ICON offers 35-70% upside based on absolute, comp and acquisition valuations. 

The Company operates in the Clinical Research Organization (CRO) industry which simplistically performs outsourced activities for pharmaceutical companies from the clinical trial through commercialization phases.  CROs are generally good businesses, the industry is increasingly consolidated, and will benefit from larger spend on R&D by drug companies while gaining a share of that spend.

According to a 2021 CBO report, the pharmaceutical industry spent $83B in 2019 on R&D, 10x the average during the 1980s. Or, more proximately on a time basis, pharma companies spent double on R&D as a % of revs in 2019 as they did in 2000, and have continued to increase R&D intensity from 2015 on.

Exclusivity/patent cliffs will impact ~$188B in sales from -2022-2026 vs $111B in the prior 5 year period, providing an impetus for spend on development to new commercialization (exact services offered by CROs, among others).

Outsourced spending as a share of clinical development has consistently risen (multi-decade), implying that CROs should, as an industry, grow revenues at a faster rate than spend on R&D by pharmaceutical companies. There are multiple drivers including: cost savings (estimates of this vary widely), conversion of fixed costs to variable costs for pharmaceutical companies, and growth of smaller speculative (especially biotech) pharmaceutical companies which lack capabilities to convert research to a market product.

Depending on the source, the CRO industry growth is expected to have a CAGR of 6.5%-11% over the next decade.  I believe and have incorporated the assumption that ICON can outpace this %  growth over the next 3 years as a result of increasing cross selling from the PRA acquisition along with a favorable subset of exposures within the CRO industry.

Comps

Public pure play comps trade at a 33% premium on EV/revs basis.  I chose this metric as Syneos arguably has sub-normalized margins and therefore profitably comp metrics would, unjustifiably (I believe), imply way more upside.

Acquisitions

Consolidation has long been a trend within the CRO industry.  However, it has accelerated in recent years.  Below is an abbreviated list of acquisitions (focused on the largest and ICON related deals). ICON is one of the larger pure play consolidators in the industry.  Greater scale should provide meaningful operating leverage. While it remains to be seen whether the prices paid were appropriate, I believe these acquisitions give the company a more complete suite of offerings, increasing the Company’s ability to win contracts and thus make economic and strategic sense.

• PRA acquired Symphony Health for ~$530MM in 2017
• Pamplona Capital acquired Parexel for ~$5B in 2017
• ICON acquired Symphony Clinical in 2019
• ICON acquired/merged with PRA for ~$12B in 2021
• Thermo Fisher acquired PPD for ~$17.4B in 2021
• EQT/Goldman acquired Parexel for ~$8.5B in 2021

Comp and acquisition multiples are always speculative.  I believe in this case they provide downside protection.  It is my opinion that ICON’s business (assets, relationships etc) are quality and, as such, any stumble would be due to management or integration mistakes.  Assuming that is true and given it is one of the only pure plays of any size still left, comp and acquisition multiples provide some downside protection.

Absolute valuation