1. Blue Hen Investment Club Health Care
Equity Research November 6, 2015
Rating Company
Buy ICON PLC
Headquarters GICS Sector
Dublin, Ireland Healthcare Services
Investment Highlights
Business Description
ICON is a contract researchorganization (“CRO”), providingoutsourced development
services ona global basis to the pharmaceutical, biotechnologyand medicaldevice
industries. ICON specializes inthe strategic development, management, andanalysis of
programs that support allstages of the clinical development process- fromcompound
selectionto Phase I – IV clinical studies. Our visionis to be the Global CRO partner of
choice for the biopharmaceutical industrybydelivering best in classinformation,
solutions, andperformance inclinical andoutcomes research.
Acquisitions Aid Expansion into Foreign Markets
ICON announced its acquisitionof AptivSolutions for a cashconsideration of$142.5
millioninMarchof 2014. AptivSolutions is a leader inclinical trial design and execution,
outsourcing their servicesto biotechnologyandpharmaceutical companies within16
various countries globally. AptivSolutions specializesinthe management anddesignof
medical device trials, which will prove to be a beneficial asset to ICON in coming years. In
addition, AptivSolutions also owns CRO Niphix, anoncology-focusedfull-service provider
of pharmaceuticalservices in Japanandother Asiancountries. Furthermore, ICON
recentlyappointed newleadershipin the Asia-Pacific regioninhopesof further
penetratingeastern markets; MaryPan andHiroshi Ichikawa nowleadoperations in
Japanwiththe goal ofexpanding ICON’s reachinthe region. Both bring over thirtyyears
of experience inthe CRO andpharmaceutical industries. ICON’s strategic acquisitionof
AptivSolutions andNiphix inconjunctionwith newleadershipin the Asia-Pacific region
positions the companyfor substantial growth inforeignmarkets inthe comingyears.
Alliance with IBM Watson Provides Competitive Advantage
ICON announced its partnershipwith technologysector leader InternationalBusiness Machines (“IBM”) in hopes of revolutionizing its approachto
data computing. The clinical trial andhealthcare servicesindustries are inherentlydata intensive as the cost andtime required to store, retrieve
and performthe necessarydata analytics to effectivelyconduct clinical trialsis substantial. Bypartneringwith IBM, ICON will have the abilityto
store its data in IBM’s WatsonHealthCloud andtherefore more efficientlystore client informationandreduce costs. ICON is currentlythe onlyCRO
on the market with such a partnership, lending the companysignificant competitive advantage.
Full Service Capabilities
The scope of servicesthat ICON offers is comprehensive, encompassingthe later phase of research anddevelopment andextending throughout
the entire clinical trialprocessthroughFDA approval. Their extensive scope of capabilities is attractive to large pharmaceutical andbiotechnology
companies as theyare able to acquire all necessaryservices through one provider. Their broad service offerings set themapart from competitive
contract research organizations as most of the other leading companiesinthe fieldfocus on a fractionof the clinicaltrial process or onresearch
and development exclusively. As such, pharmaceutical companiessuch as Pfizer, Bristol-Meyers Squibb, Johnson& Johnson, Novartis, and
AstraZeneca have sizable contracts with ICON that we expect to be ongoing inthe future. The demandfor the CRO industryremains secure as the
onlyalternative to CRO service offerings is the designand executionof clinical trials bylarge pharmaceutical services in -house. Especiallywith
ICON’s newlyacquiredtechnological abilitiesdue to their partnershipwithIBM, theyremain the most efficient provider of the clinical trial services
requiredto deliver drugs to the market.
Universityof Delaware
Hannah Crismon- Analyst
Price on November 8, 2015 68.10
Price Target 134.50
52-week Range 49.75-84.14
White – ICON PLC
Orange – S&P 500 Index
Yellow- XLV Healthcare Index
2. Blue Hen Investment Club Health Care
Equity Research
Industry Analysis
The Contract Research Organization industryprovides independent product development for
the pharmaceutical, biotechnology, andmedical device industries. Companies in these
industries outsource product development andclinical trial services to CRO’s in order to
manage the drug-development process more efficientlyand to cost-effectivelymaximize the
profit of both patent-protected and generic products. The industryis highlyfragmented,
consisting ofmanysmallandnarrowlyfocused providers and a limitednumber of mediumto
large full-service providers with global capabilities. Manylarge pharmaceuticaland
biotechnologycompanies are opting to outsource their product development and clinical trial
design to large scope CROs rather thanutilizingseveral, smaller firms inorder to drive
incremental development efficiencies andleverage the scientific andmedical expertise that
resides withinlarger CROs. This trendresults in a highlyconcentratedmarket oflarge CRO’s
with a historyof qualityservice, performance, data analytics, andgrowingexpertise in
effective clinicaltrial execution.
Strong Growth in Biotechnology Sector
The continualgrowthandnecessityfor research anddevelopment withinthe biotechnology
sector is animportant catalyst behindthe CRO industry. As patent expirationlooms around
the corner onmanybrandeddrugs, it is essential that biotechnologycompanies continue to
innovate andsendpotential drugs intotheir pipeline, a trend whichrequires the abilityto
compile data, formulate subject groups, anddesignclinical trials to successfullypush drugs
through to market. CROs capitalize onthis needbypresentingthe necessarycapabilities to
successfullyintroduce new drugs while complying withFDA restrictions.
Growing Necessity for Strong Data Analytics Tools
The CRO industryis heavilyreliant on data management tools to store and retrieve the necessaryinformationrelatedto eachof their clients. This
move towards bigdata requires substantial technological capital in order to analyze andprocess massamounts of records. ICON was one of the
first CROs to partner witha large technologyfirm to utilize supercomputer capabilities. It is expectedthat other CROs will alsofollow suite inthe
near future inorder to staycompetitive inthe market. Especiallywiththe growing demand for global reach, robust data analytics is requiredfor
sustainedupward mobility.
PharmaceuticalCompanies Aim to Consolidate Resources
As the legalrestrictions surrounding the drugapproval process continue to increase, the costs associated withlegal compliance duringclinical trials
has alsosignificantlyincreased. Pharmaceutical companies maychoose to conduct these trials in-house or throughan independent CRO, as has
been the popular trend amongst large pharmaceutical companies inrecent years. Doing soallows these companies to consolidate their research,
medical device development, data analytics, andclinical trials servicesto one provider andtherefore reduce development costs considerablyfor
higher profit margins. These CRO companieshave the medical expertise andthe legal backgroundto more effectivelyandefficientlyperform such
services, making them anattractive optionto pharmaceutical companies.
Increasingly Concentrated Market
Clinical trialshave become more global inscope due to the speedat whichtrials are beingapproved and the growing access to foreign populations.
The growingdemandfor CROs has leadto amplified growthwithinthe industry;however, veryfewhave the resources to compete in the global
market. Therefore, those with a strong international presence compete for contracts with the large pharmaceutical companiesi naneffort to build
ongoingrelationships. CROs have transitioned from being a minor service provider onanirregular basis to a strategic partner with pharmaceutical
companies in the drug development processwithinthe last thirtyyears. The nature of the industrylends itself to lowclient turnover due to the
lengthycontract periods inherent to the drug approval procedure. Thisresults inthe few, large, globallyenabledCROs dominating the majorityof
the market share.
Competitive Landscape
Rival Firms Industry Competitive Advantage of Rival
Albany Molecular
Research
Specialty
Pharmaceuticals
An integratedchemistry
research/outsourcing companywith focus
on molecular analysis anddevelopment
Clinigen Group PLC HealthCare Services
Offers broad scope pharmaceutical services
with growing presence andsuccessin
foreignmarkets, specificallyin Europe
Ticker: ICLR
Market Cap: $4,194.1M
Shares Outstanding: 59.87 M
Beta: 0.74
Dividend: N/A
Exchange: NYSE
Headquarters: Dublin,Ireland
Employees: 11,350
Management:
- Ciaran Murray, CEO since 2011
- Brendan Brennan,CFO since 2012
- Dr. Steve Culter, COO since 2014
Major Shareholders:
- EarnestPartners- 8.53%
- Neuberger Berman Group
LLC- 7.22%
- WCM Investment
Management – 6.03%
3. Parexel
International Corp.
HealthCare Services
Focus onconsultingservices to
pharmaceutical companies to determine
the optimal regulatoryandclinical paths
available. Strong international presence.
Quintiles
Transnational Corp.
HealthCare Services
Focuses onthe development ofproducts
for a varietyof medical issuesfor
cardiovascular healthandoncology
CVS Group PLC HealthCare Services
Focuses primarilyonanimal andveterinary
relatedservices
Porter’s Five Forces
Threat of New
Entrants
Threat of Substitutes
Bargaining Power of
Suppliers
Bargaining Power of
Buyers
Rivalry Within the
Industry
Moderate
-A highlyfragmented
market withlow market
share concentration(Top
5 account for 50%)
-Existence ofleaders
within each niche area,
and pre-established
strategic partnerships by
the keyplayers willprove
difficult for new entrants.
Weak
-A lot of CRO’s exist but
very few withthe robust
capabilities that ICON has
to offer
-Long-termfixed-fee
contracts mitigatesthe
risk of clients switching to
other CROs
Weak
-No true “suppliers,”
there will always be
companies withdrugs
undergoing clinical trials
and patients for these
trials
-Strong relationships with
suppliers of reagents and
testingequipment
Moderate/High
-Over 50% of revenue
from top 5 clients
-Dependent on continued
increasedR&D spending
-Large pharmaceutical
vendor base consolidation
-Increasedpharmaceutical
& R&D collaboration
Moderate
-Compete withother large
global CROs for strategic
relationships withlarge
pharmaceutical
companies.
-Low client turnover due
to the long-term fixed-fee
nature ofCRO contracts
-Verylow CROs witha
similar global presence
and reachto be
consideredcompetition
PEST Analysis
Political Economic Sociocultural Technological
-Potential increase inFDA
regulationonHCandCRO
companies
-Qualitymanagement system
must satisfyISO9000
international standards
-Hundreds of global standard
operatingprocedures
-National Institutes ofHealth
(NIH) budget, which provides
significant funding to academic
labs remains under pressure
-Rise ofinterest ratescouldlead
to decreasedR&D byHC
companies
-Stronger dollar (hedging
strategies/contract pricing)
-Trend towards cheaper generics
-Clinical trials are increasingly
becoming global, placing a
premium onCROs havingglobal
capabilities to serve their client’s
needs across geographies.
-IBMWatson
-Big Data management/ storage
-Pressure to have best and most
efficient data analytics
-Qualitymanagement system
extremelyimportant
Competitive Positioning
Comprehensive Service Scope
The CRO market is highlyfragmented, as there are onlya few large CRO’s withthe global reach that ICON has. As such, a select few companies
dominate the race for contracts withlarge pharmaceutical companies. Parexel International competes most directlywith ICON i nthe clinical
researchspace withanemphasis onconsulting servicesconcerning globalproduct development strategyto pharmaceutical companies to
determine the optimalregulatoryand clinical paths available. However, theyhave beenexperiencingdeclining market share inforeignmarkets,
especiallyinEurope. QuintilesTransnational Corp is the largest CRO on the market. However, their scope is differentiated fromICON as only
twentypercent of their total revenue flows fromintegratedhealthcare services. Nearlysixtypercent of their revenue is due to product
development, which is heavilybased in the researchanddevelopment stage. Clinigen PLCis one of the newer CRO’s as it was founded onlyfive
years ago. Their stock is tradingfar above the normfor other companiesinthe industry, indicatingthat it is possiblyovervalued. AlbanyMolecular
Researchprovides a wide arrayof chemical development services earlyon inthe research and development stage andtherefore donot compete
directlywithICON in terms ofclinicaltrial services. Similarly, CVS PLCoffers healthcare service relatedto the animal andveterinaryrealm. As such,
4. their scope is narrower thanICON’s. ICON’s competitive advantage liesinits size, wide scope ofmedicalservices, anddata analytic capabilitiesdue
to their recent coalitionwith IBMWatson.
Financials
Revenue/Income: ICON PLC’s revenue has demonstrateda steady, upward trendinrecent years. Accordingto the third quarter earnings
conference call from2015, year-on-year constant dollar revenue growth was7.5% andconstant dollar organic growthwas 4.1%. Management is
optimistic that revenue growth willcontinue inthe next fiscal year withprojected growth of1.25%. Additionally, ICON hopes to diversifyits
revenue sources byimproving client concentrations. Theyare activelytaking measuresto lessen the amount ofrevenue attributed to topclients by
adding contracts with other large andmedium sized pharmaceutical andbiotechnologycompanies.
Operating Margins: ICON leads its peer groupin bothoperatingmarginandoperatingmargingrowth as the companyhas seensteady increase
in both for ten consecutive quarters. ICON’s EBIT hasseenimpressive growthover the past several years due to the company’s lucrative contracts
with large pharmaceutical companies. As the companyhas undergone severalacquisitions andextended its scope, both COGS and SG&A expenses
have steadilyincreased proportionally. Duringthe Q4 conference call, management reported that the companyreachedits margin targets earlier
than originallyanticipated. Theyforesee increasedmarginexpansion throughout fiscal year 2015 as more contracts are finalized and recent
acquisitions are fullyassimilated. These strategic acquisitions provide a wider client base and provide ICON with new opportunities to increase
margins by employing cost cutting strategies.
Capital Structure Analysis: On September 19, 2014, CFO BrendanBrennanannounced that ICON hadsuccessfullycompleted a fortybillion
dollar share buybackprogram andwas movingforwardwithanother program to buybackone hundredmilliondollars worth ofthe company’s
common stock throughopenmarket share acquisitions. Interms of financial leveraging, the companyreceives one hundred percent of its financing
through equityas there is nodebt, either long-term or short-term, ontheir balance sheet. ICON PLCpaid off all its long-termdebt infiscal year
2009 and paidoff its remaining short-term debt in fiscal year 2011. Therefore, ICON funds its acquisitions andshare buyback programs solelyfrom
its free cash flow.
Discounted Cash Flow Model
Bear Case Assumptions
