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IDEAS FOR SMALL CAP SHARES: Ergomed will benefit from Covid-19 studies

Spikes in infection rates and fears in the second wave indicate that the fight against the coronavirus is taking a long time.

Tackling the virus will almost certainly require the development of a vaccine and new treatments for affected people.

In addition to the drugs themselves, that means more help from the companies that provide clinical services to conduct trials for new therapies, such as AIM-listed Ergomed.

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

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

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

A recent trading update underscored the strong momentum build-up within the group.

In a period impacted by the disruption of Covid-19, interim revenues were up 21 percent, like-for-like service costs were up 18 percent year-over-year, while the order book grew 22 percent to £ 151 million.

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

Based on the interim figures and record order levels, the company said full-year earnings are now significantly higher than current market forecasts.

In particular, the growth of the order book is an important indicator for the future for the two main activities of Ergomed: outsourcing of clinical research (CRO) and PrimeVigilance.

Ergomed’s CRO division specializes in drugs that go through the clinical trial process, while PrimeVigilance checks them once approved, a process known as pharmacovigilance.

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

A new drug can cost billions from concept to patient, and to keep costs down, drug developers are outsourcing support services, such as conducting trials.

This has led to increased demand for both the CRO phase 1 to phase III trials of Ergomed and the PrimeVigilance services, and although the CRO side has been affected by disturbances in trials caused by Covid-19, pharmacovigilance is booming.

Several gigantic outsourcers dominate the world market and are conducting very large trials, but as medicines have become more sophisticated and targeted, the market for smaller, more specialized operators such as Ergomed has also grown.

Ergomed can perform any type of research, but has a special expertise in oncology and rare diseases / orphan drugs – areas that are both growing and where the high level of specialist knowledge is an important plus.

As the track record of successful tests has grown, Ergomed has been able to charge a premium for its services and has led to a significant improvement in orders over sales, which is a good guide to how the company is performing.

Current year’s market estimates are for revenues of £ 86 million, which means approximately two years of future sales compared to orders of £ 151 million in this year’s six months.

Orders here are not like a widget production company, these are signed contracts where Ergomed often already provides services.

Test contracts typically last 2-3 years and have highly visible future revenue streams, says Ergomed. This enables it to predict gross profit and cash generation with a high level of confidence. Market estimates were boosted by record orders at the end of June.

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

However, Ergomed also holds a good record with carefully chosen bolt-on acquisitions, the last of which was the American pharmacovigilance company Ashfield, which is now renamed PrimeVigilance USA.

Ashfield brought 40 customers, which has already resulted in the cross-selling of other services. The deal also emphasized the company’s cash-generating character, another major asset in today’s challenging background.

Cash in the half year was £ 14.1 million or little changed compared to the previous year, despite the group spending £ 8 million on Ashfield in January.

Ashfield is now fully integrated and it is likely that more bout-on deals will contribute to future earnings and profits and its expertise.

With a share of currently 560p and a total value of around £ 270m, Ergomed has had a good run this year, but the recent optimistic statement and growing need for these types of services suggest there is still a way to go. Good value.

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