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US is now the biggest market in the mix

Ergomed 4 October 2021 Update
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Ergomed

US is now the biggest market in the mix

H121 results update

Healthcare services

04 October 2021

Price

1,315p

Market cap

£643m

Net cash (£m) at 30 June 2021

24.6

Shares in issue

48.9m

Free float

80.2%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt Xetra

Share price performance

%

1m

3m

12m

Abs

8.2

(2.7)

116.4

Rel (local)

7.1

(3.9)

77.8

52-week high/low

1,430p

585p

Business description

Ergomed is a global full-service contract research outsourcing (CRO) business with a core focus on the US and EU. It provides Phase I–III clinical services in addition to post-marketing pharmacovigilance services through its PrimeVigilance division. Ergomed is predominantly focused on oncology, orphan drugs, rare diseases and pharmacovigilance.

Next events

Trading update

January 2022

Additional bolt-on acquisitions

2021/22

Analysts

Dr Jonas Peciulis

+44 (0)20 3077 5728

Dr Sean Conroy

+44 (0)20 3077 5700

Ergomed is a research client of Edison Investment Research Limited

Ergomed has released its full H121 results. H121 revenue numbers were included in the trading update in July 2021, while the full accounts released last week provided details on profits. In the trading update, management also guided that FY21 adjusted EBITDA would be materially ahead of market expectations, which has since been discounted in the share price, hence last week’s announcement delivered no surprises. However, the key takeaway for us was that overall operational momentum continues to be strong, including the first three months of H221 (following the already stellar performance in FY20). In H121, Ergomed has also launched its expansion into the Japanese market. We have slightly increased our valuation to £751m or 1,536p/share (from 1,445p/share).

Year end

Revenue (£m)

Adjusted EBITDA* (£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

68.3

12.5

19.8

0.0

66.4

N/A

12/20

86.4

19.4

23.7

0.0

55.5

N/A

12/21e

119.6

24.0

34.1

0.0

38.6

N/A

12/22e

136.9

27.9

40.5

0.0

32.5

N/A

Note: *Adjusted EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FX headwinds, but strong underlying growth

H121 results were substantially affected by FX headwinds, reflecting the increasing US$ contribution (now c 63% of the mix) after the US-based MedSource acquisition in December 2020. Total revenues increased to £56.0m, up 48.1% on constant exchange rate basis (CER; 38.8% reported) y-o-y. Like-for-like (excluding MedSource) total service fees (revenues excluding costs that are reimbursed by clients) grew 18.2% CER (11.1% reported). Including the acquisition, total service fees were £47.6m, up 37.7% CER (29.3% reported). Growth was driven by a solid order book (£227.8m, up 51% y-o-y) and healthy new business wins in H121 (£90.8m, up 50.8% y-o-y). This provides high visibility for H221 and into 2022.

Margins also ‘masked’ by unfavourable FX rates

H121 gross profit increased to £23.0m, up 24.3% from H120. The total gross margin contraction to 41.1% from 45.8% was partially expected due to increased presence and personnel in the US after the MedSource acquisition in December 2020, but also due to FX headwinds. However, the underlying total service fee gross margin on CER basis was a healthy 48.2% in H121 versus 50.1% a year ago. Adjusted EBITDA increased to £12.1m, up 33% from H120 (£9.1m), while adjusted EPS was 16.8p, up 48.7% from H120 (11.3p).

Valuation: £751m or 1,536p/share

We keep our FY21 estimates unchanged and modestly increase our EBITDA forecasts starting from 2022 based on improved margins, cost control and integration synergies. After rolling our DCF model forward, our valuation has increased slightly to £751m or 1,536p/share. This implies an EV/EBITDA multiple of 30.0x (FY21e). Ergomed trades at a modest premium on EV/EBITDA of 25.5x vs the peer average of 24.2x, but at a discount to Medpace on 31.8x. Flexing our DCF assumptions (long-term sales growth and profit margins), our bull case stands at 2,086p/share and our bear case at 1,072p/share (details in our Outlook report).

H121 update: Operational momentum continues

PrimeVigilance: Expanding to Japan

H121 revenues in the PrimeVigilance segment increased to £28.8m, up 16.2% CER (10.3% reported) y-o-y. Gross margin was largely flat at 50.7% versus 51.3% last year. One notable development in H121 was the launch of the expansion process in Japan. The Japan office is now fully operational, with local pharmacovigilance experts providing fully integrated PV services.

Clearly, the Japanese market has unique characteristics and, as a developed country, no shortage of competitors. Ergomed has been subcontracting some work in Japan, but will now have a local presence. During the analyst call, management explained that due to the nature of its business, Ergomed can compete with local PV players from now. To compete in the CRO market, it will likely need to acquire a local player.

H121 revenues from Asia were £3.3m (versus total revenues of £56.0m). Japan is the fourth largest pharmaceutical market in the world, so even moderate success in this region could translate into a meaningful addition to sales. We believe management might try to emulate the successful expansion in the US. As recently as FY19, the US made up 27% of the total revenue mix, while after two acquisitions in both business segments (CRO and PV) over the course of 2020 (and organic growth), the US now represents 63% of the mix.

CRO: Strong post-pandemic rebound continues

Ergomed’s total CRO revenues in H120 increased to £27.2m, up 106.4% CER (or 90.2% reported). Like-for-like (excluding MedSource) revenues increased to £16.6m, up 24.5% CER (16.1% reported). MedSource’s performance during the first full half-year after acquisition was described as good. Furthermore, the parties agreed to accelerate the earnout agreed during the takeover in December 2020. Ergomed will make the final payment of $3.8m (£2.7m) to MedSource shareholders in Q321, which will allow it to complete the integration.

For the near term CRO outlook, the company envisages few, if any, disruptions like those experienced last winter (due to the nature of the business, PV delivered a solid performance despite the pandemic). Ergomed is now also involved in a number of COVID-19 projects in its CRO and PV businesses, which could act as a mitigating factor in the case of potential disruptions this winter, or as a boost to performance (albeit no financial details about the size of COVID-19-related work were provided).

Estimate changes and near-term catalysts

Following the H121 results, we keep our FY21 estimates unchanged. In FY22 we slightly increased adjusted EBITDA margin by reducing SG&A costs to reflect Ergomed/MedSource synergies that we believe could be achieved sooner than we thought now that the integration is complete (Exhibit 1). Our total FY21, FY22 and FY23 revenue estimates are unchanged at £119.6m, £136.8m and £161.3m, respectively. Our FY22 adjusted EBITDA margin improved slightly to 20.4% (from 19.8%). Our adjusted EBITDA estimates are £24.0m for FY21 (unchanged) and £27.9m for FY22 (vs £27.1m previously).

Net cash was £24.6m at end-H121 versus £19.0m at end-FY20. Ergomed continues to be debt free, but still has access to facilities of £30m. The near-term catalysts are as follows:

Bolt-on acquisitions: the strong balance sheet and access to debt (£30m facility available) position Ergomed very well to consider further inorganic growth opportunities.

A reverse in US$/£ rate could lead to an unexpected positive catalyst and continued weakness would mean further headwinds now that the US has become a major market.

Next trading update is expected in January 2022.

Exhibit 1: Key changes to forecasts

£m

FY20

FY21e

FY22e

FY23e

Actual

Old

New

Change (%)

Old

New

Change (%)

New

Total revenues

86.4

119.6

119.6

0.0%

136.8

136.8

0.0%

161.3

– PrimeVigilance

55.1

63.6

63.6

0.0%

73.6

73.6

0.0%

88.2

– CRO

31.3

56.0

56.0

0.0%

63.3

63.3

0.0%

73.1

O/W pass-through

7.6

13.6

13.6

0.0%

15.3

15.3

0.0%

17.7

Adjusted EBITDA

19.4

24.0

24.0

0.0%

27.1

27.9

2.8%

34.9

Adj. EBITDA margin

22.4%

20.0%

20.0%

0.0pp

19.8%

20.4%

0.6pp

21.6%

Adjusted EBIT

14.5

19.8

19.8

0.0%

23.0

23.7

3.3%

30.7

Adj. EBIT margin

16.8%

16.6%

16.6%

0.0pp

16.8%

17.3%

0.6pp

19.0%

Adjusted EPS (p)

23.7

34.1

34.1

0.0%

39.3

40.5

3.2%

52.1

Source: Edison Investment Research

Exhibit 2: Ergomed base case DCF model

£'000s

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Revenue

119,600

136,877

161,301

187,109

215,487

246,374

279,634

315,054

352,336

391,093

Growth (%)

38.4%

14.4%

17.8%

16.0%

15.2%

14.3%

13.5%

12.7%

11.8%

11.0%

Adj. EBIT

19,829

23,740

30,709

37,422

44,893

53,381

62,918

73,513

85,148

97,773

Margin (%)

16.6%

17.3%

19.0%

20.0%

20.8%

21.7%

22.5%

23.3%

24.2%

25.0%

Tax

(3,536)

(4,279)

(5,603)

(6,932)

(8,325)

(9,908)

(11,689)

(13,668)

(15,843)

(18,205)

Rate (%)

-19%

-19%

-19%

-19%

-19%

-19%

-19%

-19%

-19%

-19%

D&A

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

4,150

Working capital

(3,226)

(1,388)

(2,541)

(2,415)

(2,377)

(2,677)

1,283

2,963

4,095

4,639

Capex

(3,550)

(3,550)

(3,550)

(1,733)

(649)

(893)

(771)

(832)

(802)

(817)

Operating free cash flow

13,668

18,674

23,165

30,492

37,692

44,053

55,891

66,126

76,748

87,540

Value

Value
/share

DCF for forecast period (2021 to 2023)

48.6

99p

DCF for transition period (2023 to 2030)

209.2

428p

Terminal value

461.9

945p

Enterprise value

719.7

1,472p

Net cash/(debt), FY21e

31.4

64p

Equity value

751.2

1,536p

Source: Edison Investment Research. Note: 10% WACC.

Exhibit 3: Ergomed comparable companies

Company

Price

EV

EV/EBITDA (x)

EV/sales (x)

P/E (x)

2020

2021e

2022e

2023e

2020

2021e

2022e

2023e

2020

2021e

2022e

2023e

Ergomed*

1,315p

£611m

31.6x

25.5x

21.9x

17.5x

7.1x

5.1x

4.5x

3.8x

58.0x

40.1x

33.7x

26.2x

Syneos

$96.0

$12,615m

19.9x

16.6x

14.8x

13.4x

2.9x

2.4x

2.2x

2.1x

28.2x

22.0x

19.1x

16.6x

ICON

$281.5

$21,908m

46.1x

24.3x

16.0x

14.3x

7.8x

4.1x

2.8x

2.6x

43.1x

30.8x

25.3x

21.6x

Medpace

$195.2

$6,716m

35.8x

31.8x

25.8x

22.5x

7.3x

5.9x

4.9x

4.4x

50.8x

43.9x

38.6x

33.6x

Average

33.9x

24.2x

18.9x

16.7x

6.0x

4.1x

3.3x

3.0x

40.7x

32.2x

27.6x

23.9x

Source: Edison Investment Research, Refinitiv. Note: *Edison estimates. We note the merger of ICON and PRA Health Sciences announced on 24 February 2021.


Exhibit 4: Financial summary

Accounts: IFRS, year end 31 December (£000s)

2019

2020

2021e

2022e

2023e

INCOME STATEMENT

 

 

 

 

Total revenues

68,255

86,391

119,600

136,877

161,301

Cost of sales

(29,790)

(38,686)

(58,600)

(59,131)

(69,682)

Reimbursable expenses

(8,940)

(8,055)

(22,650)

(16,379)

(18,967)

Gross profit

29,525

39,650

54,120

61,367

72,651

Gross margin %

43%

46%

45%

45%

45%

SG&A (expenses)

(23,513)

(27,803)

(35,064)

(38,396)

(42,708)

R&D costs

(545)

(152)

(203)

(207)

(211)

Other income/(expense)

51

1,839

0

0

0

Exceptionals and adjustments

3,265

993

976

976

976

Reported EBITDA

9,230

18,378

23,003

26,914

33,883

Depreciation and amortisation

3,712

4,844

4,150

4,150

4,150

Reported EBIT

5,518

13,534

18,853

22,764

29,733

Finance income/(expense)

(245)

(395)

(245)

(245)

(245)

Other income/(expense)

(286)

(511)

0

0

0

Reported PBT

4,987

12,628

18,608

22,519

29,488

Income tax expense (includes exceptionals)

583

(2,936)

(3,536)

(4,279)

(5,603)

Reported net income

5,570

9,692

15,073

18,241

23,885

Basic average number of shares, m

46.6

48.5

48.9

48.9

48.9

Basic EPS (p)

12.0

20.0

30.8

37.3

48.9

Adjusted EBITDA

12,495

19,371

23,979

27,890

34,859

Adjusted EBIT

8,783

14,527

19,829

23,740

30,709

Adjusted PBT

8,637

14,442

20,184

24,095

31,064

Adjusted EPS (p)

19.8

23.7

34.1

40.5

52.1

Adjusted diluted EPS (p)

19.8

22.7

32.8

39.1

50.2

Order book

124,100

193,000

246,902

276,736

423,642

BALANCE SHEET

 

 

Property, plant and equipment

1,110

1,742

1,742

1,742

1,742

Right-of-use assets

5,171

4,715

4,715

4,715

4,715

Goodwill

13,380

24,605

24,605

24,605

24,605

Intangible assets

2,755

9,618

9,018

8,418

7,818

Other non-current assets

2,616

4,310

4,310

4,310

4,310

Total non-current assets

25,032

44,990

44,390

43,790

43,190

Cash and equivalents

14,259

18,994

31,440

48,892

70,836

Trade and other receivables

14,359

22,224

27,852

32,821

40,310

Other current assets

3,382

7,009

7,009

7,009

7,009

Total current assets

32,000

48,227

66,301

88,723

118,156

Lease liabilities

3,716

3,128

3,128

3,128

3,128

Long term debt

0

0

0

0

Other non-current liabilities

635

2,529

2,529

2,529

2,529

Total non-current liabilities

4,351

5,657

5,657

5,657

5,657

Trade and other payables

10,373

15,702

18,104

21,685

26,633

Lease liabilities

1,718

1,978

1,978

1,978

1,978

Other current liabilities

3,770

17,388

17,388

17,388

17,388

Total current liabilities

15,861

35,068

37,470

41,051

45,999

Equity attributable to company

36,820

52,492

67,565

85,805

109,690

CASH FLOW STATEMENT

 

 

Profit before tax

4,987

12,628

18,608

22,519

29,488

Cash from operations (CFO)

11,788

18,084

15,997

21,003

25,494

Capex

(996)

(974)

(3,550)

(3,550)

(3,550)

Acquisitions & disposals net

(107)

(11,969)

0

0

0

Other investing activities

(1,728)

0

0

0

0

Cash used in investing activities (CFIA)

(2,831)

(12,760)

(3,550)

(3,550)

(3,550)

Net proceeds from issue of shares

1,427

(157)

0

0

0

Movements in debt

(1,677)

(2,189)

0

0

0

Other financing activities

0

0

0

0

0

Cash from financing activities (CFF)

(250)

(477)

0

0

0

Increase/(decrease) in cash and equivalents

8,707

4,847

12,447

17,453

21,944

Currency translation differences and other

363

(113)

0

0

0

Cash and equivalents at start of period

5,189

14,259

18,993

31,440

48,892

Cash and equivalents at end of period

14,259

18,993

31,440

48,892

70,836

Net (debt)/cash

14,259

18,993

31,440

48,892

70,836

Source: Ergomed accounts, Edison Investment Research


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This report has been commissioned by Ergomed and prepared and issued by Edison, in consideration of a fee payable by Ergomed. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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