1. ICON PLC (ICLR $64.30) – Wait…Keeponradar to Buy soon May 10, 2016
Market cap $3.5 Bil
Dividendyield 0%
Analystratings: Buys9, Holds 7, Sells1
Short interest: 4%
Top 5 CRO– clinical researchorganization(peerof PRXL)
EPS: P/E
FY Dec’16 $4.70 (+18%) 13.7x
FY Dec’17 $5.25 (+12%) 12.2x
Wait – Target $88 (17x FY’17 eps),(+37%) – Keepon radar until Pfizer(PFE) outcome, then Buy. If ICLR
renewscontract, target of $88. If ICLR losescontract, stock gets hit ~25%, thenyou can Buy also.
Positives:
1. Operatingmargin continuestoimpress,at19% currently(upfrom12% two yearsago);while less
potential remains(vs.PRXL),stillmovinghigher.
2. Continuedstable industrygrowth –biopharmaR&Dgrowth of LSD%, plusfurtheroutsourcing
penetration,plusmarketshare gainsbytop5-10 CRO’s,gets togrowth of mid-highsingledigits%.
ICLR anticipates longtermorganicgrowthof mid-to-highsingledigits %.
3. Revenuesconversionfrombacklogiscurrently low at10.3%,as 41% of ICLR’sbacklogisfor complex
therapeuticstrialsinoncology. These trialsare more complicatedandtake longertorecruitand
enroll patients,andtherefore take longertostartgeneratingsteady-state revenuesfor
ICLR/industry. Previously,thismetricwas11.5-12.0% forICLR. Can expectlow-to-mid10’s%for
nextfewQ’s,before picking upagain.
4. Valuation isextremely low atlessthan14x FY’16 eps,as investorsare pricinginthislowerrevenues
growth,as well asthe massive PFErisk(29% of revenues,see below),butopportunityexistsif
revenuesre-accelerate,toreturntoP/E of 17-18x.
Risks:
1. Pfizer(PFE) represents29%of ICLR’s revenues(andshrinkingfrom31%,by the way) – Five-year
contract up for renewal nowinMay2016. In contract negotiationstorenew –and waitinguntil we
getyesor nofinal decision. Certainlythisisa massive riskforICLR,and keepingsome investors
away at the moment. Assumingo.m.onPFE’scontract is below average, ICLRmightdrop 25% if
contract not renewed. Iwould definitelywaitforfinal outcome before buying,just in case.
2. RevenuesconversiondoesnotreboundinFY’17as anticipated
3. Biotechfundingforsmall/medium-sizedcompaniespotentiallyslowingdownandimpactingCRO’s
business,due todrugpricingenvironmentrisksandstockprice declines.
Doug Sokolower
917-494-2030
dsokolower@yahoo.com