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Rating Action: Moody's affirms Baa3 issuer rating of ICON Plc, stable outlook
Global Credit Research - 30 Jul 2020
Paris, July 30, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the Baa3 long term issuer rating of ICON Plc ("ICON" or "the company"). The outlook remains stable.
Today's rating action recognizes the company's track record of generating strong profitability and free cash flow (FCF) generation as well as the company's financial flexibility, which is supported by the company's prudent financial policies to date.
ICON is strongly positioned in the Baa3 rating. The agency expects that Moody's-adjusted gross leverage will be around 1.0x in 2020 and that leverage will improve modestly from these levels on the back of EBITDA growth gradually to around 0.8x in the next 12 to 18 months. Besides ICON's strong footprint in the contract research organisation (CRO) industry, Moody's expects the company will continue to benefit from good underlying fundamentals, including an ageing population, new drug developments and continued outsourcing by pharmaceutical companies. Additionally, Moody's expects that ICON will continue to have strong Moody's-adjusted EBITDA margins of around 18% to 19%. Moody's-adjusted FCF will be about USD250 million in 2020 and the agency expects this to increase to above USD300 million over the next 12 to 18 months.
Moody's forecasts that the coronavirus epidemic will reduce ICON's Moody's-adjusted EBITDA to around USD470 million in 2020, down by 12% versus the previous year, but that earnings will recover to 2019 levels in 2021. Since the beginning of the pandemic, the company's core Phase 2 and 3 businesses have been impacted because new trials were put on hold. At the peak of the outbreak in April and May approximately 70% of ICON's sites had either restricted, or stopped access to ICON's clinical research associates. This resulted in lower monitoring activities and lower patient enrolments during the second quarter.
Moody's expects that ICON's credit metrics should strengthen as confinement and social distancing measures continue to ease globally. This is because trials and tests were mainly delayed and not cancelled. ICON also has a well-diversified geographical global presence, which will limit the effects of any further lockdowns or social distancing. Additionally, ICON is currently working on different coronavirus treatments and vaccine trials, including prophylactic vaccine studies, trials of antiviral treatment across multiple geographies, and regulatory framework developments. Moody's views the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
ICON's rating affirmation continues to take into consideration the company's limited business diversification, and the relatively high business risk associated with the CRO industry. There is some uncertainty regarding future research pipelines and the risk of large project cancellations, as well as potential pricing pressure from pharmaceutical companies.
ICON remains concentrated on clinical testing, and in particular on Phase 2 and 3 of the drug development process, namely the final stages prior to the new drug application with the relevant regulatory bodies. At end-2019, clinical trial testing (Phases 1 to 3) represented 70% of the company's revenue, highlighting ICON's still material concentration on one service segment that has relatively high business risk.
ICON is a key partner to a number of large pharmaceutical companies, but its customer concentration remains important. ICON's largest customer represented 12% of total revenue and the company's top five customers contributed to 41% of its revenue, at 30 June 2020.
ICON's rating continues to factor in the risk of M&A. While the company has been disciplined so far in pursuing acquisitions, Moody's believes that M&A remains a risk because the CRO industry has seen rapid consolidation over the past few years, with several large M&A transactions. This industry environment poses a high degree of event risk because companies are pursuing scale-related benefits.
ICON has excellent liquidity, with cash and marketable securities of USD594 million as of 30 June 2020. In addition, it has access to an undrawn USD150 million revolving credit facility (RCF), due in October 2023, with significant capacity under its financial covenants (consolidated leverage ratio and minimum EBIT/consolidated net interest charge). The company has USD350 million of notes maturing in December 2020. Moody's understands that ICON will repay its current outstanding debt and new senior notes will be raised in December for the same amount.
While ICON does not pay dividends, it pursues opportunistic share buybacks, and Moody's anticipates that it will continue to do so. The agency's base case scenario assumes USD160 million in share buybacks in 2021. The agency anticipates working capital swings will return to normal levels by year-end, now that the effects of the coronavirus are easing.
The stable outlook reflects Moody's expectation that ICON will maintain a strong financial profile, with leverage (Moody's-adjusted gross debt/EBITDA) below 1.5x in the next 12 to 18 months. The stable outlook also reflects the credit agency's expectation that ICON will maintain at least stable margins and that the company will maintain a prudent financial policy, with discretionary spending calibrated to the company's FCF generation. Moody's forecasts do not incorporate large debt-financed acquisitions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Upward pressure could arise if, (1) the company commits to maintain a leverage (Moody's-adjusted gross debt/EBITDA) below 1.5x on a sustained basis; (2) the company's Moody's-adjusted EBITDA margin trends in excess of 20% on a sustained basis; and (3) ICON improves its business diversification and scale.
Conversely, downward pressure could develop if (1) there is a visible shift towards a more aggressive financial policy, as illustrated by Moody's-adjusted debt/EBITDA above 2.5x on a sustained basis; (2) Moody's-adjusted EBITDA margin trends below 15% sustainably; or (3) there is a material deterioration in the business prospects for or market conditions of the CRO industry.
The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
ICON Plc is a globally operating CRO. The company provides outsourced development services to the pharmaceutical, biotechnology and medical device industries. The company specialises in the strategic development, management and analysis of programmes that support clinical development, from compound selection to Phase 1-4 clinical studies. Founded in 1990 in Ireland, the company operates from 94 locations in 40 countries and has around 15,150 employees. For the 12 months ended June 2020, the company generated USD2.8 billion in revenue with a reported operating profit of USD407 million.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Gilberto Ramos, CFA Analyst Corporate Finance Group Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Jeanine Arnold Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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