ICON, a contract research outsourcer (CRO), is the world’s number-four player in the sector, providing research and development services to the pharmaceutical, biotechnology and medical-device industries. The stock has been crushed in line with the rest of the CRO sector, but to me this is another case of Wall Street throwing the baby out with the bathwater.
The firm is winning plenty of new business – $265m in the first quarter of this year, representing a book-to-bill ratio of 1.2 (in other words, it has more orders than it can deliver right away) – and has a healthy $1.8bn backlog. A further $4bn is in the pipeline, and the balance sheet is solid.
Also, despite weak newsflow from many of its rivals, ICON’s board is confident of delivering 2009 sales and underlying earnings per share of at least $930m and $1.34, equating to a p/e ratio of 12.4.
On top of all that, Standard & Poor’s reckons the CRO sector is worth around $16bn, or 24% of the global $65bn research and development market. Most analysts expect this proportion to grow to 35% in the next four years, suggesting annual growth rates in the mid-teens.
ICON plc (Nasdaq: ICLR)
So what’s caused all the worry? There are fears over possible side-effects from the recent mega-mergers between Merck and Schering-Plough, Pfizer and Wyeth, and Roche and Genentech. There could be some fallout from this consolidation, but currently Wyeth doesn’t outsource any of its pre-clinical work, and Schering does most of its research in-house anyway. So if anything, the takeovers may actually lead to more trials being pushed out to the CROs. The other concern is that some biotechs are struggling to raise finance, and have cancelled projects and aggressively cut back on blue-sky research. Yet ICON derives only 7% from these smaller healthcare groups – 50% comes from big pharma. ICON has also been hurt by the stronger dollar.
But with the industry’s long-term fundamentals intact, today’s price looks a good entry point. Over time there could even be a boost from greater post-marketing and generic drug testing work as the US government tightens product safety requirements and tries to cut the cost of prescription medicines.
Recommendation: speculative BUY at $16.60
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments