A company which provides important services to pharmaceutical companies has the potential to become a much bigger name in the future, thanks to the way the drugs industry is going.

Ergomed (ERGO:AIM) may only be worth £102m at the moment, yet a recent strategy shift places the company in a much stronger position and analysts certainly believe earnings are going to explode over the coming years.

Having made a loss in 2017, Ergomed is now forecast to make £1m pre-tax profit this year and see that figure increase by nearly eight-fold to £7.9m in two years’ time, according to estimates from research group Equity Development.

WHAT DOES IT DO?

Ergomed hopes to become the leading global provider of pharmacovigilance services by 2020. It offers outsourced services to the pharmaceutical sector by managing clinical trials and helping these companies develop drugs.

Approved drugs are then monitored after entering the market to explore any potential side effects.

Historically the group has also had a co-development business where it partners with pharma and biotech firms and offers its drug development services for a cut of future royalties, if successful. Ergomed has decided to stop expanding this business.

At the moment the co-development operation only contains six partnerships, including one struck with Allergy Therapeutics (AGY: AIM) in December 2017.

We believe Ergomed’s strategic shift is the right move as it focuses the business on a fast-growing market with recurring contracts and loyal clients eager to outsource services to meet regulatory hurdles.

$8BN OPPORTUNITY

Chief executive officer (CEO) Stephen Stamp says the services division is being prioritised over co-development partnerships
as pharmacovigilance benefits from more stable cash flow and no UK-listed rivals.

Pharmacovigilance involves a huge collection of data from various sources on potential side effects, which is then aggregated and analysed to determine any risks.

It could be potentially lucrative for Ergomed as the pharmacovigilance market is expected to be worth over $8bn by 2024.

Using data and sophisticated statistics, Ergomed can determine if any there are any side effects or potential drug interactions, possibly leading to drug relabelling.

The outcome could even lead to a recommended withdrawal of a product if it is deemed to be unsafe.

FUND MANAGER FANS

Investment trust Strategic Equity Capital (SEC) holds Ergomed in its portfolio. Fund manager Jeff Harris believes the company’s new strategy is a step in the right direction as pharma firms are outsourcing more work to meet increasing regulatory hurdles.

Harris flags that Ergomed’s chairman Peter George used to be CEO at successful services group Clinigen (CLIN: AIM), another stock in his portfolio.

Ergomed also features in Livingbridge UK Micro Cap Fund’s (GB00B55S9X98) portfolio. Fund manager Ken Wotton says Ergomed is a hidden gem as its buy and build strategy and focus on pharmacovigilance could be a recipe for success.

Wotton believes if the company continues to gain critical mass it could potentially benefit from a re-rating and be seen as a strategic asset in the sector over time.

Savvy investors have started to become aware of Ergomed’s potential with the shares having recently hit an all-time high of 228p (21 May).

LEVERS FOR GROWTH

Looking ahead, Ergomed aims to grow organically and possibly through future acquisitions which could help it build on existing services or enter new territories.

In late 2017, the company acquired contract research organisation PSR for up to €5.7m, a business which specialises in the development of orphan drugs for rare diseases.

The orphan drug market is forecast to grow at a compound annual growth rate of 11% from 2017 to hit an anticipated $200bn in market sales by 2022.

Ergomed is also anticipating growth through its acquired business PharmacoVigilance, a medical information service provider.

Equity Development analyst Elizabeth Klein says growth in PharmacoVigilance is likely to be supported by M&A, while its automation services should lift margins and expand premium activities.

According to Ergomed, automation is likely to complete 80% of manual case processing by 2020, helping the company compete with low-cost providers of pharmacovigilance services. (LMJ)

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