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Morningstar | Icon Announces Acquisition of MolecularMD Specialty Lab; Otherwise No Surprises in 4Q Results

Icon reported fourth-quarter results that were in line with our expectations and slightly above analyst consensus, with $679 million in revenue. Expenses came in slightly lower than we expected, with fourth-quarter operating margin of 15%. Excluding the effect of new accounting standards, operating margin improved about 140 basis points from last year. Management guidance for 2019 was in line with our expectations, and w e don't anticipate a material change to our fair value estimate of $111 per share. We continue to believe that Icon has a narrow economic moat, underpinned by intangible assets and high switching costs.

Net new business looked slightly weaker this quarter, with $607 million, up less than 1% off of a difficult comparable last year. Given the challenging comp and continued backlog growth, we're not worried about Icon's ability to book new business in the near term. Further, the operating environment continues to look robust, with Icon reporting double-digit growth in requests for proposals from biotechs and high-single-digit growth from large pharma. While we expect strong biotech funding to drive growth for the contract research organization industry in the near term, we echo management's sentiments that the positive biotech environment will not continue forever. As such, we're comfortable with our explicit forecast of mid- to high-single-digit top-line growth for Icon.

The company also announced the acquisition of MolecularMD, a specialty lab, which closed in January for about $40 million. We like the lab's oncology focus, given that an outsize proportion of clinical development in the next several years will likely be in oncology and about 45% of Icon's backlog is made up of oncology business. Icon historically does well with smaller tuck-in acquisitions, building out its portfolio of services while maintaining overall returns well above its cost of capital.

We were pleased to hear about the extended agreement with Pfizer until June 2020, as Pfizer continues to be the company's largest customer. Given the strong switching costs associated with late-stage clinical trial work, we believe that Icon has a sticky relationship with its client base. Pfizer contributed 14% of total fourth-quarter revenue, up in absolute dollars and slightly up from 13% of total revenue last year. For the full year, Pfizer contributed 13% of revenue, down from about 18% (26%) in 2017 (2016). We expect Pfizer business to trend down as a proportion of total revenue as Icon diversifies its client base, but we would like to see continued increases in absolute Pfizer dollars in 2019.