Sunday, April 23, 2017

A current AIM Fund holding: ICON plc (ICLR) by Jacob Schwister, "Healthcare Reform is Up in the Air - Continued Hold"

ICON plc (ICLR, $77.58): “Growing Icon”
By: Jacob Schwister, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

ICON plc (NASDAQ:ICLR) is a pure-play contract research organization (CRO), which provides global healthcare services to the biotechnology, pharmaceutical, and medical device industries. ICLR specializes in the drug development process by providing information, solutions, and performance in clinical research.  

• ICLR believes they are one of few CROs with the amount of expertise and capacity needed to provide the full-service outsourcing support to companies. This stems from the capability to perform clinical trials in most of the main therapeutic areas that are relevant around the globe.  

• Revenues are derived from the US (45.8%), Europe (43.4%), and the rest of world (10.8%). As of 2016, ICON was the fifth largest CRO in the world based on revenues.

• In 2016, ICLR acquired Clinical Research Management, Inc., a full-service CRO based in the United States. The acquisition created net cash outflows of $52.4M.  

• Revenue in 2016 grew 5.8% to $1,666.5M from $1,575M in 2015. This growth is attributed to strong performance in the United States.  

Key points:
ICON plc has continued its inorganic growth by acquiring companies providing geographical, strategic, and growth advantages. The most recent acquisition in Sept 2016 of Clinical Research Management, Inc. (ClinicalRM) demonstrated ICON’s focus to boost exposure and growth in the United States, the country with its highest growth yoy (17%). ClinicalRM’s customer platform includes past contracts with US governmental agencies and Non-Government Organizations (NGOs). About 45% of revenues are derived from their five largest customers; therefore, ICON focuses intensely on expanding its customer base through acquisitions.

In February 2017, the United States FDA selected ICON to validate three Patient Reported Outcome (PRO) tools that will be used to measure clinical endpoints in antibacterial drug trials. This project will assist ICON’s effort of gaining market share in the United States. In 2016, ICON was selected by International Consortium for Health Outcomes Measurement (ICHOM), Genomics England, and Pfizer to provide expertise in the organization's relative industries.

In the company's Q4 Earnings Call, management discussed the drivers of their successful business model and the CRO market growth over the past year.  R&D budgets are continuing to grow and outsourcing is becoming more popular for biotechnology and pharmaceutical companies looking for an edge on their drug investments. ICON's success in this growing market is highlighted in their full year EPS growth of almost 20% in 2016.   

During the earnings call the company emphasized their confidence heading into 2017. They expect another year of revenue and earnings growth. Through the method of acquisitions, they have increased their customer base. ICON expects their largest customer that contributed 26% of revenues in 2016 to decrease to 15-17% in 2017 due to a more diverse and growing customer base.

What has the stock done lately?
On April 12, 2017, ICON received an award for the “Best CRO” at the World Vaccine Congress 2017. This news caused a price jump of 1.4%, which only lasted for the morning and decreased to the opening price at the end of the day. The stock has decreased approximately $3 since the beginning of April.

Past Year Performance: ICON’s stock price has increased 5.3% over the past year. In the most recent earnings call, management discussed their 2016 performance. Revenues grew 6.4%, and gross margin, operating margin, and net margin all were very similar to 2015 percentages. In February 2017, the stock reached an all-time high of $87.78 on the day earnings were released. Since then, the stock has dropped about 10%.

Source: FactSet

My Takeaway
Despite a decreasing stock price in the beginning of 2017, I believe ICON has the potential to rebound in the second half of 2017. The consistent growth of the company for the past 10 years shows management's ability to control the direction of the company. With intense political and regulation tension being at the core of a volatile market, healthcare remains on edge due to the spotlight it has been in. I expect ICON to capitalize on its expertise and show the CRO market they can compete with the best.

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