An "Icon" in Clinical Research

11/29/2018 5:00 am EST

Focus: HEALTHCARE

Richard Moroney

Editor, Dow Theory Forecasts

ICON (ICLR) — a clinical-research organization (CRO) — helps biotechnology and pharmaceutical companies test new products, especially in the late stages of development, explains Richard Moroney, editor of Dow Theory Forecasts.

Late-stage trials typically involve enrolling and tracking thousands of patients around the world. Finding test subjects to enroll in drug trials is always a challenge — less than 2% of U.S. physicians and patients participate in clinical research.

Yet speed matters because the patent clock has already begun ticking. ICON taps its own healthcare alliances to screen for potential patients, accelerating the recruitment process and lowering costs. Few CROs can match ICON’s global reach, extending to 38 countries. ICON has an estimated 7% share of the fragmented $39 billion CRO market.

Rather than employing a broad roster of CROs to handle individual projects, many drugmakers have shifted toward forming deep partnerships with one or two CROs to manage their entire pipeline. This is creating stickier relationships for CROs and higher switching costs for drugmakers.

But as the contracts get bigger, the backlog-conversion rate slows for CROs such as ICON, which are taking on more complex trials for oncology drugs.

One drugmaker bucking this industry trend is ICON’s largest client, Pfizer (PFE), which has spread out its business in recent years. Pfizer accounted for 13% of ICON’s sales in the first nine months of 2018, down from 31% in 2015. But recent operating momentum shows ICON is gaining enough new business elsewhere to overcome the effects of less from Pfizer.

ICON’s per-share profits rose 14% on 9% higher revenue in the fi rst nine months of the year. Free cash flow totaled $179 million in the first nine months of 2018, and ICON is letting that cash build. Net cash rose to $142 million at the end of September, versus $12 million to begin the year.

In September, management said it sees the overall CRO industry growing 6% annually to reach $49 billion in revenue by 2022, up slightly from its previous long-term-growth target of 5% to 6%.

Analysts expect ICON’s per-share profits to climb at twice that pace over the next five years. For 2019, the consensus targets earnings per share of $6.78, up 12% on 7% sales growth. If ICON meets that profit consensus and its trailing P/E reverts to the industry median of 24, the shares would reach $163 over the next 14 months.

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