According to David H. Windley, CFA, CPA, Managing Director, Healthcare Equity Research at Jefferies, Icon is doing about double the amount of revenue with Pfizer versus Parexel.
Last year, Icon brought in $488m and Parexel, $267m. However, both Icon and Parexel are seeing their revenue decline – Icon more recently and Parexel for several quarters.
“I think the primary issue there is that, especially as it relates to Icon, they got so over-concentrated with Pfizer, that there’s a certain amount of risk management that is factoring in those decisions,” Windley told Outsourcing-Pharma.com – and this was part of the motivation for Pfizer to bring on a third partner, Pharmaceutical Product Development (PPD), in April 2015.
Windley described it as a “rebalancing,” adding, “if for not for other reasons than managing risk and not being overweighed to one vendor.”
With PPD on board, Icon’s revenue is expected to decline, yet with 29% of its revenue coming from Pfizer last quarter most expect the contract to be renewed.
According to Windley, if he had to put a number on it, he would guess it’s a 90-95% chance that Icon will be renewed and a 70-75% chance for Parexel, but his predominant assumption is that both will be renewed.
“It’s been a topic of question and concern for investors for some time,” he said. “People started speculating a year ago about how this would play out.”
The renewal addresses the company’s access to revenue, and whether or not they will be among the short list of CROs that get included in RFPs. However, the other part of the story is the renewal’s terms. Specifically, there are questions around pricing.
“Looking at both Icon and Parexel – but in particular Icon – margins have risen a bunch over the five year term Pfizer agreement,” said Windley,
In general, CRO margins have increased dramatically in the past three years and are now at an all-time high. However as Windley previously told us, sponsors are more concerned about efficiency than margins.
Still, he added that there is “some nervousness around the potential for changes in pricing terms.”
Per his conversations, Windley doesn’t expect that pricing will change much; however it is likely that Pfizer will want its CROs to use information systems to regularly provide updates on trials.
Windley explained, “As Pfizer is handing over more management responsibilities to CROs, they still want to be able to see very easily, on a daily basis: what’s my status.”