Shares in the Irish clinical trials group ICON collapsed on the Nasdaq market yesterday after the group warned that earnings for the year to the end of May would be well down on analysts' forecasts. It also said that there will be no growth in earnings in the year ending May 2000.
From its overnight price of $26.75, ICON was hit by a wave of selling and the share fell to $10 in the first half hour's trading on Nasdsaq before recovering slightly. At the close last night, ICON was on $131/8 - this compares with its post-flotation high of $36.75 last January and the $18 at which the shares were floated on Nasdaq last May.
Analysts had been looking for earnings per share between 67 and 72 US cents for 1999, but given the statement by ICON, it would seem that earnings per share for the year are likely to be in the order of 63-65 cents for both 1999 and 2000. Analysts had also been expecting earnings per share in 2000 of over 90 cents per share compared to the 65 cents hinted at in yesterday's statement from ICON.
ICON's finance director, Mr Peter Gray, was phlegmatic about the huge fall in the share price.
"It's the reaction of the market to a stock with very high multiples if there's a hint of an earnings disappointment. High multiples mean high expectations" He stated bluntly that at yesterday's lower levels between $10 and $12, ICON shares are undervalued. "We don't think we're a different company today than we were yesterday."
He said that it will probably be a few days before the ICON share price and trading volumes settle down and added: "It will take a few quarters for confidence to be rebuilt with investors." He said that ICON has no regrets about floating on Nasdaq despite yesterday's mauling and plans to go ahead with its secondary listing on the Dublin stock market by the middle of May.
ICON's problems stem from the loss of a $5 million contract from its backlog of contracts, and this is expected to impact directly on earnings in the final quarter of the 1999 financial year and the first two quarters of the 1999-2000 financial year.
"Given the relatively fixed nature of our costs and our commitment to continued investment in the company, this reduction in our planned revenues will lead to earnings per share for the year ended May 31st 1999 increasing by over 30 per cent rather than over 40 per cent as expected by analysts.
"For our fiscal year ended May 31st, 2000, we expect the earnings per share number to be similar to that of fiscal 1999, due to declines in the first and second quarter offset by the resumption of strong growth in the third and fourth quarters," ICON's chairman, Mr Ronan Lambe, stated.
The profits warning came with the group's third quarters results which showed strong growth with net revenues up 32 per cent to $14.7 million in the quarter and up 37 per cent to $41.3 million in the nine months to the end of February.
But these results were totally ignored by the market which focused on the profits warning, and the wave of selling - compounded by the presence of many momentum investors - drove the ICON share to well below its flotation price. Trading in ICON shares was described by one dealer as "staggering", with a total of 2.6 million shares trading, compared with the average daily turnover of 30,000 shares and the total of 19.8 million shares in issue.
NCB analyst Mr Ciaran O'Neill said that the cutback in earnings is totally due to the loss of the $5 million contract but added that the sell-off in ICON shares was an "over-reaction".
But clinical trials companies like ICON tend not to be valued on their earnings but on their backlog of contracts, and the loss of a $5 million contract from ICON's backlog has had a devastating effect on the group's ratings and reputation in the marketplace.
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