SMALL CAP SHARE IDEAS: Ergomed runs coronavirus trials

Spikes in infection rates and second wave fears point to the battle against coronavirus being a long one.

To tackle the virus, will most almost certainly require the development of a vaccine and new treatments for the people affected.

As well as the drugs themselves, that will mean more help from the companies providing clinical services to run trials for new therapies, such as AIM-listed Ergomed.

The company is already running trials in Italy for two possible Covid-19 treatments, but these are just part of the company’s growing presence in several critical healthcare segments.

Ergomed is already running trials in Italy for two possible Covid-19 treatments

Ergomed is already running trials in Italy for two possible Covid-19 treatments

A recent trading update underlined the strong momentum building within the group.

In a period affected by disruption from Covid-19, interim revenues rose by 21 per cent, like-for-like service fees rose by 18 per cent year-on-year, while the order book expanded by 22 per cent to £151million.

Ergomed described its progress in the first half of 2020 as ‘exceptional’. Even in normal circumstances it would have been a strong update, but given the backdrop it underlined how things recently have aligned for the group.

Based on its interim numbers and the record level of orders, the company said profits over the whole year would now be materially ahead of current market forecasts.

The growth in the order book, particularly, is an important indicator of the future for both of Ergomed’s two main businesses – clinical research outsourcing (CRO) and PrimeVigilance.

Ergomed’s CRO division specialises in drugs going through the clinical trial process, while PrimeVigilance monitors them once they have been approved, a process known as pharmacovigilance.

Drugs in development go through Phase I, II and III human trials to test their safety and efficacy, while post-approval studies (Phase IV) check for adverse effects in patients using the drugs.

A new drug can cost billions from concept to patient and to help keep costs down drug developers are outsourcing ancillary services such as the running of trials.

That has led to increased demand both for Ergomed’s CRO phase 1 to phase III trials and its PrimeVigilance services and though the CRO side has been affected by disruptions to trials caused by Covid-19, pharmacovigilance is booming.

Several giant outsourcers dominate the global market and handle very large trials, but as drugs have become more sophisticated and targeted, the market for smaller, more specialist operators such as Ergomed has also become significant.

Ergomed can run any type of trial, but has a special expertise in oncology and rare diseases/orphan drugs – areas that are both growing and where its high degree of specialist knowledge is a significant plus.

As its track record of successful trials has grown, so Ergomed has been able charge a premium for its services and that has led to a notable improvement in orders relative to sales, which is a good guide to how the business is doing.

Market estimates for the current year are for revenues of £86million, which compared to orders of £151million at this year’s half-year implies about two years-worth of future sales.

Orders here are not like a widget manufacturing business, these are signed contracts where often Ergomed is already providing services.

Contracts for trials typically last 2-3 years and have highly visible future revenues streams, says Ergomed. That allows it to predict gross profits and cash generation with a strong degree of confidence. Estimates in the market were reinforced by the record level of orders at the end of June.

Research house Edison expects Ergomed’s revenues to rise to around £100million in 2021 from £68million in 2019, with underlying profits tipped to increase to around £19million from £12.5million.

Ergomed, though, also has a good record with carefully chosen bolt-on acquisitions, the last of which was US pharmacovigilance business Ashfield now renamed PrimeVigilance USA.

Ashfield brought with it 40 customers that has already resulted in the cross-selling of other services. The deal also highlighted the cash generative nature of the business, another major plus in the current challenging backdrop.

Cash at the half-year was £14.1million or little changed from the previous year-end despite the group spending £8million on Ashfield in January.

Ashfield has now been fully integrated and more bolt-on deals are likely that will add to future revenue and profit and its expertise base.

At 560p a share currently, and valued overall at around £270million, Ergomed has had a good run this year, but the recent upbeat statement and growing need for its type of services suggest there is still some way to go yet. Good value.

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source: dailymail.co.uk