Is This Stock the Next Tax-Fleeing Takeout?

Icon Plc (ICLR) operates in the fast growing drug R&D industry and its tax friendly Irish address may make it an attractive acquisition target for larger peers like Quintiles (Q) or Covance (CVD)

Jun 17, 2014 at 11:38AM

Icon Plc (NASDAQ:ICLR) is an Ireland based contract research organization that manages clinical trials for global drugmakers. The contract research industry is quickly consolidating as it shifts from a market dominated by small niche players to large companies offering global scale.

Icon's already a big player in the clinical trial industry, but it's far from the biggest. That suggests that larger CROs including Quintiles (NYSE:Q) and Covance (NYSE:CVD) may find that an Icon acquisition makes sense, particularly given its tax friendly status.

G

Source: Icon Plc

The benefit of inversions
Rising political scrutiny is increasing the urgency for companies interested in inversions. The tax reducing strategy has caught the attention of regulators worried over losing billions in tax revenue from companies shifting headquarters abroad.

That worry may translate into a tightening of regulations governing tax inversions that could ultimately derail future deals.

Currently, companies are accomplishing two shareholder friendly things by doing inversions: they're reducing taxes and putting cash held abroad to work.

Here's how it works: A company like Medtronic (NYSE:MDT) inks a deal to buy the Ireland based Covidien, allowing it to put to use billions in cash held abroad that if brought back into the U.S. would be heavily taxed. Medtronic provision for income taxes totaled $640 million last fiscal year on $17 billion in sales, and Medtronic and Covidien's effective tax rates are roughly 18% and 15% per year, respectively. That suggests that shifting Medtronic overseas for tax purposes could save shareholders around $95 million a year.

While that's good news for investors, it's not good news for the Treasury's war chest. In response, Washington is considering changing regulations that currently say that the acquiring company's ownership of the new entity can't be more than 80%. Under the proposed changes, that ownership would be limited to just 50%, meaning that acquiring companies would effectively have to buy companies bigger than they are to still qualify for inversion. Faced with that hurdle, a flood of inversions could be coming by year end before new regulations take effect.

Potential benefit for CROs?

G

Source: Quintiles

One of the industries that may benefit from acting ahead of regulators may be contract research organizations.

Facing the patent cliff, big drugmakers are increasingly embracing R&D outsourcing to cut costs. That has helped the CRO market jump to $13.6 billion, up 10.2% from 2011.

CRO demand should continue to grow given that drugmakers are targeting margin-friendly orphan disease and biologics, two areas of research that are both complex and costly. Drugmakers' interest in emerging markets and a flood of public and private funding for biotechnology companies should also translate into revenue growth for CROs.

If so, sales at Quintiles, the largest CRO, could continue to climb. Quintiles already helps more than 400 drugmakers worldwide and more than 65% of its sales are generated abroad. That global reach has the company expecting to deliver over $4 billion in revenue this year, but Quintiles will pay a stiff tax on that revenue given that Quintiles' effective tax rate hovers around 30%.

Covance is another large player in the global CRO market, with $2.4 billion in revenue last year. Like Quintiles, Covance gets a big chunk of its annual sales abroad. About 53% of its revenue was generated internationally last year, including 16% in emerging markets. Overall, Covance's effective tax rate was 21% last year.

Given that these CROs are generating considerable sales abroad and have significant tax bills, it wouldn't be shocking to think they may be looking at inversion strategies.

If so, Icon may be one of the companies that acquirers could be considering. Icon's sales climbed 20% to $1.3 billion in 2013 and Icon expects sales could reach as high as $1.54 billion this year, translating into earnings per share that could total as much as $2.40. Importantly, Icon's effective tax rate is just 15%, which is significantly lower than Quintiles and Covance.

Q Effective Tax Rate (Annual) Chart

Q Effective Tax Rate (Annual) data by YCharts

Fool-worthy final thoughts
Investors shouldn't buy companies solely because they may or may not become acquisition targets. Instead, it's best to focus on solid business models that are producing solid and profitable growth. That said, Icon operates a growing business in a growing market and offers tax friendly advantages that may make it attractive to suitors. And for those reasons, I think it's an intriguing opportunity that merits a closer look.

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need to Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

 

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool owns shares of ICON plc (ADR) and Medtronic and recommends Covidien. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers