Publicly traded outsourcing companies have had their share of
success on Wall Street.
No surprise, really, because the value proposition is
compelling. Who doesn't want to save money, time and improve
efficiency by handing off a big job to someone else?
In the health care space, contract research organizations
(CROs) likeIcon (
) are in the right place at the right time.
Based in Dublin, Ireland, the company provides drug
development and clinical testing services to pharmaceutical,
biotechnology and medical device companies. The vast majority of
its revenue comes from clinical research, but Icon also offers
ancillary services such as laboratory and imaging capabilities.
It has a market capitalization of around $1.9 billion.
CROs dramatically cut costs and development time for drug
makers, allowing them to focus on their core competencies of drug
discovery and marketing.
New conditions in an industry often fuel earnings growth, and
that's what's going on in the CRO space.
"The CRO industry is shifting away from contractual
trial-by-trial arrangements toward long-term strategic alliances
between big pharma firms and drug-development service providers,"
said Lauren Migliore, an analyst with Morningstar.
Icon has succeeded in signing longer-term deals with some of
the world's largest drugmakers.
In May 2011, Icon and industry peerParexel (
) signed a five-year deal withPfizer (
) to conduct clinical trials. Terms weren't disclosed, but Pfizer
spends millions on research and development each year so the
alliance is potentially lucrative to both firms.
In August 2011, Icon was selected byBristol-Myers Squibb (
) as a preferred provider for full-service clinical pharmacology
and exploratory clinical studies.
Big pharma business has made its way to Icon's bottom line in
recent quarters. In 2012, annual earnings soared 92% to $1.00 a
Icon has been expanding its head count and building up
infrastructure as a result of recent deals.
"Double-digit backlog gains and new partnership revenue are
allowing Icon to leverage the head count and infrastructure
investments made in prior quarters over a larger revenue base.
This operating leverage should help the firm expand earnings at a
much higher rate than its top line," Migliore said.
Wall Street analysts concur because annual earnings at Icon
are expected to ramp up this year and next. The Thomson Reuters
consensus estimate calls for profit of $1.54 in 2013, up 54% from
2012. Earnings are seen rising another 20% in 2014 to $1.85 a
share. For 2013, earnings are seen rising 14% to $1.28
Icon continues to pursue growth through acquisition, and it's
not averse to small deals. Earlier this month, the company
shelled out $52 million for Cross Country's clinical trial
support business. Last year, Icon bought BeijingWits, increasing
its scale and capabilities in China. It also acquired
PriceSpective in 2012 to broaden its consulting services.
Like many other companies, Icon had a rough go of it in 2011
during a global economic slump. Annual earnings slumped 64% to 54
cents a share, but it wasn't because of poor execution. "It was a
perfect storm for CROs: A slowdown in global economic activity,
the credit crunch, which resulted in a biotech funding freeze,
and then there was uncertainty about health care reform. A lot of
drug makers postponed trials," Migliore said.
Fast-forward to today and business is much better. Earlier
this month, the company reported profit of 34 cents a share, up
386% from a year ago. Sales rose 24% to $300.2 million. The
company's top five customers represented 48% of revenue in the
quarter. Its top 10 customers represented 63%.
Backlog rose 20% to $2.8 billion. Its book-to-bill ratio,
meanwhile, has been above 1.4 for four straight quarters. That's
a ratio of orders received to units shipped and billed. Readings
above 1.0 indicate healthy demand.
Operating margin has accelerated for four quarters in a row,
from 2.7% in the fourth quarter of 2011 to 8.1% in the fourth
quarter of 2012.
In 2012, 45% of Icon's revenue came from Europe/Middle
East/Africa, 43% came from the U.S. and 12% from Asia
Pacific/Latin America. Only a handful of top-tier contract
research providers have the expertise and scale to conduct large
clinical trials around the world. Icon is in that group, along
with privately held Quintiles,Covance (
) and Parexel. Because of their global reach, all are expected to
take share from smaller players in the space.
The industry has seen some consolidation in recent years. In
May 2011, INC Research agreed to acquire Kendle International for
$232 million in cash. And in October 2011, Carlyle Group and
Hellman & Friedman LLC took Pharmaceutical Product
Development private in a transaction valued at $3.9 billion.
The largest player in the space is Quintiles. It brought in
$3.7 billion in service revenue in 2012. Quintiles went public in
1994 but in 2003, One Equity Partners, the private equity arm
ofJPMorgan Chase (JPM), took the company private. In 2008, Bain
and TPG co-led a recapitalization of Quintiles.
It won't be private for long though, because Quintiles filed
an S-1 on Feb. 15 with the Securities and Exchange Commission.
That's basically the first step in going public.