AGB 2022.10 - IQVIA (IQV)

Improving Outsourced R&D

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IQVIA

IQVIA is the leading contract research organization (CRO) and data analytics provider for the life sciences industry. The company is the result of the 2016 merger between Quintiles, the leading CRO, and IMS Health, the leading clinical data provider for life science companies. The main thesis of the merger was that the business combination would allow for the leverage of data across both segments and introduce new products for its customers. The two most successful product introductions as a result of the merger are next generation clinical trials and real world evidence.

IQVIA has the largest dataset of anonymized health data with over 1.2B non-identified patient records and 56B petabytes of proprietary data coming over 150k data suppliers. Over 100B healthcare records are processed annually, adding to or supplementing the existing dataset. The company then sells access to the data to its customers or leverages the data to improve execution of its outsourced clinical trials or other studies.

CROs get paid by the project and bidding can begin as early as 3 years prior to the actual clinical trial. This is because timing largely depends on the progression of development pipelines for each customer and CROs need to continually sell their expertise on facilitating that development over time. The outsourcing of clinical trials has increased in adoption over the past decade, with almost 60% being outsourced in 2020.

CROs bring data insights and project management, support data collection, provide analysis for regulatory approvals, and conduct efficient patient and personnel recruitment for its customers’ clinical trials. Recruiting efficiency is important because more than 45% of trial delays are recruiting related. Many of the large clinical trials span across geographies and require expertise on the ground at different sites.

IQVIA competes against other CROs for the outsourced R&D opportunity. While market shares have slightly shifted due to recent M&A, as of 2020 IQVIA led the pack at 12% market share, followed by Covance (10%), PPD (9%), Syneos (9%), PRA (7%), Charles River (6%) and ICON (6%). Not all CROs compete along the same space and service the same type of customer. IQVIA focuses more on the late stage trials and calls large pharma their main customers, while a company like Charles River is focused more on early stage, pre-clinical discovery and analysis.

As the complexity and costs of running a successful clinical trial has increased over the years, more life sciences companies are outsourcing their trials to CROs. According to the Tufts Center for the Study of Drug Development, from 2002 to 2012 the average number of medical procedures per trial increased 58%, clinical endpoints required increased 86%, eligibility criteria increased 61% and countries that a trial takes place increased by +209%.

Furthermore, the success rate of a clinical trial is very low, even more reason for companies to try to mitigate costs and reduce time to completion. For every drug that is approved and marketed, there are another 31 that enter discovery that fail. The total average cost per approved drug (including the failures) is ~$1.3B. This cost per approved drug has increased by 14x from 1970 to 2012.

IQVIA’s solution to the increasing complexity and costs are next generation clinical trials. One of the main benefits from the merger in 2016 was the ability to offer data driven and more efficient studies. IQVIA began offering these new trials in 2017 and quickly gained adoption from its customer base. Initially, smaller customers were more willing to try IQVIA’s next gen trials offering. However, starting in 3Q 2018, roughly 50% of the company’s next gen awards were from large pharma customers.

In 2017, the company stated at its Analyst Day that next gen trials resulted in 50% reduction in site selection times, 30%-75% reduction in trial start up times and 60% increase of patient enrollment speed. Customers noticed the benefits as well. Win rates improved from 33% as legacy Quintiles to 60% as IQVIA offering next gen CRO services. Quickly, next gen trials increased to make up a third of the total that IQVIA was servicing by the end of 2018. At the company’s 2021 Analyst Day, updated stats were given about its clinical trials. There was a further 33% reduction in site selection times and 34% reduction in recruitment rates vs. historical benchmarks.

Real world evidence is the other solution that IQVIA was able to offer since the merger. Once a drug has been approved by the FDA, companies monitor the effectiveness, risk and overall value of the new therapy using data from patient records and medical claims. Since many newly approved drugs are more expensive than existing therapies, there is some pressure on life science companies to prove and justify the value of the new drugs.

Real world evidence can be generated from real world trials (as opposed to clinical trials) where the new therapy’s effectiveness is studied with active patients (rather than in a controlled setting). Typically these real world trials can be complex and expensive to run, and many pharma companies outsource this to CROs. With IQVIA’s large anonymized health dataset and privacy-enhancing technologies, the company can offer a less expensive and extensive trial to generate the pertinent data.

At the company’s Analyst Day in 2021, IQVIA released its growth targets from 2022 to 2025. The company expects total revenues to grow 10%-12% annually and EBITDA to grow 11%-13%. IQVIA expects to deploy 4.5% of revenues in capex and $2B-$3B in M&A + share repurchases.

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Why is it a good business?

As the largest global CRO, IQVIA benefits from their customer’s switching costs. Minimizing time spent during pre-clinical and clinical trials is very important to the economic value of a drug. Typically, a drug will have a 20 year patent life span, and that usually begins at discovery. This means that the time spent on clinical trials can take away from the time the life sciences company can earn patent protected profits. Clinical trials can last up to seven years and it can take more years to bring the drug to market. These trials can be complicated if there are multiple geographies involved.

Oftentimes trials and studies get canceled, especially if there is no longer a need for the drug (IQVIA has mentioned that this is more likely with vaccines that other types of therapies). The later stage the trial is in, the more likely that it’s larger in scope, complexity is high and it’s being conducted in many sites across geographies. It also implies that the the therapy has passed the early stages of FDA approval. With IQVIA’s global capabilities and infrastructure, it’s one of the few large CROs that can provide these types of services.

With the largest set of patient data, the company also benefits from its intangible assets. IQVIA claims that its patient datasets are linked so that the same patient can be cross referenced to get a more accurate picture of a therapy’s effectiveness and resulting outcome. The data is encrypted with technology so that the company is compliant with the different privacy laws around the world. (This we hope is true, but there’s no way to verify these claims.)

IQVIA’s differentiated dataset especially helps during the recruitment of patients in a clinical trial and real world evidence studies. Sometimes de-identified patient data can be used in lieu of running more costly real world evidence studies for reporting additional safety and efficacy data.

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Returns on incremental capital?

Since the closing of the Quintiles + IMS Health merger, the company has spent 44% of its capital on capex and the remaining 56% on acquisitions. While capital spent on new product and software development isn’t exactly disclosed on the company’s financial statements, IQVIA has given intermittent commentary around cumulative spend since the merger.

At the Baird conference in September of 2019, IQVIA’s CEO stated that cumulative spend for technology was almost $1.5B. This was further broken out at the company’s 2019 Analyst Day. Cumulative spend on software development was ~$1B, technology infrastructure $200M, data science and AI capabilities $150M and technology platform and enhancements $100M.

Other CROs similarly do not break out R&D cost as a line item and IMS health didn’t either prior to the merger. It's likely that some of technology investments are included in the capex line item. IQVIA has stated that capex spend should run about 5% of revenues going forward, which is an increase from 2017 and 2018 when the company wasn’t spending as much for internal technology investments.

Acquisitions for the most part are tuck-ins that shore up the product offering for IQVIA. The cadence of these deals has averaged $650M per year since the merger and the inorganic growth impact has been around 1.5% per year. A few deals that were mentioned were Myriad RBM and DMD Marketing Solutions in 2021. IQVIA doesn’t discuss most of its deals in detail and even describes the acquisitions as immaterial in the company’s annual reports.

The only deal since the merger that was discussed in detail was IQVIA’s acquisition of the remaining interest in the Q2 Solutions joint venture from Quest Diagnostics. Q2 Solutions provides testing, project management and tracking solutions for clinical trials. The company had owned 60% of the business, so the financials were already consolidated. The remaining 40% interest was acquired for $760M in 2021.

In terms of consolidation of the CRO industry, IQVIA’s view is that there are few benefits to acquiring other CROs at the company’s current size and breadth of offerings. Typically, customers want to have relationships with multiple providers and because many of these CROs are serving the same customer base, consolidation would actually be a net negative. Only in cases where there are meaningful differences in product offerings or customer bases would it make some sense to merge. Here is CEO, Ari Bousbib, on the Q1 2021 earnings call:

“In the CRO business, there are very few cases where there is synergy between two CROs, very few cases. Now, if someone is largely present in Phase I, or preclinical and Phase I, and someone that is stronger in Phase II, Phase III, then maybe you can say there's complementarity and value. If someone is very strong in the US, very weak in Asia and someone else is very strong in Asia, very weak in the US, then you can say there is geographic complementarity and there is value. But in most cases, they're serving the same client base. And in many cases, including for the people that I just mentioned who are merging, there are clients where they, the two of them, are the preferred providers for a client. So, what do you think is going to happen? The client is going to remain with one provider. So, we now are going to have a negative synergy, dis-synergy on the revenue side.”

We estimate that IQVIA generated returns on incremental capital between 20%-40% since the merger. Those are great returns for this type of business but because there was (1) the initial benefit from the introduction of next gen trials + real world evidence and the launch of OCE (discussed in the following section) soon after the merger, and (2) the negative impact from Covid and then the subsequent surge in demand, it’s uncertain if these returns represent the business going forward.

We’ll have to see in a future update whether the returns of this business remain at this level. It’s also worth mentioning that the incremental returns of the other CROs are much more volatile than IQVIA, which makes sense given that the company’s more steady data business is 40% of revenues and IQVIA is more skewed more towards servicing late-stage clinical trials.

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Reinvestment potential?

IQVIA addresses many different markets within healthcare services with its three business segments: R&D (54% of revenues in 2021), Technology and Analytics (40%) and Contract Sales (6%). Within IQVIA’s TAM of $285B, R&D is the largest at $150B, of which the outsourced portion is $39B or roughly 26%. Real World Evidence is estimated to be $80B and Technology Enabled Solutions is estimated to be $75B. These two segments are mostly addressed by the Technology and Analytics segment.

From a customer and geographic segment perspective, the company views the emerging biopharma (EBP) customer segment and the APAC region to have the largest growth opportunities. At its 2021 Analyst Day, IQVIA estimated the EBP market to grow from $21B in 2020 to $32B in 2025 for a CAGR of 8.8%. Similarly, the APAC region is estimated to have the highest growth from $6B in 2020 to $11B by 2025 for a CAGR of 12.9%.

Among IQVIA’s three revenue segments, the R&D Solutions segment has the highest tailwinds. The company estimates that the life sciences industry’s collective R&D spend increases roughly 2.5% per year and that the shift from in-house to outsourced is another 2.5%. IQVIA aims to gain about 2.5% in market share due to their differentiated data products and clinical trial solutions.

Within the Technology & Analytics segment, one of the highest growth areas is Orchestrated Customer Engagement (OCE). This is CRM software built on top of Salesforce’s Force.com platform, similar to the company’s main competitor in this area, Veeva Systems. OCE was launched at the end of 2017 and has signed over 350 customers by the end of 2021 (140 by 2020 and 80 by 2019), some of which have subscribed to multiple modules. Orchestrated Analytics, which recommends actions to sales reps based on data was launched in 2018 and Orchestrated Clinical Trial suite (OCT) was launched in 2019. As of Q3 2021, 165 customers have subscribed to the OCT module, managing 155k clinical trial sites and over 1.7 active studies.

While Veeva has a meaningful head start in this space, given that IQVIA can leverage its data offerings and CRO relationships, the company has won its fair share of competitive deals. IQVIA has stated win rates between 60%-75% over the years. And even Veeva has admitted that it sees IQVIA in almost every large deal. This is usually difficult to achieve against a high performing SaaS competitor with a first-mover advantage.

With a reinvestment rate between 30%-55% and a return on incremental capital between 20%-40%, we estimate that IQVIA has increased its intrinsic value between 11%-12% annually over the past 5 years. If you look at the stock performance over the same time period, the 5 year CAGR has been much higher at close to 30%. The reason behind for that is the forward earnings multiple has increased from 16x to 28x and IQVIA was a Covid beneficiary in late 2020/2021 (we discuss that in the next section).

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What else is important?

Decentralized trials adoption

Decentralized trials leverage technologies and services to enable remote clinical trials away from a typical trial site. The main advantage of this method is for patients not having to commute to and from the sites. This is a bigger factor than many realize. IQVIA stated that less than 5% of eligible patients participate in clinical research and the main reason is distance to the site. Over 70% of eligible patients live at least two hours way from a site and so most don’t participate. And the average patient that is enrolled in a trial travels 50 miles to a site.

To facilitate decentralized trials, IQVIA uses its tech platform called Study Hub. This is an app that can handle eConsent, eCOA (Electronic Clinical Outcome Assessment), allow patients to interact with team members, track wearable devices, provide access to documents, capture data, etc. The company also has nurses and phlebotomists across geographies to work with the patients.

Prior to 2020, IQVIA was running ~60 small trials that were experimental in nature. Customers wanted to try this new type of trial before committing to it for a larger trial. Due to the travel restrictions and health implications from Covid, many more wins came in 2021. By 2Q 2021, the company won a dozen large decentralized trials and were working with 5 of the top 10 large pharma companies. And by the next quarter the company stated that there were 34 unique customers running decentralized trials, 10 of which are running multiple trials.

Looking ahead, it’s uncertain how decentralized trials will fare as the world moves on from Covid. The company did mention that demand increased in 4Q 2021 and that over 300k patients were enrolled in decentralized trials in 1Q 2022. On the 2Q 2022 earnings call, decentralized trials were not mentioned.

Covid impact to financials

After the initial lockdown measures were relaxed around the world in the 2nd half of 2020, IQVIA benefited from its global sites coming back online and extra revenues from Covid vaccine related projects. When the company announced 1Q 2020 earnings, just 20% of global sites were available for access. That improved to 53% when the company reported 2Q 2020 earnings, then 70% by 3Q 2020 and 75% by 1Q 2021.

IQVIA was also involved in more than 300 clinical trials related to the Covid-19 virus and four of the five vaccine trials that made it past phase III, which were funded by Operation Warp Speed. The company stated that this work was much lower margin, with pass-through revenues (costs are the same as revenues) as being 10:1 of normal margin service revenues. This compares to regular clinical trials were the pass-through revenues were 2-3:1.

Covid related work peaked in early 2021 at roughly $300M per quarter. At the 1Q 2022 earnings call, the company stated that there was $800M-$900M of Covid related revenue remaining in 2022 and likely much less than that in future years. The company recognized $250M in 2Q 2022, which implies another $550M-$650M for the remainder of the year. After 1Q 2022 earnings, JP Morgan estimated that there will be a $400M step down in 2023 and $225M in both 2024 and 2025.

Optionality

M&A is the largest source of optionality for IQVIA. Because consolidation in the CRO space is unlikely (for reasons mentioned in the returns on capital section), M&A optionality comes from complementary offerings and/or technologies that get developed after an acquisition. For example, the foundation for IQVIA’s OCE offering came from an acquisition of Cegedim in 2015. And because the company is committed to making tuck-in acquisitions to round out its product offering, there is a decent chance of acquiring more of these new growth vectors.

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