positive indicator. The pipeline is there, and it has been for a while. The question is when a customer starts spending against it. And a lot of what you're trying to glean from talking to customers is kind of their mood. What are they saying? And we see indications that they're going to loosen their purse strings going forward. And there's some reasons to expect they would.
We had a record number of drug approvals in 2023, and drug approvals tend to carry with them drug introduction, promotional spending, things that our customers want to do to make sure that when they launch their products, they get off to a good start. Those can be deferred and trimmed and so forth, but not indefinitely. We expect that to come back. We are seeing some indications based on pipelines, based on new drug introductions, based on conversations we're having with our customers that things should start coming back as we go through the year. But the way we build our plans is cautiously that it's a second-half sort of phenomena rather than a first half, and that you should see a gradual recovery as we go through the year. We're not expecting a sudden snapback.
We're expecting gradual recovery, kind of the opposite of what we saw in 2023 where we started out pretty good on the growth rates, and then they tailed off as they went through the year. We think they've bottomed, and they're going to come back up. There is a natural cycle to these things that we've observed over the years that having a cycle like this is not out of the ordinary at all. That's how we build our plans. That's what we expect to happen. It is a short-cycle business, so it's one of those things as you go through the year, you say, "Okay." As a CFO, I believe it when I see it.
There are a lot of good indicators there, but we have to see it come through, as opposed to the R&DS business where you come into the year, and you have 85% of your revenue in backlog. And yeah, you know that you got a lot of stuff in the pipe that's going to come through and contribute. So you have pretty good visibility, really good visibility of what's going to happen during the year. The shorter-cycle businesses are always a little bit more white-knuckle. Now, the flip side of that is you can be surprised on the upside too, and we have in the past. So it goes both directions.
Walk me through kind of the workflow. We had the elevated approvals, especially on biologics. When does the pharma engage you on the commercial side and on the TAS business? I would think that it would be right before. They want the plan. They want the consulting. They want the pricing and the promotion. They want all that well before the drug's approved so that it can hit the ground running.
Right. Well, the statistics say that 50% of the promotional spending is in the first two years after drug introduction. So you'd think it would be more front-end loaded than it ends up being. It ends up being during the rollout that it happens. But there is certain stuff like pricing and market access that you have to do upfront. Some of the targeting work and the follow-up and the tracking and all of that doesn't have to happen immediately. So yeah, there's a good chunk of it that's right at introduction. But even within that, you can trim back the amount of work that you're doing, even if it's something that's absolutely required work. And the real-world evidence work is another example of something that's discretionary that you do.
A lot of our pharma clients will do this because it helps them market the drugs down the road to have done the phase four studies and some of the follow-up work to prove the efficacy of the drugs and the efficiency of the drugs and so forth. But real world is more than 50% what we would call discretionary as opposed to required by regulation. So that work can be deferred. We think the clients ultimately will want to do a lot of it because it's to their benefit. But when you start tightening your budgets, the first thing you do is go after spending effect in the very near term, and it may have a deleterious effect over the next 6, 12 months. But that happens. You see it in the consumer products business with advertising. You cut advertising right upfront.
You know that it's going to have an effect. But when you're trying to cut your budget in the short term, you make that sacrifice sometimes.
Yeah. And I guess on the discretion part of the real-world evidence, that's what you're talking about. They're capturing on top of just tracking to make sure that the drug's not impacting the general pop. But are they also tracking user data?
User data and tying that to outcomes and being able to have very rigorous studies that show, "Look, this drug is working in real-world application." And in certain parts of the world, it's less discretionary than others. Germany, for instance, in order to maintain branded pricing, you have to do real-world studies after the fact. But that isn't the case everywhere. So there is the ability to trim back on that in the short run. But ultimately, we always see it coming back over time.
Awesome. That's all the time we have. Thank you.
Okay. Great. Thank you.