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Last close As at 02/06/2023
GBP10.00
▲ −14.00 (−1.38%)
Market capitalisation
GBP508m
Research: Healthcare
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).
Written by
Jonas Peciulis
Ergomed |
PrimeVigilance excels; CRO strengthened in US |
2020 trading update |
Healthcare services |
26 January 2021 |
Share price performance
Business description
Next events
Analyst
Ergomed is a research client of Edison Investment Research Limited |
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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* |
Adj. EPS* |
DPS |
P/E |
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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