​Ergomed offers clinical trial and pharmacovigilance services to pharmaceutical companies, while also co-developing a product portfolio of therapies. It has unusually high revenue visibility, indeed the order backlog stood at c £60m at the end of July. The security of revenues is due to two factors: long-term clinical trial contracts in the Clinical Research Organisation (CRO) business and the high client retention rates seen in the Primevigilance business.
In an area that is normally fraught with risk, Ergomed has pursued a low risk strategy to benefit from drug development. It provides its services on (on-average) a zero-margin basis to its partner for a percentage (between 5% and 15%) of the revenue the partner receives for the asset. The income encompasses both long-term royalties and nearer-term milestones.
The recent H1 results show that Ergomed has already contracted enough business to hit FY2016 expectations, and has good visibility into FY2017 too. We also see significant upside potential going forward from its co-development relationships and from its ownership of Haemostatix.
Our valuation of the shares looks separately at the Services and Products (including co-development and Haemostatix) businesses. The Services business alone is valued higher than the current share price (at between 159p – 211p), while the Products business adds a further 83p. Adding to Products' worth a value for Services of 184p, means we reach a fair value of 267p / share.
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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