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Buying the dip is a proven formula for some investors. Permira thinks it will work well in combination with another kind of science. The private equity group is bidding £700mn ($882mn) for Ergomed, a contract researcher listed on the UK’s junior Aim market.
Shares in the rare disease and oncology specialist have drifted lower since the Covid-era biotech boom. Current levels hint at healthy buyout returns.
Ergomed has two businesses: running early-stage drug trials and “pharmacovigilance” or drug safety. Multi-year contracts and sticky revenues, especially in the latter division, appeal to investors.
Self-funded acquisitions led by founder and executive chair Miroslav Reljanović have increased revenues. The US is the largest market for clinical services and now Ergomed’s main one. Permira’s backing should help Ergomed expand steadily.
Tighter funding for pharma research means Ergomed’s market is slowing down. Group revenues are expected to grow at 10 per cent this year, down from more than 20 per cent in 2022. A chunky acquisition is needed to get growth up and build a company able to tackle larger, later-stage trials.
Permira is offering £13.50 per share but even with a 30 per cent premium that is below the £15.40 price achieved in 2021. Ergomed has net cash. After allowing for this, the offer is worth 19 times 2024 expected ebitda.
Assume debt covers a hefty chunk of the purchase price and Permira sells after five years. If Ergomed grows at a measured pace, annualised percentage returns on equity would end up in the required high teens if margins and the exit multiple remained constant.
An exit via US markets could easily yield more. Faster-growing peer Medpace is trading on a 21 times multiple, down from a high 20s multiple in 2021. If Permira could sell out at 22 times, annualised returns would rise to almost a third.
Reljanović will sell his 18 per cent shareholding via the deal. Even so, minority investors should pursue an experiment of their own: asking Permira for more money.
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