Ergomed : Ongoing strength in Ergomed's approach
Ergomed offers clinical trial and pharmacovigilance services to pharmaceutical companies, while also co-developing a product portfolio of therapies.Aeterna Zentaris, a co-development partner of Ergomed, announced that its Pivotal Phase III Clinical Trial of Zoptrex in women with endometrial cancer failed to meet its primary endpoint. As a result, there is no longer any potential upside from the relationship. We have reduced the top end of our valuation range/share which includes the co-development deals, by 39.7p.
While it is disappointing that the phase III trial of Zoptrex failed, it is not fatal to Ergomed’s business model. Indeed, in some ways the relationship with Aeterna illustrates the strength rather than the weakness of this model. It was a low-risk co-development deal as Ergomed has already received c US$20m from the service revenues and partnering deals that Aeterna struck on Zoptrex.
In the meantime, the underlying profit generating business remains very healthy. The forward order book for the CRO currently stands at c. £70m (up from £59m in 2016). Of this, we estimate just under 50% falling in FY2017, with the rest coming through over FY2018 and FY2019. In addition, the Pharmacovigilance (PV) business, which operates on yearly contracts, remains sticky – many of these contracts repeat year-on-year.
The expected news flow for 2017 and 2018 suggests significant valuation inflexion points: we shall be looking out, for example, for the Haemostatix trial and Sevuparin phase II results. The Services business could see additional contract wins and is likely to be the focus for M&A. Financial forecasts remain unchanged.
The bottom of the range of our 232p - 397p valuation per share is based on the more conservative “Services-only†sales forecast, discounting completely the potential upside from the attractive Products and Co-Development projects. The top of the range adds in these Product and Co-development projects. This top-end valuation is now 397p, after the removal of the Zoptrex deal.
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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