Ergomed — PrimeVigilance excels; CRO strengthened in US

Ergomed (AIM: ERGO)

Last close As at 20/06/2024

1,042.00

−16.00 (−1.51%)

Market capitalisation

529m

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Research: Healthcare

Ergomed — PrimeVigilance excels; CRO strengthened in US

Ergomed’s H220 trading update highlights a successful end to 2020 despite the COVID-19 pandemic causing restrictions for much of the year. Total revenues were £86.4m (up 26.5%). Like-for-like revenues in the PrimeVigilance segment grew 30% (or 56% including the acquisition in January 2020). Unsurprisingly, the CRO segment was flat. However, in H220 revenues were up 11.2% over H120 and up 15.2% y-o-y. Ergomed’s key markets are the US and Europe, where vaccine deployment should be relatively efficient, so we expect the CRO segment to rebound throughout 2021. The recent MedSource acquisition will also significantly add to the 2021 top line. Because of the well-balanced pharma services offering (pharmacovigilance and CRO), Ergomed has proved to be a resilient business with further growth prospects intact, in our view. Net positive revisions to our estimates and an expansion of peer multiples have led to an upgrade of our valuation to £501m or 1,113p/share (from 845p/share previously).

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Healthcare

Ergomed

PrimeVigilance excels; CRO strengthened in US

2020 trading update

Healthcare services

26 January 2021

Price

980p

Market cap

£477m

Net cash (£m) at end-2020

19.0

Shares in issue

48.7m

Free float

78%

Code

ERGO

Primary exchange

AIM

Secondary exchange

Frankfurt (Xetra)

Share price performance

%

1m

3m

12m

Abs

(1.6)

21.7

127.9

Rel (local)

(3.2)

7.4

155.9

52-week high/low

1,200p

280p

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 (Phase IV) services through its PrimeVigilance division. The company is predominantly focused on oncology, orphan drugs, rare diseases and pharmacovigilance.

Next events

FY20 results

March 2021

Analyst

Dr Jonas Peciulis

+44 (0)20 3077 5728

Ergomed is a research client of Edison Investment Research Limited

Ergomed’s H220 trading update highlights a successful end to 2020 despite the COVID-19 pandemic causing restrictions for much of the year. Total revenues were £86.4m (up 26.5%). Like-for-like revenues in the PrimeVigilance segment grew 30% (or 56% including the acquisition in January 2020). Unsurprisingly, the CRO segment was flat. However, in H220 revenues were up 11.2% over H120 and up 15.2% y-o-y. Ergomed’s key markets are the US and Europe, where vaccine deployment should be relatively efficient, so we expect the CRO segment to rebound throughout 2021. The recent MedSource acquisition will also significantly add to the 2021 top line. Because of the well-balanced pharma services offering (pharmacovigilance and CRO), Ergomed has proved to be a resilient business with further growth prospects intact, in our view. Net positive revisions to our estimates and an expansion of peer multiples have led to an upgrade of our valuation to £501m or 1,113p/share (from 845p/share previously).

Year end

Revenue (£m)

Adj. EBITDA*
(£m)

Adj. EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

54.1

2.3

1.9

0.0

N/A

N/A

12/19

68.3

12.5

19.8

0.0

N/A

N/A

12/20e

86.4

18.6

23.0

0.0

N/A

N/A

12/21e

119.6

21.7

32.1

0.0

30.1

N/A

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

MedSource acquisition will boost CRO fees

In 2020 like-for-like CRO revenues were flat at £31.3m y-o-y (after adjusting 2019 revenues for a £1.6m one-off). The recently acquired MedSource booked $19.3m (£14.5m) and $17.0m (£12.8m) in service fees in 2019 and 2020, respectively. The gross margin on service fees was 47% in 2019 and 41% in 2020, while adjusted EBITDA was $1.3m (£1m) in 2019. Ergomed indicated that MedSource is on track to rebound from the impact of the COVID-19 pandemic in 2021 and guided to a potential uplift of 4–5% in revenues over 2019. Therefore, in addition to the expected resumption of organic CRO growth, MedSource will significantly boost 2021 CRO revenues.

PrimeVigilance segment excels; strong order book

Like-for-like revenues in the PrimeVigilance segment increased to £46.0m, up by an impressive 30% and on a par with growth of 29% recorded in pre-pandemic 2019 over 2018. Including the Ashfield Pharmacovigilance (now PrimeVigilance US) acquisition in January 2020, total revenues were £55.1m, up 56%. The total order book across both segments is expected to be approximately £190m, up 53% y-o-y (organic and including MedSource). This provides high visibility for 2021.

Valuation: £501m or 1,113p/share

We value Ergomed at £501m or 1,113p/share, compared to £409m or 845p/share previously, prior to the MedSource acquisition. This is a result of net positive revisions to our estimates, as well as substantial peer multiple expansion (see Exhibit 2 vs last published in our September 2020 report). FY20 results will be released in March 2021, when we will revise our estimates in detail.

A transformational 2020

Widespread lockdowns caused disruption to the clinical drug development industry in 2020. However, demand for pharmacovigilance services remained high, which allowed Ergomed to record strong organic growth in 2020.

Cash was around £18.9m at the end of December 2020 and the company had no debt, but has access to £30m in credit facilities. We note that Ergomed consolidated MedSource in December 2020 and the initial cash outlay was £5.2m (full financial statements will be published in March 2021). Following the cash outlay of £8.1m on the Ashfield PV acquisition earlier in 2020, this indicates that underlying organic cash generation was a healthy £18m, representing strong cash conversion.

We have revised our estimates to reflect the top-line trends reported in the 2020 trading update and our initial assessment of the MedSource acquisition (Exhibit 1). The reported results for 2020 were largely in line with our estimates. We have therefore only fine-tuned the PrimeVigilance growth rate for 2021 (increased by 1.8%, the same as recorded growth in 2020). Inclusion of the MedSource business is the only reason for our revision to 2021 CRO revenue estimates. As mentioned above, as an estimate for 2021 we use MedSource 2019 results: £14.5m in service fees and £9m in pass-through revenues, which are costs reimbursed by customers, but booked in the top line according to IFRS. As a result, our 2021 total revenues increased to £119.6m from £96.6m.

Ergomed guided to adjusted EBITDA ahead of market expectations. We will revise our profitability estimates once the full-year results are released. For now, we have added £1.6m to adjusted EBITDA in 2021 partly resulting from a marginal increase in PrimeVigilance revenues and partly our estimate of the potential uplift resulting from the acquisition of MedSource. Based on the information currently provided by Ergomed, MedSource recorded adjusted EBIDTA of £1m in 2019. Our 2021 adjusted EBITDA estimate now stands at £21.7m vs £20.1m previously.

We value Ergomed using 2021e peer EV/EBITDA multiples. As previously, we believe Medpace is the best comparator given its more comparable size and higher growth than the other companies. Medpace trades at a c 25% premium to the sector average (up from 20% at the time of our last report). Applying the same premium (as we have done previously) to peer multiples, we upgrade our valuation to £501m or 1,113p/share, compared to £409m or 845p/share previously. For this calculation we use estimated cash of £33.8m at the end of 2021.

Exhibit 1: Key changes to our financial forecasts

£m

FY19

FY20e

FY21e

Actual

Old

New

Change (%)

Old

New

Change (%)

Total revenues

68.3

84.1

86.4

2.7%

96.6

119.6

23.8%

– PrimeVigilance

35.4

54.1

55.1

1.8%

62.5

63.6

1.8%

– CRO

32.8

30.0

31.3

4.3%

34.1

56.0

64.2%

Adjusted EBITDA

12.5

18.3

18.6

1.4%

20.1

21.7

8.4%

Adjusted EBIT

8.8

14.2

14.4

1.8%

16.4

18.1

10.2%

Adjusted EPS (p)

19.8

23.8

24.3

2.3%

27.3

33.4

22.1%

Source: Ergomed 2020 trading update, Edison Investment Research. Note: Adjustments mainly exclude share-based payments.

Exhibit 2: Comparable companies

EV ($m)

EV/EBITDA (x)

EV/Sales (x)

P/E (x)

P/Book (x)

Market consensus forecast/actual FY19

Syneos Health

10,338

16.02

2.21

23.35

2.59

PRA Health Sciences

9,656

18.12

3.15

26.05

7.84

ICON

11,249

22.73

4.01

31.68

7.22

Medpace

4,982

33.30

5.79

47.34

7.10

Average

9,056

22.54

3.79

32.10

6.19

FY20e

Syneos Health

10,338

16.42

2.34

22.20

2.84

PRA Health Sciences

9,656

19.86

3.08

28.82

6.71

ICON

11,249

23.87

4.03

33.79

6.98

Medpace

4,982

26.77

5.46

38.20

6.38

Average

9,056

21.73

3.73

30.75

5.73

FY21e

Syneos Health

10,338

13.77

2.02

18.04

2.55

PRA Health Sciences

9,656

16.62

2.77

23.18

5.74

ICON

11,249

20.05

3.57

27.49

6.23

Medpace

4,982

23.25

4.53

34.25

5.53

Average

9,056

18.42

3.22

25.74

5.01

Source: Refinitiv. Note: Priced at close, 22 January 2021.

Exhibit 3: Financial summary

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

2017

2018

2019

2020e

2021e

INCOME STATEMENT

 

 

 

 

 

Total revenues

47,624

54,112

68,255

86,400

119,595

Cost of sales

(22,398)

(26,788)

(29,790)

(39,024)

(52,355)

Reimbursable expenses

(7,609)

(8,070)

(8,940)

(7,459)

(17,040)

Gross profit

17,617

19,254

29,525

38,442

50,199

Gross margin %

37%

36%

43%

44%

42%

SG&A (expenses)

(19,784)

(28,152)

(23,513)

(24,039)

(32,901)

R&D costs

(2,689)

(1,578)

(545)

(199)

(203)

Other income/(expense)

952

30

51

(233)

0

Exceptionals and adjustments

5,062

10,165

3,265

466

976

Reported EBITDA

(2,278)

(7,912)

9,230

18,120

20,769

Depreciation and amortisation

1,626

2,534

3,712

4,149

3,674

Reported EBIT

(3,904)

(10,446)

5,518

13,971

17,095

Finance income/(expense)

(543)

(599)

(245)

(360)

(240)

Other income/(expense)

0

277

(286)

(686)

0

Reported PBT

(4,447)

(10,768)

4,987

12,924

16,855

Income tax expense (includes exceptionals)

(57)

(89)

583

(1,687)

(1,771)

Reported net income

(4,504)

(8,980)

5,570

11,237

15,084

Basic average number of shares, m

41.1

44.7

46.6

48.1

48.7

Basic EPS (p)

(11.0)

(20.1)

12.0

23.4

31.0

 

Adjusted EBITDA

2,784

2,253

12,495

18,586

21,745

Adjusted EBIT

1,158

(281)

8,783

14,437

18,071

Adjusted PBT

1,782

960

8,637

13,379

18,031

Adjusted EPS (p)

4.2

1.9

19.8

24.3

33.4

Adjusted diluted EPS (p)

4.2

1.9

19.8

23.0

32.1

Order book

88,200

109,200

125,000

168,745

217,547

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

Property, plant and equipment

1,078

1,344

1,110

428

418

Right-of-use assets

-

-

5,171

5,630

5,630

Goodwill

15,269

13,659

13,380

23,095

23,095

Intangible assets

20,229

3,740

2,755

4,508

4,308

Other non-current assets

2,367

2,646

2,616

3,184

3,184

Total non-current assets

38,943

21,389

25,032

36,845

36,635

Cash and equivalents

3,218

5,189

14,259

18,850

33,795

Trade and other receivables

16,807

16,429

14,359

18,306

20,813

Other current assets

2,945

3,857

5,665

4,957

4,957

Total current assets

22,970

25,475

34,283

42,113

59,565

Lease liabilities

0

0

3,716

4,015

4,015

Long term debt

0

0

Other non-current liabilities

13,201

1,314

635

1,149

1,149

Total non-current liabilities

13,207

1,314

4,351

5,164

5,164

Trade and other payables

10,717

10,989

10,373

14,295

16,453

Lease liabilities

0

0

1,718

2,000

2,000

Other current liabilities

3,134

6,192

6,053

7,237

7,237

Total current liabilities

13,863

17,187

18,144

23,532

25,690

Equity attributable to company

34,843

28,363

36,820

50,262

65,346

 

 

 

 

 

CASH FLOW STATEMENT

 

 

 

 

Profit before tax

(4,447)

(10,768)

4,987

12,924

16,855

Cash from operations (CFO)

70

1,044

11,788

18,342

18,409

Capex

(1,425)

(1,587)

(996)

(650)

(3,474)

Acquisitions & disposals net

(1,932)

(398)

(107)

(12,789)

10

Other investing activities

(559)

(751)

(1,728)

0

0

Cash used in investing activities (CFIA)

(3,916)

(2,736)

(2,831)

(13,432)

(3,464)

Net proceeds from issue of shares

2,676

3,790

1,427

0

0

Movements in debt

10

(12)

(1,677)

0

0

Other financing activities

(2)

(4)

0

(1,210)

0

Cash from financing activities (CFF)

2,684

3,774

(250)

217

0

Increase/(decrease) in cash and equivalents

(1,162)

2,082

8,707

5,127

14,945

Currency translation differences and other

(44)

(111)

363

(536)

0

Cash and equivalents at start of period

4,424

3,218

5,189

14,259

18,850

Cash and equivalents at end of period

3,218

5,189

14,259

18,850

33,795

Net (debt)/cash

3,218

5,189

14,259

18,850

33,795

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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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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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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.

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Frankfurt +49 (0)69 78 8076 960

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London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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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Newron Pharmaceuticals — Evenamide Phase II completes recruitment

Newron has completed the recruitment of 138 patients into the Phase II study of its novel schizophrenia drug, Evenamide. As expected, the read out is due in March 2021. Newron notes that Evenamide Phase III trials could start in H221 and it is progressing possible partnering and co-development deals. Newron had €39m cash at end-June 2020, with enough cash to fund development well into 2022. Our indicative value remains CHF121m.

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