We are initiating coverage on specialist pharmaceutical services provider Ergomed. We believe it should prove relatively resilient during the COVID-19 crisis and has the fundamentals in place to execute its growth strategy. Ergomed announced impressive audited numbers for FY19, with revenue up 26% to £68.3m and EBITDA up 5.5x to £12.5m. The FY19 announcement is effectively Ergomed’s fourth profit upgrade for FY19 and a small beat on recently reset FY19 expectations. Ergomed trades at a discounted EV/EBITDA of 10.1x vs the contract research outsourcing (CRO) sector average of 11.5x (FY20). We value Ergomed at £186m or 399p/share. Ergomed’s strong organic growth is benefiting from a clear strategic focus on high growth pharma sectors, margin control and order book growth (up 15% to £125m in FY19, giving 90% visibility to 2020).
We believe Ergomed is well positioned to maintain a steady course through the economic crisis caused by the onset of the COVID-19 pandemic. Its services in both its CRO and pharmacovigilance divisions are provided under long-term contracts to meet the needs of essential medical research as well as mandated pharmacovigilance (PV) requirements. Both CRO and pharmacovigilance services are delivered remotely and Ergomed has announced it has seen no decline in its business volumes since the start of the crisis. If necessary, the company can adjust the cost of its external contractor labour and discretionary costs
Ergomed enjoys relatively low customer concentration with its top five clients representing 24.8% of FY19 revenues. Clients are generally well financed and good payers, with >85% of debtor ageing current or under 30 days. The contracted order book of £124.1m (up 14% over 2018) together with the strong pipeline and significant recent wins give over 90% visibility to 2020 revenue. The company’s recently signed new credit facility, on which it has now drawn £15m to add to its own cash pile of over £10m, provides additional resilience. Finally, Ergomed is likely to play a role in the expected increase in COVID-19 research, as can be seen from recent announcement of an important new study and contracts with EUSA Pharma/ Bergamo Papa Giovanni XXIII hospital.
We value Ergomed on an EV/EBITDA multiple based on our FY20 forecasts using a FY20e sector average ratio of 11.5x. We believe Ergomed’s strengthened management, focus on growing segments (oncology, orphan drugs and pharmacovigilance) and potential resilience in responding to the coronavirus crisis support our valuation.
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