IQVIA Holdings: A Possible Beat And Raise Scenario In The Works

Recommendation

Despite the fact that the price of IQVIA Holdings (NYSE:IQV) shares has declined since I recommended buying them, I still think the company is doing well. IQV reported 1Q23 results that were above expectations, but the company maintained its guidance for the full year. Although the R&DS business showed growth and I was heartened to hear that the demand environment was holding steady, TAS performance left me dissatisfied (but not a big problem). While it is unfortunate that TAS weakness is expected to continue into 2Q23, it also means that 2H23 performance is expected to be a stronger performance vs 1H given the reiteration of FY23 guidance. However, I think the slowdown was a timing issue caused by some shorter cycle businesses that were delayed. Otherwise, I believe the company has maintained its strong performance, and the market does not appear to be rewarding IQV for its growth. IQV valuation (forward PE) continued to trade down to 1 standard deviation below its 10-year average. As such, I am reiterating my buy rating on the back of improving business fundamentals and a cheaper valuation today.

Demand still healthy

Stripping away all the noise about TAS performance due to timing, I believe the key thing that mattered is that the R&D demand environment continues to be healthy. What gave me more confidence was hearing from management that demand in the industry as a whole is still strong, and that the company is experiencing record-breaking sequential growth in RFP flows of 15%. Furthermore, in 2022, the 15 largest pharma companies spent a record $138 billion on research and development, according to IQV, and in 1Q23, EBP funding was $15.6 billion. Management also noted an increase in 1Q23 FDA approvals, from 9 in the prior five years to 13. Finally, the $27.9 billion in outstanding backlog set a new record. When taken together, I think these indicators show that demand is strong and showing no signs of slowing down. Management has also highlighted IQV's increasing portfolio diversification as the company gains market share in oncology at the expense of existing competitors. Management has disclosed that the current churn rate is slightly above 10%, which is slightly lower than pre-COVID levels and has a direct impact on operational productivity. This is a significant improvement over the 20%+ rate of the previous year, and it has allowed the business to become more productive. Overall, demand is still healthy, but I would advise to remain cautious as the high rates environment today are hurting the biotech industry ability to raise funds, which is impacting life sciences buying patterns.

TAS performance

Management mentioned that TAS performance is within expectations, but its weakness is going to flow to 2Q23. TAS performance was weak, but not disappointing, in my opinion. Management attributed the poor performance to cautious discretionary spending in short cycle businesses. From this, my sense is management is expecting 2H23 performance to be the recovery period, as they did not revise guidance downwards to reflect the weak TAS performance. This weakness is a function of timing rather than structural decline, as I mentioned before. My belief was confirmed in the earnings call that it was indeed a matter of timing, and that there have been no project cancellations. Instead, management anticipates completion of these projects by the end of 2H23. As such, I believe investors should not extrapolate TAS weak performance linearly for the remaining of FY23 as things should get better after 2Q23.

Valuation

IQV valuation has continued to fall to 18x forward PE today, which is 2x lower than its average of 20x. Given the healthy demand outlook and strong first-quarter performance, I believe this derating is not warranted. Perhaps the stock did not react positively because management reaffirmed its FY23 guidance rather than increasing it. This could imply that management does not anticipate 2H23 to be weaker than previously anticipated. While this bearish viewpoint has merit, I believe this situation has become a catalyst for re-rating because the guidance allows for a beat and raise in the coming quarters. Attaching at 20x PE on FY24 EPS of 11.87 results in a share price of $237.4, implying a 20% upside.

Conclusion

Despite the decline in IQV share price, I remain optimistic about the company's performance. IQV reported strong 1Q23 results that exceeded expectations, and although TAS performance was not satisfactory, it is expected to improve in the second half of the year. Importantly, I believe the demand environment for R&D remains healthy, with strong sequential growth in RFP flows and increased funding for research and development. Furthermore, IQV's valuation is currently trading below its average, presenting a buying opportunity. Considering these factors, I reiterate my buy rating on IQV stock and believe there is potential for a 20% upside.