Contract pharma research provider Ergomed (LON: ERGO) is in the top forty best AIM performers over five years with a 635% increase in the share price and it is not far from quadrupling over the past year. That means that the shares have a heady rating, but the growing market and potential for earnings enhancing acquisitions make it appear warranted.
Ergomed decided to concentrate on third-party services rather than co-development more than two years ago. Last year, two major acquisitions were made in the important North American market and management would like to further increase scale in the region.
The focus in contract research is oncology and rare diseases. The acquisition of MedSource at the end of the 2020 means that Ergomed has a significant presence in the US.
Pharmacovigilance, which is the monitoring of drugs for side-effects after commercial launch, is becoming increasingly important and there have already been £9m of cross-selling benefits from recent purchases. Investment in automation and machine learning will help to improve efficiency.
Ergomed is an international business. North America accounted for 54% of 2020 revenues, up from 37%. A full contribution from last year’s acquisitions is likely to increase the percentage.
In 2020, group revenues increased from £68.3m to £86.4m, while pre-tax profit jumped from £5m to £12.6m – although excluding exceptionals the improvement is from £8.25m to £13.6m. There was £18.1m of cash generated from operations, which covered the cash costs of acquisitions.
Acquisitions contributed to the progress last year, but there was 30% like-for-like growth in pharmacovigilance revenues. Contract research revenues were flat, but the core service fees grew. This was in a year when there were some delays to clinical trials and other work – mainly during the second quarter.
The order book increased from £124.1m to £193m. This stretches a few years into the future. Pharmacovigilance may not be contracted for long periods, but this work tends to continue over many years and those repeating revenues would not be included in the order book. This indicates what a solid base Ergomed has for its future revenues.
Net cash was £19m at the end of 2020 and there is £30m in unused credit facilities. This and share issues can fund acquisitions. Net cash could be £48m by the end of 2022 if no acquisitions were made. That is not likely.
Further acquisitions could be made in North America to increase scale. Asia Pacific is still a small contributor to the group, which works through partners. This is the fastest growing market, so acquisitions would make sense if the right candidates can be identified.
Management is keen to increase the scale of a business that is still relatively small compared to its main competitors – despite being one of the larger AIM companies. There has been consolidation among its larger peers. They are trading on lower ratings than Ergomed, although most of their growth rates are not as high.
Ergomed has grown revenues at an annual rate of 22% between 2017 and 2020 with a significant chunk of that being organic growth.
At 1235p, the shares are trading on 40 times prospective 2021 earnings, falling to 33 the following year. There is still upside in the share price over the medium-term.