IQVIA Holdings Inc. (NYSE: IQV) Q3 2022 earnings call dated Oct. 26, 2022
Corporate Participants:
Nick Childs — Senior Vice President, Investor Relations and Corporate Communications
Ari Bousbib — Chairman and Chief Executive Officer
Ron Bruehlman — Executive Vice President and Chief Financial Officer
Analysts:
David Windley — Jefferies — Analyst
John Sourbeer — UBS — Analyst
Alexander Draper — Guggenheim Securities — Analyst
Shlomo Rosenbaum — Stifel Nicolaus — Analyst
Justin Bowers — Deutsche Bank — Analyst
Patrick Donnelly — Citi — Analyst
Luke Sergott — Barclays — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA Third Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Nick Childs, Senior Vice President, Investor Relations and Treasurer. Mr. Childs, you may begin your conference.
Nick Childs — Senior Vice President, Investor Relations and Corporate Communications
Thank you. Good morning, everyone. Thank you for joining our third 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, who has succeeded Brian Stengel. 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 & 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 will include forward-looking statements. 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.
Ari Bousbib — Chairman and Chief Executive Officer
Thank you, Nick, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. IQVIA delivered another quarter of strong financial results despite market concerns about slowing demand, broader macroeconomic challenges and the various global geopolitical issues. In fact, indicators of demand both from customers and in the market generally remain healthy. Industry critical trial starts continue to trend ahead of last year, rising almost 7% year-to-date. The pipeline of active early-stage and late-stage molecules are both up 8% from 2019 pre-pandemic levels.
EBP funding, which has been a lingering concern since the beginning of the year when one of our smaller competitors raised alarms. EBP funding improved, in fact, in the quarter. According to BioWorld, third quarter funding was $18.7 billion, the highest of any quarter this year. Year-to-date, funding is running at about a $60 billion annual rate, which exceeds the average of the last 5 years pre-COVID. Our own RFP flow grew mid-teens in Q3 and RFP flow in both the large pharma and EBP segments are up double digits on a year-to-date basis.
Our Q3 book-to-bill was 1.39, excluding pass-throughs and 1.27, including pass-throughs, continuing our strong results from the first half of the year. And as a result, as you saw, our backlog grew 5.4% versus prior year on a reported basis and 9.4% excluding the impact from foreign exchange. As you can tell, we are not experiencing any signs of slowdown in demand. It also helps that we are extremely diversified. Remember, we serve over 10,000 customers in more than 100 countries, including all top 25 large pharma clients across the spectrum of therapeutic areas. Now while demand remains very healthy, as you know and as we have been saying throughout the year, we have been dealing with operational challenges caused by the global macro environment, including wage inflation, high levels of attrition, obviously, the ongoing Russia-Ukraine disruptions, reoccurring China lockdowns that are still going on and perhaps that’s a newer development, some staff shortages at certain investigator sites.
As you know, we have been able to overcome all these issues as reflected in our results for the first 9 months of the year. Although as we end the year, we are anticipating some minor delays in the timing of deliveries caused by these macro disruptions and specifically by the bottlenecks that are created by staff shortages at certain sites that are delaying the execution of our deliveries. This is why we decided to tweak the guidance a little in the final stretch to the end of the year.
A note on our capital allocation strategy as a result of persistent high levels of inflation, interest rates have been increasing sharply. In response, we are adjusting our capital allocation strategy to include some debt pay down in addition to continuing the M&A and share repurchase opportunistically as in the past.
In summary, the underlying demand in the industry and in our businesses remain strong, and we are managing through the headwinds caused by the factors I just discussed.
Now let’s review the third quarter in more detail. Revenue for the third quarter grew 5% on a reported basis and 10.5% at constant currency. The $22 million beat above the midpoint of our guidance range was driven by operational upsides in both TAS and R&DS services, offset by continued foreign exchange headwinds.
Compared to last year and excluding COVID-related work from both periods, our base businesses grew 14% at constant currency on an organic basis. Notably, on the same basis, the R&DS business was up 18% and TAS was up 12%.
Third quarter adjusted EBITDA increased 11.8%, reflecting our strong revenue growth and ongoing cost management discipline offsetting the headwinds of wage inflation that are persisting in our business. Third quarter adjusted diluted EPS of $2.48 grew 14.3% driven by our adjusted EBITDA growth.
I did provide some color on the business, starting with the commercial and technology side. The exponential increase in industry data access and complexity has created tremendous new opportunities for insight and evidence generation. But making this data usable requires robust information management capabilities and as you know at IQVIA, we’ve been building these capabilities for decades.
In the call, the Top 10 pharma clients selected IQVIA’s human data science cloud to power large-scale data and analytics programs by centralizing and harmonizing data for 35 large countries across their primary care and specialty medicine portfolio. We continue to advance digital marketing in health care. We’re deploying a privacy-first, open ecosystem that delivers health care information in a timely and personalized manner to meet the fast-changing needs of the health care consumer.
In the quarter, IQVIA acquired Lasso Marketing, which developed an operating system that’s purpose-built for health care marketers to coordinate and execute omnichannel digital campaigns from a single platform. In addition, DMD Marketing Solutions, which you will recall, we acquired about a year ago, was recently selected by a top 10 pharma client to bring to market 13 oncology and biological brands using digital insights to deliver personalized brand content to HCPs that are relevant to their practices and interests.
Demand for our commercial technology solutions remains strong. This quarter, the top 20 pharma clients selected IQVIA’s commercial technology ecosystem suite to transform its commercial operations into an AI-enabled commercial model. The customer will deploy IQVIA’s orchestrated customer engagement suite, IQVIA’s master data management and orchestrated analytics in more than 30 countries, driving a 20% efficiency gain in customer coverage and boosting the speed and precision of their older management process.
In the real-world business, IQVIA continues to lead in innovative study design that combine multiple IQVIA capabilities. For example, in the quarter, we were awarded a multiyear portfolio of real-world studies in psychiatry from a midsized pharma company. We are combining faster data-driven recruitment time lines with a comprehensive home health infrastructure to reduce the burden on both the patients and the site. In another example, we were awarded a significant contract with a major medtech company to identify early markers for organ transplant rejection through a non-interventional study that combines our medtech, real-world and translational sciences capabilities.
Moving to RDS. Our decentralized clinical trial, DCT program, has received independent compliance validation from EU General Data Protection Regulation, GDPR, from TRUSTArc, which is the leader in GDPR validation. This is a big deal. This program is highly recognized in the industry as it requires two separate independent audits. It’s a key achievement for IQVIA as it is the first time any DCT offering has received this European data privacy validation.
In addition, we’ve now expanded our DCT capabilities by launching the first self-collection safety lab panel for U.S. clinical trial participants in collaboration with Tasso Inc., a leader in clinical grade blood collection solutions. Participants in clinical trials can now provide a blood specimen for lab testing in the comfort of their own home without the need to visit an investigator site or have a health care professional visit them, expanding our DCT offerings and capabilities.
And, of course, as you’ve seen, the overall R&DS business continues its strong momentum with services bookings in the quarter exceeding $2 billion for the first time ever. This translated into a quarterly book-to-bill ratio of 1.39 excluding pass-throughs. And including pass-throughs, the business delivered over $2.5 billion of total net new business in the quarter with a book-to-bill ratio of 1.27. Over the last 12 months, our contracted book-to-bill ratio was 1.35, excluding pass-throughs, and 1.29, including 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
Okay. Thanks, Ari, and good morning, everyone. Let’s start by reviewing revenue. Third quarter revenue of $3.562 billion grew 5% on a reported basis and 10.5% at constant currency. In the quarter, COVID-related revenues were approximately $220 million, down about $160 million versus the third quarter of 2021. In our base business, that is excluding all COVID-related work from both this year and last, organic growth at constant currency was 14%.
Technology & Analytics Solutions revenue for the third quarter was $1,400 million, up 4.7% reported and 11.6% at constant currency. Excluding all COVID-related work, organic growth at constant currency in TAS was 12%. R&D Solutions third quarter revenue of $1.979 billion was up 6.8% reported and 10.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in R&DS was 18%, as Ari mentioned. Finally, Contract Sales & Medical Solutions or CSMS third quarter revenue of $183 million declined 9% reported but grew 1% at constant currency. And excluding all COVID-related work, organic growth at constant currency in CSMS was 3%.
Year-to-date revenue was $10,671 million grew 4.2% on a reported basis and 8.1% at constant currency. COVID-related revenues were about $850 million year-to-date. In our base business, that is excluding all COVID-related work, organic growth at constant currency was 14%. Technology & Analytics Solutions revenue year-to-date was $4.247 billion, up 5.2% reported and 10.3% at constant currency. Excluding all COVID-related work, organic growth at constant currency in Tech & Analytics Solutions was 11%.
R&D Solutions year-to-date revenue of $5.863 billion was up 4.5% at actual FX rates and 7.1% at constant currency. But excluding all COVID-related work, organic growth at constant currency in R&DS was 19% year-to-date. Finally, Contract Sales & Medical Solutions or CSMS year-to-date revenue of $561 million declined 4.6% reported and grew 2.9% at constant currency. Excluding all COVID-related work, organic growth at constant currency in CSMS was 5%.
Now let’s move down the P&L. Adjusted EBITDA was $814 million for the third quarter, representing growth of 11.8% while year-to-date adjusted EBITDA was $2.426 billion, up 10.6% year-over-year. Third quarter GAAP net income was $283 million and GAAP diluted earnings per share was $1.49. Year-to-date, GAAP net income was $864 million or $4.52 of earnings per diluted share. Adjusted net income was $470 million for the third quarter, and adjusted diluted earnings per share grew 14.3% to $2.48 and year-to-date adjusted net income was $1.413 billion or $7.39 per share.
Now as Ari reviewed, R&D Solutions delivered another outstanding quarter of bookings. Our backlog at September 30 stood at a record $25.8 billion, an increase of 5.4% year-over-year on a reported basis and 9.4% adjusting for the impact of foreign exchange. In fact, I might point out that without the impact of foreign exchange, year-over-year backlog would be $900 million higher. Next 12 months revenue from backlog increased to $7.1 billion, growing 2.8% year-over-year on a reported basis and 6.7% adjusting for the impact of foreign exchange.
And now reviewing the balance sheet. As of September 30, cash and cash equivalents totaled $1.274 billion and gross debt was $12.394 billion resulting in net debt of $11.120 billion. Our net leverage ratio at the end of the quarter was 3.42 times trailing 12-month adjusted EBITDA. Third quarter cash flow from operations was $863 million, and capex was $165 million, resulting in a strong free cash flow result of $698 million for the quarter. You saw in the quarter that we repurchased $150 million of our shares, which puts our year-to-date share repurchase at slightly above $1.1 billion and this leaves us with just under $1.4 billion of share repurchase authorization remaining under the current program.
As Ari discussed earlier, we’re adjusting our cash deployment strategy in the light of higher interest rates. Earlier this month, we retired $510 million of variable rate U.S. dollar term loans scheduled to mature early in 2024. And this was in October, so you don’t see it in our end of September balance sheet. We will likely retire additional term debt during 2023 while we continue to pursue acquisitions and repurchase shares as has been our practice since the merger.
Now let’s turn now to guidance. For the full year 2022, we continue to expect revenue, excluding COVID-related work, to grow organically at constant currency in the low-to-mid-teens. On a reported basis, the strengthening of the U.S. dollar has caused over $500 million of full year headwind since our initial guidance last November and this $500 million includes a further impact since our second quarter earnings release.
In addition, as Ari mentioned, global macro environment challenges such as wage inflation, investigator staff shortages, slower-than-expected recovery of patient visits, continued lockdowns in China and the still unresolved Russia-Ukraine conflict are persisting. And so far, we’ve been able to offset all of these challenges and absorb them in our numbers, but we’re forecasting a modest residual impact in pockets of our business during the balance of the year, and we reflected this in the updated guidance.
So for the full year, we now expect revenue to be between $14.325 billion and $14.425 billion. At the midpoint of our guidance, this represents an adjustment of about $100 million with roughly two-thirds of this driven by foreign exchange impact and the rest by the global macro environment headwinds I just detailed. Our updated guidance represents year-over-year growth of 7.4% to 8.2% at constant currency and 3.2% to 4% on a reported basis. And as a reminder, this equates to low-to-mid-teens organic growth at constant currency, excluding COVID-related work.
Our projected revenue growth includes approximately 200 basis points of contribution from M&A. We’re also updating our guidance on adjusted EBITDA to reflect the revenue and cost headwinds mentioned. We’re now expecting the guidance range to be between — we are now setting the guidance range to be between $3.330 billion and $3.360 billion, which represents year-over-year growth of 10.2% to 11.2%. And lastly, we’re raising the midpoint of our adjusted EBITDA EPS guidance by $0.05 to reflect updated estimates of costs below the adjusted EBITDA line. We now expect adjusted diluted EPS to be between $10.10 and $10.20, which represents year-over-year growth of 11.8% to 13%.
Moving to our fourth quarter guidance. We expect revenue to be between $3.654 billion and $3.754 billion or a growth of 5.5% to 8.2% on a constant currency basis and 0.5% to 3.2% on a reported basis. Excluding all COVID-related work, we expect organic revenue growth at constant currency to be over 10% at the midpoint of our fourth quarter guidance. Adjusted EBITDA is expected to be between $904 million and $934 million, that’s up 9.2% to 12.8%. And finally, adjusted diluted EPS is expected to be between $2.72 and $2.82, growing 6.7% to 10.6%. Now all of our guidance assumes that foreign currency rates as of October 24 continue for the balance of the year.
So to summarize before we go to Q&A, the underlying demand in the industry and our business remain very healthy. We delivered strong operational P&L and free cash flow performance in the quarter. Revenue grew mid-teens organically at constant currency, excluding COVID-related work. Our R&DS business continued its strong momentum with services bookings in the quarter exceeding $2 billion for the first time ever. Contracted backlog sits at a new record of $25.8 billion, up over 9%, excluding the impact of foreign exchange. We repurchased nearly $150 million of our shares while reducing our net leverage ratio to approximately 3.4 times trailing 12-month adjusted EBITDA. And finally, we retired at the beginning of the fourth quarter $510 million of our variable term debt.
With that, let me hand it over to the operator to start the Q&A session.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Dave Windley with Jefferies.
David Windley — Jefferies — Analyst
Hi. Good morning. Thanks for taking my question. I wanted to focus on kind of speed of throughput in RDS, call it speed of studies and thinking about major buckets that could fall both on the accelerator side and the decelerator side. So you talked about your DCT capabilities, more remote activity that could spur along throughput or recruitment of patients, finding patients that are willing to participate in studies, maybe clients that post-COVID are kind of pushing hard to catch up for things that were pushed behind during COVID.
And then on the other side, these things that you’ve highlighted around staff shortages at sites, things like that maybe therapeutic mix in your backlog might be lengthening that’s something that’s a trend in the industry. So it just seems like relevant to how quickly you can convert your backlog into revenue or these factors. And I wondered, Ari, if you could kind of help us understand the tug-of-war there and which one’s winning?
Ari Bousbib — Chairman and Chief Executive Officer
Well, David, thank you for the question. And there are many elements of response built in your question itself. You clearly know the industry and what’s happening very well. Look, as a context, as you all know, in the field, patient visits have not fully recovered to pre-pandemic levels. So that’s point number one. I think it was presented at an industry conference recently, I think it was on October 7, Society for Clinical Research Sites Summit, this issue of staff shortages that are affecting investor side operations was flagged as a development industry-wide.
So that, if you will, is on the negative now. You’re correct to point to DCT as obviously — the less we require the patient to actually visit the site, the better it is as a counter to this issue. Now we don’t see this issue as a sort of permanent or ongoing thing. It happens to be that what we have been dealing with, and we’ve been talking about from the beginning of the year, which is very high levels of attrition, people have a hard time going back to work. We have a harder time recruiting the skill sets that we require plus the impact on cost of labor that all of that has, all of these factors in combination are a significant — or the single most important operational challenge we have seen. And as we’ve mentioned many times, we’ve been dealing with that and offsetting the impact of these issues with our productivity initiatives and cost-reduction programs.
Now we’re not the only ones to experience these staff shortages. The sites also have staff shortages as a result of the same factors. And when they have to prioritize dealing with the incoming flow of patients versus dealing with clinical trials and so that’s a development. You mentioned also the complexity of studies as new factors and I think this is also correct.
The mix, not just in our backlog, I think it’s industry-wide that happens to be the evolution of the market, the mix of studies makes the factors I just mentioned, even more acute. As you know, recruitment of patients is much more — is correlated. The difficulty to recruit patients is correlated with the complexity of the study.
Now this is an area where we can shine because we’ve got our data analytics and our technology, and we’ve proven many times that we are able to address complex studies and recruit patients better than we would have had otherwise. So which side is going to win, it’s hard to tell. But look, so far, I mean, through the year, we’ve been able to address all of those. I mean, you’ve seen our numbers every quarter we have been able to beat our own expectations, and that’s because we’ve been able to address it.
We have a very diversified, large-scale company, and we are able to adjust. We’re not dependent on one single study. Had we been a-tenth of the size, we would be highly sensitive to a big study win or a big study loss. We’re not. We just tweaked a little bit the fourth quarter numbers here just because we want to make sure we anticipate everything and be transparent and put this out to investors. Thank you for your question, Dave.
Operator
Your next question comes from the line of John Sourbeer with UBS.
John Sourbeer — UBS — Analyst
Hi. Thanks for taking my questions. I was just wondering if you could talk a little bit more on the inflation and hiring trends. And you also mentioned some attrition in the prepared remarks. Just how do you see this playing out into next year? I know you’re not guiding on 2023, but do you see some easing on the trends there? And then on the other side, I guess, how is pricing looking? And are you able to offset any of these pricing — these inflationary pressures on pricing?
Ari Bousbib — Chairman and Chief Executive Officer
Thank you, John, and a very good question. That is exactly the operational equation that we are dealing with. And again, there’s no news here. We’ve been talking about this throughout the year. We’ve been saying this the single most significant operational challenge we’re dealing with is talent, talent, talent and the cost of the talent, recruiting, training, retaining and compensating the talent that we need to execute our studies.
The levels of attrition reached record highs. I mean, you’re talking about almost 20% sometime in the first part of the year. We have seen those levels of attrition come down and stabilize. Now they’re still very high. It’s now more in the 16%, 17% type of range and is stabilized there. And we hope that they are going to continue to come down. Obviously, we put in place a very large number of measures to retain people. And those include, not only but they include the compensation — upward compensation adjustments, which again, places more burden and creates inflation that we have to deal with.
This is, as I just mentioned before, the same issue industry-wide and including at our partner sites where we execute the studies, which is creating the bottlenecks that we talked about for us to execute. So as far as our operations, we don’t know how long these attrition issues and employee turnover and headwinds will last. We are dealing with them. I can tell you that many of the cost-cutting and productivity initiative programs that we were planning to launch in ’23, we have decided to accelerate and we’re starting many of them in this fourth quarter of 2022 in anticipation of potential continuation of some of these employee turnover and wage inflation issues.
So we are going to address that as far as our operations. Now you asked the balancing question, which is how are we able to reflect that on pricing. As you know, on the CRO side of the house, it’s a long-cycle business. So the contracted backlog that was contracted a year or 2 years, 3 years, 4 years ago, that’s still in our backlog sometimes, that is at certain cost assumptions, which were different than the ones we are facing.
There are, in most contracts, cost escalation provisions and clauses that enable us to adjust the rates. But I don’t think anyone anticipated 8%, 9% inflation. So we’re not fully able to immediately recall [Phonetic], there is a delay, if you will, there is a lag between when we are suffering the cost headwind and when we can reflect that into our pricing. Now it’s a little less like that in the shorter cycle businesses on the commercial side.
But there also we have long-term contracts. We have at least 1 year, 2-year contracts. We’ve got technology licenses at certain rates. We’ve got data contracts at certain rates. So it is more likely that we are able to reflect price increases in analytics, in consulting, in services, which are 3, 6 months, 1 year visibility-type contracts and those were able to — but again, it’s not the bulk of the business. So it will happen, and we’ve got plans to do so, but there is a lag. Thank you, John, for your question.
Operator
Your next question comes from Sandy Draper with Guggenheim.
Alexander Draper — Guggenheim Securities — Analyst
Thanks very much. I guess, Ari, it’d be helpful to hear some commentary on the TAS side and thinking about the three broad buckets you look at TAS. In terms of the demand drivers there, are there — what do you feel like is improving, staying the same, potentially weakening? Just thinking about some of the commentary or concerns out there around, okay, what’s happening with the sales force? Is that going to be accelerating in terms of cuts? Has that stabilized, thinking about overall marketing budgets how people are looking at using data in marketing. Just would love some commentary about how you see what’s going on in terms of pros and cons and puts and takes on the TAS side as we head into next year?
Ari Bousbib — Chairman and Chief Executive Officer
Yes. Well, good morning, Sandy, and thank you for the question. Look, we are very pleased with the continued strong growth that we are seeing in TAS. You heard us, both Ron and myself, report organic constant currency revenue growth excluding COVID from both years of 12%. That’s really, really, strong. And you know that the — if we think about the business in three buckets and the high-growth bucket includes real world and commercial tech and they continue to be strong drivers of growth.
We continue to find innovative ways to utilize real-world evidence for clients, as I described in my introductory remarks, and we care to deploy more of our technology solutions. You talked about digital marketing. So it’s true that sales forces, sales reps as a demographic in general, are going down. And so any parts of any business that are reliant on physical interactions between sales reps and physicians, those businesses clearly have downward long-term trends.
So people who are dependent on CRM, for example, are going to experience headwinds. Now as I have mentioned many times before, we have been long ago at the forefront of the transition to digital marketing. Interactions with HCPs are now rapidly evolving towards digital interactions. And I mentioned in my introductory remarks some examples, we made investments in this area. We bought DMD Marketing last year. We bought Lasso this past quarter. These are unique, this is kind of an operating system that enables pharma clients to buy and decide where to place promotional content.
This is where the industry is going. We’ve made investments. We bought technology and companies that we feel are unique and will enable us to claim our fair share of that market. And we are here to support our clients in this transition. So you’re absolutely correct. Overall, the traditional mode of going to market is going away. It’s a slow trend downwards, but it is downward, but it is more than offset by growth in digital marketing, and that’s what we’ve been investing in, and that’s what’s growing in our business. Thank you, Sandy.
Alexander Draper — Guggenheim Securities — Analyst
That’s really helpful. Thanks, Ari.
Operator
Your next question comes from the line of Shlomo Rosenbaum with Stifel.
Shlomo Rosenbaum — Stifel Nicolaus — Analyst
Hi. Good morning. Thank you for taking my question. This one is actually for Ron. Given the rise in interest rates and your focus on retiring more debt, can you give us a little bit of color as to how we should be thinking of the blended interest rate that we should assume on debt? And are you targeting kind of a leverage ratio instead of the mid-3s, low-3s, like how should we be thinking about this just more of on an ongoing basis?
Ron Bruehlman — Executive Vice President and Chief Financial Officer
Yes. Thanks for the question, Shlomo. And it’s very topical given the interest rate environment these days. And we haven’t provided comprehensive P&L guidance for 2023 at this point. But it’s an important enough issue. I want to give you a little bit of color around that in addition to what our strategies are to deal with it.
Let’s start with the strategies. You saw that we paid down debt in the fourth quarter with a term loan that was coming to $510 million early in 2024 and comparatively expensive, and we’ll be looking to pay down some additional term loan debt near term in maturity as we go through next year. So you’ll see us talking about that. As far as our leverage ratio, that’s been gradually trending downward. It was at 3.4 as we exited Q3.
I would expect that as we go through next year, we’ll hit that or get close to any way that 3 target that we set for the end of 2025. I think we’re going to get down to that level sooner rather than later and possibly by the end of next year.
Now as far as interest expense goes, look, we’re not in the business of forecasting rates. And precisely forecasting interest expense depends on what you think is going to happen with rates, but we can give you some help. If we just look at where the market consensus for rates is and kind of project outward from that, we think that in Q4, interest expense will be about $130 million, give or take. And you see that’s a fairly substantial step-up from where it has been. And actually, the run rate exiting the year at the very end of the quarter will be about $140 million per quarter. And if you extend that out, you don’t have to be a math major to say it’s — $560 million is kind of an annual rate exiting the year.
And if there are further increases, modest increases in rates as we go into the first quarter, which was what the market is projecting, we’ll see then that number could go higher. We also have a swap rolling off at the end of Q3. So you could see interest expense next year getting higher than $560 million, maybe approaching $600 million. We’ll see. But you have to keep in mind that this depends on a lot of things. It depends on central rate actions, our cash flow, how we choose to use our cash flow next year and so forth. But this should get you in the ballpark anyway for your models. I know some people have been struggling with that. So I wanted to be a little bit more explicit than we had been in the past when we said count on like $16 million for each 0.25 point of interest in drive, right?
Ari Bousbib — Chairman and Chief Executive Officer
Yes. So I mean, that’s the item that we’ve been working on. And as Ron mentioned, we decided that it was time to retire some of the debt that matures in ’24. So we took out $510 million just a few weeks ago, a couple of weeks ago. And we’re probably going to retire what is maturing in ’24, we will retire that in ’23. And so we will begin addressing the issue of interest expense.
Of course, it’s a 1-year issue right? From a comparison standpoint, we likely will have a step-up in interest expense in aggregate for us in ’23 versus ’22. But from then on, hopefully, rates are going to either stabilize or decrease. If you look at the forecasts by the individual governor’s of the Fed, and you’ve got these charts with every dots representing each governor’s anticipation of rates and they are really all over the map. For 2024, ranging from 2.5% to 5%.
So hopefully, at some point, the rates will go down and then it becomes a tailwind so to speak. But certainly, going ’22 to ’23, it will be a headwind that we have to address and we’re planning to address and take other actions on other fronts to mitigate that impact.
Operator
Your next question comes from the line of Justin Bowers with Deutsche Bank.
Justin Bowers — Deutsche Bank — Analyst
Hi. Good morning, everyone. Just wanted to follow up on the comments around labor. And we’re seeing obviously some turnover in — or some changes in the Bay Area and then in some of your clients as well. So wanted to get a sense of if the labor pressures that you’re seeing are isolated in any specific pockets or geographies? And if some of the turnover we’re seeing in those other areas provide you an opportunity to either hire talent, notably in TAS or just combat some of the inflation?
And then the follow-up to that would be with some of the labor issues at the sites, is there a way to provide us some goal posts on what the backlog conversion would be over the next 12 months in light of what you’re seeing at the site level?
Ari Bousbib — Chairman and Chief Executive Officer
Yes. Thank you very much for your question. Look, given the strength of the industry backdrop, there’s obviously competition for TAS. That’s number one. That in addition to the overall context of post-COVID resignations and the inflation that drives an additional component of wage inflation. Now we are actively recruiting and hiring, I mean, thousands of people, the numbers are staggering, the number of people we bring on board in order to meet the incremental demand.
And, of course, we’ve had this attrition issue that I mentioned earlier. We have approximately 83,000 employees. We recruit, as I said, thousands and thousands of employees a year. So we do have the capabilities we are focused on it. Now where? Which pockets? Obviously, it’s CRAs, it’s operational people, it’s project leadership. It’s really front-line execution, field skilled professionals. And that’s where the issues are.
Now because of that, we’re seeing margin pressure from the labor cost increases but you’ve seen we’ve expanded our margins. So really, that’s because of our productivity initiatives. We do intend to continue this trend. We are not just sitting here and watching the headwinds, we are countering them, and you know that we’ve done that throughout the year. Now we made a minor [Phonetic] modest adjustment to reflect some labor cost increase that we’re not able to offset entirely in the fourth quarter, again, very minor just because there is a lag.
You recruit highly skilled and expensive people, it takes a little bit of time before they are actually deployed in the field and productive. And sometimes, you just don’t have the time to catch up with the cost reduction programs to offset those increases in costs. Now with respect to the staff shortage at other sites, we don’t manage those sites, and it’s hard to do the same thing there.
I do not, at this point in time, see that these trends are widespread or that they are going to continue in such a way that all of a sudden, the long-term conversion of our backlog is compromised. We do not see that because those staff shortages have been located in pockets. We are operating in a lot of sites and not all of them are experiencing globally.
And it’s mostly some sites — mostly the sites that have been affected are in the U.S. where we see most of the pressure. Frankly, some of the reasons we’ve had to make the very modest residual adjustments we made to our fourth quarter numbers is a lot of it is due to the lab business not being able — not receiving the flow of samples from the sites on the time line that they had expected them.
And the reason for that is because there were less patient visits at the site. There were less patient visits at the sites because there was less staff to handle the patients. And so that’s what created the bottleneck. And we know it’s a specific site. So it’s too early for me to say this is a widespread permanent change in the industry.
Yes, the studies are more complex and that results into slower conversion by definition, but that was occurring even before COVID and it’s not going to be a major step down in conversion [Phonetic]. So, so far, we cannot say that this is going to continue. We think that we’ll be able to deal with it in the early part of 2023.
Operator
Your next question comes from Patrick Donnelly with Citi.
Patrick Donnelly — Citi — Analyst
Great. Thank you, guys, for taking the questions. Ron, maybe one for you in a similar vein there. You talked about the interest expense, obviously, jumping up with the variable next year. I guess when you think about the different inputs, Ari, you touched on labor costs there as well. When you think about the ability to offset some of that down the P&L, can you just talk about, I guess, the margin structure for next year? Again, you have some of the inflationary pressures. You talked a little bit about pricing throughout the call. But I guess, how do you think about the P&L defensiveness, ability to insulate away from some of that interest expense jumping up on you guys as you get into next year?
Ron Bruehlman — Executive Vice President and Chief Financial Officer
Look, the interest expense is going to be pretty much what it is, and it’s going to be based upon rate increases and so forth. And we will do what we talked about in terms of debt reduction. And really what you’re looking for is what can we do up above the EBITDA line and above to offset some of the items below, like interest spend below the line that we have less control over in the short term.
And we see our demand environment, as we laid out today, is fundamentally being very healthy. Yes, we highlighted a few executional challenges due to macro factors, but we don’t see them as being permanent. And we see the outlook for next year without getting into guidance for 2023, obviously, at this point, is being fundamentally strong on an operating basis. Nothing has changed there.
We’re going to try to continue to drive cost reduction to offset not just what Ari said about the continued labor pressures, which hopefully will abate, but we can’t count on that. But also to help offset some of what we see below the line in interest expense. And we’ll be coming out with guidance in the February time frame and lay it all out for you then.
Ari Bousbib — Chairman and Chief Executive Officer
Yes. And again, that’s absolutely — you’re absolutely correct, Patrick. We are exactly working on this. I mentioned earlier that we have plans. You will recall when we gave our 2025 [Phonetic] targets, which, by the way, are unchanged. Nothing here is, in the slightest, making us deviate from the goals we’ve set for 2025 for our company, at least with the exception perhaps of the leverage ratio we were targeting 2025 at a leverage ratio of 3. And as Ron mentioned, it’s likely we’ll be at 3 well before that. But other than that, our goals are the same.
The road to those goals may not always necessarily be a straight line, but the growth haven’t changed. Now in support of these goals, we have over the next 3 years a series of programs and productivity initiatives internally, and we’ve decided in light of both the increased below-the-line headwinds for ’23 and a continued labor inflation, which we are assuming as a given, we’ve decided to accelerate the programs we were supposed to initiate in ’23, and we are initiating them in the fourth quarter of ’22. So the answer to your question is absolutely yes, and that’s the plan.
Operator
Your next — your final question comes from Luke Sergott with Barclays.
Luke Sergott — Barclays — Analyst
Hey, guys. Thanks for taking the question. So Ron, a quick one for you. You guys had a big cash quarter. Can you talk about the drivers here? You’ve brought your conversion up to 85%, which is kind of where you guys were targeting, I guess, your long-term range. So is this a good spot to think about the jump off?
Ron Bruehlman — Executive Vice President and Chief Financial Officer
I’m not sure what you mean by the jump off, but —
Luke Sergott — Barclays — Analyst
For ’23, sorry.
Ron Bruehlman — Executive Vice President and Chief Financial Officer
Well, look, I think in any given year, we target 80% to 90% of adjusted net income for cash flow. But cash flow is inherently volatile. So one year it may be a lot better, one year it may be a little bit less. And certainly, from quarter-to-quarter, you see that to a much greater degree. And we had a not so great second quarter and a much better third quarter. And the reason is pretty simple, our collection — timing of collections, it was just much better in the third quarter than it was in the second quarter.
And nothing has fundamentally changed in terms of our cash flow. We’re going to continue driving towards maximizing cash flow, trying to minimize our day sales outstanding and remain a strong cash generator. My only comment there is don’t put too much weight on the quarter-to-quarter fluctuations because that’s the nature of cash flow. It’s not like earnings, it’s not accrual-based. So it tends to be more volatile and more difficult to predict on a short-term basis.
Luke Sergott — Barclays — Analyst
All right. And then lastly here, I’ll leave the staffing shortage question for offline. But can you talk a little bit more about the color of the bookings? Any change in the duration or the size of the average win that you guys are seeing? Anything that would portend on an acceleration or deceleration in overall project quality and in size?
Ari Bousbib — Chairman and Chief Executive Officer
Absolutely nothing changed at all, okay? Overall, RFP flow is 10% up year-to-date, 15% in Q3. What we call the qualified pipeline, which means it’s advanced, it’s not early stage, it’s not speculative, is up 19% year-over-year. Awards in Q3, the awards are — should I mention the number? The awards in Q3 are 22% up, second highest quarter ever, plus 10% sequential growth.
I mean, I don’t know what else to tell you. I’m looking at every number possible. On the demand side, we see no change. It’s widespread, large pharma, EBP. We’ve been saying this from the beginning of the year. You guys are not believing us, but the numbers are showing, and I guess everyone else is coming to the story as well.
Operator
And there are no further questions. Mr. Childs, I will turn the call back over to you.
Nick Childs — Senior Vice President, Investor Relations and Corporate Communications
Okay. Thank you, everyone, for joining us today. We look forward to speaking to all of you again soon. The team will be available rest of the day to take any follow-up questions you may have. Thanks, everyone.
Operator
[Operator Closing Remarks]