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- 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
- 5. Base Case Assumptions Bull Case Assumptions