Earnings Call Transcript - IQV Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA Fourth 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 session. 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, Senior Vice President, Investor Relations and Treasury

Thank you. Good morning, everyone. Thank you for joining our fourth quarter 2022 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 will 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 Presentations section of our IQVIA Investor Relations website. 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 Chief Executive Officer

Thank you, Nick, and good morning, everyone. Thanks for joining us today to discuss our fourth quarter and full-year results. As we close 2022, we are very proud of what we've achieved at IQVIA. It was a record year for our R&DS business, we achieved bookings of $10.8 billion, which was the highest ever, our backlog stands now at a record $27.2 billion, and the business added over 275 new customers in the year. We improved access to critical research; we've expanded our decentralized clinical trial capabilities by launching the first self-collection safety lab panel for U.S. clinical trial participants in collaboration with Tasso. Our DCT program achieved GDPR validation in Europe, marking the first time a DCT offering received this data privacy validation. And our connected devices business added 50 new customers, including wins with two top-10 pharma companies. We made significant advancements as well in our real-world business. We increased the number of 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 European Medicines Agency and the Real-World Alliance. We expanded our digital marketing capabilities with the acquisition of Lasso Marketing, which offers a technology purpose-built for healthcare marketers to execute digital campaigns. We deployed capital of $3.7 billion during the year. This included $1.3 billion in acquisitions, $1.2 billion in share repurchase, $700 million in CapEx, and repayment of $510 million of debt. At the same time, we were able to reduce our net leverage ratio to 3.45 times adjusted EBITDA. 2022 also marked the end of our Vision 22 three-year strategic plan. 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 have exceeded our Vision 2022 goals. I am proud of the resilience, resourcefulness, 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 '22, 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. As we've discussed before, while we've seen anecdotal evidence of these concerns, at IQVIA, we remain confident that the fundamentals of our industry and the demand from our clients remain healthy. 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 saw an acceleration in Q4 to 22%, with double-digit growth in all three segments: large, midsize, and EBP segments. Our net new business reached a record $3.1 billion in Q4, which is up 29% versus the prior year. For the full-year, we achieved bookings of $10.8 billion despite the large COVID bookings we had in 2021 that didn't repeat in 2022. Yes, in our commercial business, while we are seeing some short-term fluctuations in discretionary spend categories, such as 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 recognition the company received last week. IQVIA was named to Fortune's list of the World's Most Admired Companies for the sixth consecutive year. Importantly, once again, we earned the first-place ranking within our industry group. We also rank number one in seven out of nine 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 fourth quarter grew 2.8% on a reported basis, 7% at constant currency compared to last year. Excluding COVID-related work from both periods, we grew the top line 10% at constant currency on an organic basis. Fourth quarter adjusted EBITDA increased 11.1%, reflecting our strong revenue growth and ongoing cost management discipline. Fourth quarter adjusted diluted EPS of $2.78 grew 9% driven by our adjusted EBITDA growth. A few highlights of business activity this quarter: 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 first company to make its Salesforce-based products available on Alibaba Cloud and the only life sciences provider to have a full Salesforce-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. A 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. Personalization of care is becoming a focus of our customers' commercial strategy. This quarter, IQVIA was awarded a major patient support program by a top-10 pharma for their cardiology product, displacing the incumbent vendor. The demand from our EBP customers has remained high despite 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. IQVIA was selected due to the breadth of capabilities, our domain expertise, strong resources, and technology 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 treatment, selected IQVIA to manage its first clinical trial of their esophageal implant product. Current treatment options for patients diagnosed with esophageal cancer result in only 20% survival at five 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. 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 RNVS, we also signed a long-term collaboration with Clalit, the largest health services provider in Israel to launch the first Prime Site in the region. The collaboration combines IQVIA and Clalit’s capabilities in clinical trial delivery, real world research data, and genomics. Clalit 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&D outsourcing, we continue to experience strong double-digit year-over-year growth in bookings. As an example, we expanded one of our preferred partnerships with a top global pharma that awarded IQVIA a large early and late-stage trial in multiple oncology indications. We were selected because of our analytics to optimize protocol development, site selection, and operational planning, including our ability to recruit patients meeting their diversity targets. Overall, the R&DS business continues to show strong momentum. We achieved new bookings of $3.1 billion in the quarter, the highest in our history. This translated into a quarterly book-to-bill of 1.51, including pass-throughs. Excluding pass-throughs, the business delivered almost $2 billion 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 pass-throughs. I will now turn it over to Ron for more details on our financial performance.

Ron Bruehlman, Executive Vice President and Chief Financial Officer

Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. Fourth quarter revenue of $739 million grew 2.8% on a reported basis and 7% at constant currency. In the quarter, COVID-related revenues were approximately $190 million, which was down about $150 million versus the fourth quarter of 2021. In our base business, excluding all COVID-related work from both this year and last, organic growth at constant currency was 10%. Technology & Analytics Solutions revenue for the fourth quarter was $1,499 million, 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&D Solutions fourth quarter revenue of $2,058 million was up 5.9% reported and 9.3% at constant currency. Excluding all COVID-related work, organic growth at constant currency in R&DS was 14%. Finally, Contract Sales & Medical Solutions' fourth quarter revenue of $182 million 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 million, growing at 3.9% on a reported basis and 7.8% at constant currency. COVID-related revenues totaled approximately $1 billion for the year. In our base business, again that's excluding all COVID-related work, organic growth at constant currency was 13%. For the full-year, Technology & Analytics Solutions revenue was $5,746 million, up 3.8% reported and 8.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in TAS was 10% for the year. Full-year revenue in R&D Solutions was $7,921 million, growing 4.8% reported and 7.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in R&DS was 17%. Full-year CSMS revenue was $743 million, which was down 5.2% reported but grew 2.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in CSMS was 4% for the year. Adjusted EBITDA was $920 million for the fourth quarter, representing growth of 11.1%, while full-year adjusted EBITDA was $3,346 million, which was up 10.7% year-over-year. Fourth quarter GAAP net income was $227 million, and GAAP diluted earnings per share was $1.20. Full-year GAAP net income was $1,091 million or $5.72 of earnings per diluted share. Adjusted net income was $524 million in the fourth quarter, and adjusted diluted earnings per share grew 9% to $2.78. For the full-year, adjusted net income was $1,937 million, and adjusted diluted earnings per share was $10.16, up 12.5% year-over-year. Now as Ari reviewed, R&D Solutions delivered another outstanding quarterly booking. Our backlog at December 31 stood at a record $27.2 billion, which was up 9.6% year-over-year on a reported basis and 11.6% adjusting for the impact of foreign exchange. Without the impact of foreign exchange, year-over-year backlog would have been about $500 million higher. Full-year net new business increased $10.8 billion, growing 6.2% year-over-year on a reported basis, despite a significant amount of COVID bookings we had in 2021 that didn't repeat in 2022. Now reviewing the balance sheet, as of December 31, cash and cash equivalents totaled $1,216 million, and gross debt was $12,747 million, resulting in net debt of $11,531 million. Our net leverage ratio ended the year at 3.45 times trailing 12-month adjusted EBITDA. Fourth quarter cash flow from operations was $560 million, and CapEx was $171 million, resulting in a free cash flow of $389 million for the quarter. As we shared on our last earnings call, early in the fourth quarter we retired $510 million of variable rate U.S. dollar term loan that was scheduled to mature in early 2024. At the end of the year, we entered into a $1 billion floating to fixed interest rates swap to further limit our exposure to changes in interest rates. With these changes, our debt structure at year-end was 66% fixed. We expect this to drop to about 58% fixed at the end of Q1 when we have a $1 billion swap expiring. December 31 marked the end of our Vision 2022 three-year plan. As already 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 three-year CAGR for adjusted EBITDA was 11.7%, exceeding our goal of 8% to 11%. 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 trailing 12-month adjusted EBITDA compared favorably to our goal of 3.5x to 4x. Okay, let's turn now to 2023 guidance. For the full-year 2023, we expect total revenue to be between $15.150 billion and $15.400 billion, representing year-over-year growth of 5.1% to 6.9%. This revenue growth includes about 100 basis points of contribution from M&A activity and a very slight FX tailwind of approximately 10 basis points versus the prior year. Adjusting for the COVID-related work step-down which we anticipate to be approximately $600 million, 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 billion to $3.695 billion, representing growth of 8.3% to 10.4%. Our adjusted diluted EPS guidance is $10.26 to $10.56, representing year-over-year growth of 1% to 3.9%. Our EPS guidance includes about $615 million of interest expense, just under $550 million of operational D&A, and an effective income tax rate of approximately 21%, which is about a point higher than it otherwise would have been due to the increase in the U.K. corporate tax rate from 19% to 25%. Finally, our EPS guidance assumes an average diluted share count slightly above 190 million shares. Adjusting for the year-over-year impact of the one-time step-up in interest rates and the higher U.K. tax rate, our guidance implies adjusted EPS growth of 11% to 14%. This guidance assumes about $2 billion of cash deployment split evenly between acquisitions and debt retirement. Regarding the latter, we expect to retire the remaining term debt maturing in March 2024 towards the end of the year. Based on these assumptions and our guidance, our net leverage ratio should drop to below three times adjusted EBITDA by the end of 2023. 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. 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 step down by approximately $600 million versus 2022. About 40% of this step-down will occur in the first quarter, which will more than compensate for this headwind during the course of the year as we project revenue to grow between 9% and 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&A contribution and a very slight tailwind from foreign exchange of 10 basis points. It's important to point out that we will experience a headwind from FX in the first half. At the segment level, we expect 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, adjusting for the step-down and COVID work, FX, and acquisition impacts, will be 7% to 9%. R&DS revenue will grow 5% to 7% reported, reflecting an even more significant year-over-year step-down in COVID-related work. Underlying organic growth for R&DS, again adjusting for COVID-related work, FX, and acquisition impact, will be 10% to 12%. Finally, in CSMS, revenue growth is expected to be flat reported and approximately two percentage points organic excluding COVID-related work and FX impacts. On adjusted EPS, we will experience a year-over-year impact from the step-up in interest rates and an increase in the U.K. corporate tax rate. 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 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. Regarding first-quarter guidance, Q1 will be the toughest comparison versus the prior year, primarily due to four factors: the largest headwind from FX, the largest year-over-year COVID-related step-down, the toughest interest expense comparison, and finally, the phasing during the year of 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 billion and $3.640 billion, representing growth of 2.4% to 4.3% on a constant currency basis and 0.1% to 2% on a reported basis. Excluding COVID-related work, we expect organic revenue growth at constant currency to be between 9% and 11%. Adjusted EBITDA is expected to be between $835 million and $860 million, up 2.8% to 5.9%. Finally, adjusted diluted EPS is expected to be between $2.35 and $2.46, declining 4.9% to 0.4%. Excluding the step-up of the interest expense and the tax rate in the U.K., we expect adjusted diluted EPS to grow between 6% and 10% in the first quarter. Again, our guidance assumes that foreign currency rates, as of February 8, continue for the balance of the year. To summarize, Q4 was another strong quarter capping a successful year. For 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 recording bookings in R&DS. During 2022, we repurchased almost $1.2 billion of our shares and retired $500 million of our variable rate term debt, while reducing our net debt leverage ratio to 3.4 times. We exceeded our Vision 2022 commitments despite the volatile macro environment. We're projecting strong operational performance again in 2023, with 9% to 11% organic revenue growth at constant currency excluding COVID-related work and 11% to 14% adjusted EPS growth excluding non-operational headwinds. With that, let me hand it back over to the operator for Q&A.

Operator, Operator

Your first question comes from the line of Dan Leonard with Credit Suisse. Your line is open.

Dan Leonard, Analyst

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 '23. I think the CAGR through '25 was a double-digit number. So, could you bridge from the 2023 result to the acceleration anticipated thereafter? Thank you.

Ari Bousbib, Chairman and Chief Executive Officer

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, although I'm not sure about the exact number any longer, we probably lost $500 million in revenue just in 2022 to FX. So, look, I don't know about revenue; it'll be close. Maybe not 20, but it'll be close. On EBITDA and on earnings per share, we're very confident that we will achieve those goals. What we are facing, first of all, you're seeing the EBITDA is certainly, clearly on that trajectory unchanged despite everything else. And EPS, as we said in our introductory remarks, is a one-time step-up that hopefully won't replicate. If anything, I think the world expects rates to either stabilize or start declining afterwards, in '24 and '25, so that would be even a tailwind. But certainly, that step-up is one-time. After that, we fully expect to resume very strong double-digit growth as we experienced. I remind you we delivered over a 16% compound earnings per share growth rate over the three-year period, ending in 2022. Thank you.

Dan Leonard, Analyst

Thanks.

Operator, Operator

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

Eric Coldwell, Analyst

Thank you. Good morning. So, I wanted to hit on R&DS 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 fourth-quarter strong bookings, your '22 bookings. Do you have a sense of 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? Just trying to get a sense of where the market was versus what IQV did additionally on top of that, if that makes sense.

Ari Bousbib, Chairman and Chief Executive Officer

It's challenging to assess the situation accurately without having the advantage of time and clear competitor data. We'll have a better understanding once we review your report on CRO performance after everyone has reported. However, it's evident that since the merger, we've gained momentum in increasing our market share. We're aware of our market share growth because we are successfully displacing competitors. I don't believe rescue studies have significantly influenced this. We have some anecdotal evidence, but nothing more than we've seen historically. Situations arise where if a study doesn't perform well with a specific approach, the sponsor may opt to change CROs, which is a complicated process that nobody wants to undertake, but it does occur. I don't think this is happening more frequently than in the past, unless it involves earlier rescue studies where sponsors chose to switch CROs for various reasons, which I would categorize as market share gains. The market remains strong, and all indicators we observe confirm this. Throughout 2022, we maintained that perspective, even when others suggested dire circumstances due to declining biotech funding, which has returned to solid levels, albeit lower than during the pandemic. We've not experienced any decision-making delays or signs of demand slowing; in fact, our request for proposals (RFP) flow has been robust. Our overall RFP flow increased by 13% for the entire year and over 20% in the fourth quarter, indicating acceleration. At year-end, our qualified pipeline rose by more than 20%, representing a significant portion of our real opportunities. Additionally, our awards, which are early indicators of future performance, reached their highest absolute number in Q4, up 9% year-over-year. We have solid metrics supporting healthy demand for clinical trial services, combined with our market share gains, which I believe clarifies the situation. Thank you, Eric.

Eric Coldwell, Analyst

And Ron, if I could just have one quick technical item here, can you confirm that there are no share repurchases built into the guidance? I know you talked about the $2 billion capital deployment and the split between debt and M&A. But is there any current thinking on taking some advantage of that authorization that you have on the repurchase side?

Ron Bruehlman, Executive Vice President and Chief Financial Officer

I can confirm that there is no share repurchase baked into our guidance. We're right now assuming $2 billion of capital deployment split evenly between M&A and debt reduction. Might we repurchase some shares during the year? Sure, that's our assumption going in, and the guidance we gave is that we're not. We'll devote the capital to debt reduction instead. But that could always change with circumstances.

Operator, Operator

Your next question is from the line of Anne Samuel with JPMorgan. Your line is open.

Ari Bousbib, Chairman and Chief Executive Officer

Okay, next question, please.

Operator, Operator

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

Justin Bowers, Analyst

Hi, good morning, everyone. Just pivoting from R&D, Ari, you talked a lot about some strong momentum in commercial managed services. Wondering if you could expand on that strength, and also if that is isolated just in TAS or if that is also in the CSMS business.

Ari Bousbib, Chairman and Chief Executive Officer

You mean CSMS, right, the Contract Sales...? Yes. CSMS is a relatively slow grower, so I'd put that aside. TAS growth has been consistent. We're pleased, obviously, to see that it continued to grow. You saw that, excluding the COVID step down, we had growth of 7% in Q4, and 10% for the full-year. Quarter-to-quarter variability could occur. The first half was more or less around 10% growth, the third quarter was 12%, we had activity that came in earlier than we thought, and the fourth quarter was 7%. Overall, very good growth in Q4. We guide 7% to 9% for next year. Excluding COVID, acquisitions, and FX, this is consistent with the underlying operating momentum that we've had in TAS, which we've guided to, which is high single-digit. The fast growers in this business are technology and real-world, which I mentioned in a few significant achievements and a few significant awards with clients. Both are considered strong drivers of growth as we continue to find innovative ways to utilize real-world evidence for clients and deploy more technology solutions. A piece of the business that's more exposed to economic whims and budget expansions or restrictions by clients is more discretionary spending, like analytics and consulting work. We usually see an acceleration in this business at the end of the year, but we didn't see that in December. I don't know if people are being more cautious or anything, but it was primarily in the consulting area, which tends to be more short-cycle and discretionary. The underlying growth is driven by real-world and technology, both of which are longer-term decisions and not so subject to cyclical economic changes. The last piece is the data business, which remains flat to low single digits, one percent, and that continues where it is. When you consider all this, that leads to your high single-digit growth for the segment. Thank you for your question.

Operator, Operator

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

Jack Meehan, Analyst

Thank you. Good morning. Ari, I know you sound bullish around the funding trend that you've seen over the last year. I wanted to ask about funding in a different way; just what are you seeing in terms of cancellations around your end? Was there anything notable about that relative to the last couple of years?

Ari Bousbib, Chairman and Chief Executive Officer

Nothing.

Jack Meehan, Analyst

Short and sweet. Has there been any rumbling around restructuring at any of your important clients? How are you factoring the macro into your outlook for the R&D segment this year?

Ari Bousbib, Chairman and Chief Executive Officer

In terms of demand, no signs that we can see that our clients are delaying, canceling, or postponing clinical trial development work that was previously planned. We've been saying this for 12 months. No unusual cancellation activity or unusual postponements. We are a large, powerful ship navigating extremely stormy waters. The engine continues to be strong—that's demand and our operational momentum. The winds, in the form of interest expense, wage inflation, wars in foreign theaters affecting our ability to work in certain regions, and ongoing COVID issues in China, are factors we need to address. We are managing our workforce tightly, increasing productivity initiatives, and maintaining cost-cutting discipline. We've accelerated those plans for 2023. Debt levels are being reduced, and we entered into swaps to address that. That's how we are addressing the macro factors we can offset. Thank you very much.

Jack Meehan, Analyst

Thank you.

Operator, Operator

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

Luke Sergott, Analyst

Hey, guys, thanks. Can you give us a sense of how you're expecting the roll-off in Q1 between the two segments between TAS and RDS, just from a modeling perspective?

Ari Bousbib, Chairman and Chief Executive Officer

Yes, I think I had said overall of the $600 million COVID step-down year-over-year, about 40% of it would be in Q1. That's fairly substantial impacts in both segments. I would say about a third of the impact would be in TAS, and about two-thirds in R&D is how you should think about it by quarter and for the full-year, it's above that.

Luke Sergott, Analyst

All right, great. Thanks. It's really helpful. And lastly, regarding free cash flow. I understand a ton of moving parts here for the year. But can you give us a sense of what you're targeting for '23 and as a percentage of EBITDA conversion?

Ari Bousbib, Chairman and Chief Executive Officer

We always target between 80% and 90% of free cash flow adjusted net income. That was our range for the full-year 2022. Of course, it could vary any given year because cash flow is dependent on the balance sheet. We were substantially higher than that in 2021. For 2022, we were right within that range. For 2023, you should think of it as being in the 80% to 90% of adjusted net income range, but we could deviate from that.

Luke Sergott, Analyst

All right, thank you.

Operator, Operator

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

Sandy Draper, Analyst

Thanks very much. Ari, could you engage in your crystal ball a little bit longer-term? When I look back at what I heard at JPMorgan and Davos around how pharma is looking at the next three to 10 years, especially with the Inflation Reduction Act, I hear conflicting messages about whether people will invest more or try to get away from concentrating on one or two blockbuster drugs. I would love to hear what you're thinking about what your customers are looking at, not really from the economic perspective about the current macro environment, but how their portfolios are how concentrated they are and what the Inflation Reduction Act means.

Ari Bousbib, Chairman and Chief Executive Officer

Yes, thank you. The Inflation Reduction Act has many provisions that are still being finalized. We've been spending a lot of time with our clients trying to clarify what's in it. Many provisions won’t kick in until later in the decade, and many rules are still being discussed. Generally, pharma CEOs believe it may harm innovation and patient access. When curbing the economics or aspects of drug development, it could affect decision-making about program continuance. The motivation for pharma companies is to heal people through R&D and drive innovation. There could be effects at the margins, but core aspects of decision-making are unlikely to change due to economic factors alone. There's a substantial focus on addressing specific diseases and rare diseases continuing, which is a trend independent of the Inflation Reduction Act. Oncology remains the largest growth area, and the demand for clinical trials and drug development there is strong. That's the color from my conversations with clients.

Sandy Draper, Analyst

Got it. Thanks, Ari.

Operator, Operator

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

Elizabeth Anderson, Analyst

Hi, guys. Thanks for the question. I was wondering if you could comment on the degree of pricing you're getting on new contracts and how that aligns with wage inflation you are currently experiencing?

Ari Bousbib, Chairman and Chief Executive Officer

Yes, we are facing significant wage inflation, particularly for scarce skill sets like healthcare expertise, data science, and software development. This expertise drives increased compensation and inflation. Despite the challenges, we've been able to grow our margins through cost management programs. In the commercial sector, we seek to offset rising costs with pricing when possible, but our pricing flexibility is limited by competition and negotiations with clients. Rates for clinical trials reflect labor costs, and while we strive to transfer part of wage raises to clients, long timelines mean today’s contracts may not reflect current costs. Contracts sometimes have inflation escalation clauses but were not designed for the level of inflation we’re facing. That captures the pricing landscape for us. Thank you.

Elizabeth Anderson, Analyst

That's very helpful. Thank you.

Nick Childs, Senior Vice President, Investor Relations and Treasury

One more question.

Operator, Operator

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

Charles Rhyee, Analyst

Great, thanks for taking the question. Maybe Ron, could you break down the impact on EPS from higher tax rates, interest expense, etc., and then if you think about for this year?

Ron Bruehlman, Executive Vice President and Chief Financial Officer

The U.K. corporate tax rate increase added about a percentage point to our overall effective tax rate. But most of the year-over-year impact is coming from interest expense. We were slightly over $400 million in interest expense in 2022. We expect about $615 million in 2023. You can do the math, and most of the impact stems from that. Year-over-year operational growth in EPS remains strong even if we exclude these two items.

Ari Bousbib, Chairman and Chief Executive Officer

Yes, all of that is baked into our assumptions.

Nick Childs, Senior Vice President, Investor Relations and Treasury

Thank you.

Operator, Operator

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

Nick Childs, Senior Vice President, Investor Relations and Treasury

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, Operator

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