Permira has a three-part plan to grow pharma services company Ergomed: invest in the commercial team and refine the go-to-market strategy; accelerate automation and adopt generative AI; and consolidate its fragmented sector, principals Florian Kreuzer and Peter Michel told PE Hub Europe.
The London-headquartered private equity firm completed the take-private of Guildford, UK-based Ergomed in November for £703 million ($893 million; €818 million), entering sectors with a combined total addressable market of over $35 billion, said Michel.
Ergomed operates in the asset-light pharma services sector, which has strong organic growth, high cashflow generation and M&A consolidation potential, he added.
The company focuses on two areas for its biotech and pharma customers: Pharmacovigilance (PV), the detection, assessment and prevention of drug side-effects and other safety problems; and Contract Research Organisation (CRO), the management of clinical trials in drug development and including patient recruitment, site selection and data management.
Permira puts the total addressable market of CRO at over $30 billion and of PV at over $5 billion, with “attractive fundamental growth drivers” such as increasing complexity, regulatory scrutiny and increasing outsourcing rates.
“Within these large end-markets, and based on our extensive commercial due diligence, Ergomed has exposure to the fastest growing categories and customer base, leading to double-digit end-market growth,” said Michel.
Within PV, Ergomed’s core serviceable market focuses on drugs already on the market, while in CRO the company concentrates on Phases I, II and III of clinical trials and on oncology and rare diseases.
“These subsegments have an increasing outsourcing trend, regulatory complexity and the most growth,” said Michel, adding that they are growing much faster than the broader markets.
The commercialisation strategy for growth features different tactics for each business segment.
“On the PV side, the goal is to help the management team expand the share of wallet within existing customers while improving the go-to-market execution to accelerate customer growth,” said Kreuzer. “On the CRO side, the goal is to accelerate the commercial momentum to harness Ergomed’s therapeutic area differentiation and accelerate growth by further scaling into a massive market.”
The automation and AI element will aim to improve competitive advantage and drive cost efficiencies, while the M&A strand will look to strengthen the existing PV and CRO businesses and add adjacent capabilities.
Ergomed had already been highly acquisitive over the years since its 2014 IPO on the AIM market in London, an approach that supported a 29 percent compound annual growth rate in revenue since the listing. But Permira believed it would be better able to achieve its growth plans as a private company.
“Permira is well-positioned to support Ergomed’s next phase of growth by investing into the commercial expansion and technological transformation of the business as well as providing, where needed, additional capital to undertake transformational M&A,” said Kreuzer, who also heads the DACH region for Permira.
Ergomed’s medic-led business model was one of the differentiating factors that drew Permira, said Michel. Fifty-six percent of the company’s workforce has either a PhD, MD title or advanced degree, he said – something that started with the company’s formation in Zagreb in 1997 by clinical investigator Dr Miroslav Reljanović, who is now executive chairman.
“Ergomed is centred around the customer, which was clearly shown in our diligence findings,” said Michel. “The company has very strong customer advocacy and came out at the top of the peer set in both businesses with best-in-class [net promotor] scores.”
A strong reoccurring business model with almost “software-like” metrics of highly recurring revenue streams from existing customers was another attraction, said Michel.
Ergomed was also able to meet growth expectations set during the covid pandemic – a feat that has eluded some other healthcare businesses. That was down to the management team’s effort to strengthen the business organically and via its acquisitions, said Kreuzer. Ergomed lists three add-ons during the covid years on its website, two in 2020 and one in 2022.
“Given Ergomed’s size relative to the markets it operates in, Ergomed’s success is more predicated on the execution of the management team than on broader market dynamics,” he added. “On top of this, the pharmacovigilance business has a long-term compounding growth model given its highly sticky customers” – it has a 95 percent renewal rate – “long-term contracts, and ability to consistently penetrate customers with new services geographies. This revenue quality has allowed Ergomed to achieve its growth expectations.”
Valuing the business required creativity from Permira, given that Ergomed’s “unique business mix” meant there was no direct public peer.
The Ergomed board recommended the £13.50 per share offer in September, which combined with the cash position of £26 million and lease liabilities of £2.9 million gave an enterprise value of £680 million – 24x Ergomed’s adjusted EBITDA of £28.4 million for the year ended 31 December, 2022 and 21x the adjusted EBITDA forecast for 2023 of £32.4 million.
“This transaction represented an attractive opportunity to take the company private at a favourable valuation which compares well with public companies, such as Medpace, and precedent transactions, such as WWCT and George Clinical,” said Michel. Medpace is a US CRO company listed on the Nasdaq. Midmarket private equity firm Kohlberg & Company agreed to acquire US-headquartered CRO company WWCT in August while private equity firm Hillhouse agreed to buy Australia-headquartered George Clinical in December 2022.
Blackstone was the sole lender in the Ergomed acquisition, committing £285 million, split between a £200 million unitranche and a £85m delayed draw term loan, according to public filings.