Ergomed Plc - Creating Further Value
Ergomed’s new strategy is to become a global leader in pharmacovigilance and orphan drug development services by 2020. This refocusing of the business moves Ergomed away from its reliance on the risk/reward profile of development deals, towards repeatable and sticky contracts across various geographies and therapy areas. This offers a much better, more visible, cash-generating story.FY2017 saw Net Services revenue up 36% to £39.6m, Gross profits rose 22% to £14.6m and pre-R&D EBITDA were up to £5.5m from £4.1m in the previous year. Ergomed ended the period with cash of £3.2m, and has been generating further cash since then. By end of December 2017 Ergomed had won £54m in new contracts, up 29% yoy.
The forward order book grew to £88m by the end of December 2017, up from £70m at the same time the previous year and from £59m in 2016. All these contracts are in the refocused Services businesses. Of this, we estimate around 50% falling in FY2018, with most of the rest coming through over FY2019 and FY2020.
The Pharmacovigilance (PV) business, which operates on yearly contracts is relatively sticky – many of these contracts repeat year-on-year, and it is difficult for the client to change PV consultants. For the first time, in 2017, the PV business generated more revenues than the Contract Research Organisation (CRO) business at 56% or £22.2m. The PV business grew 68% last year with recent acquisitions in this area adding further expertise and geographies.
FY2018 and FY2019 estimates have been revised to reflect the changing business model and the move away from a reliance on co-development deals. While revenues are modestly lower, margins have increased, and so EBITDA is broadly unchanged. Organic growth of the Services businesses should continue to be ahead of the market growth of 18% YoY for PV, and 9.5% yoy for the CRO business. Both the PV and CRO businesses will benefit from Ergomed’s new focus and margins should continue to improve.
Our headline valuation has been revised to centre on the Services businesses only, giving a fair value of 266-292p. The Development and Haemostatix businesses add a further 120p to that range.
Allergy Therapeutics is a pharmaceutical group focused on allergy vaccination. Co. mainly sell its products in European countries and its pipeline of products in clinical development includes vaccines for grass, tree and house dust mite, as well as a peanut allergy vaccine in preclinical development. Co. sells a range of aluminium-free allergy vaccines and diagnostics. Co. sells both injectable and sublingual (oral) formats. The commonly prescribed are those for the treatment of pollen related allergies, particularly for allergies to grasses, weeds and trees. Co.'s vaccines trade under various brand names depending on the market, e.g. Pollinex Quattro, Polligoid and TA Graser Top.
Ergomed is engaged in the provision of specialized services to the pharmaceutical industry and the development of new drugs. Co. focuses on oncology, neurology and immunology and the development of orphan drugs. Co. is building a portfolio of co-development partnerships with pharmaceutical and biotech companies. Co. has two business segments: clinical research services, which provides clinical development services to clients ranging from pharmaceutical companies to small and mid-sized drug development companies; and drug safety and medical information services, which includes Co.'s subsidiary, PrimeVigilance Limited, a pharmacovigilance and medical information services company.
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