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Ergomed's cost-cutting programme to yield £4mln in savings each year

Management has made some tough decisions, cutting the cost base, since a disappointing first-half performance and expects the benefits to really kick in next year
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Headcount has been reduced by around one-tenth

Ergomed PLC (LON:ERGO), which provides specialist services to the pharmaceutical industry, said it has reduced the company’s cost base after a disappointing first-half performance.

As announced at the end of June, contract delays, in addition to reductions in scope by sponsors of other contracts, meant that revenues in the first six months of the year would be below management’s expectations and this morning, in its interim results, the company revealed total revenue rose to £25.3mlmn from £22.9mln the year before.

READ: Ergomed revenue delay leads to Numis downgrade

Net service fee revenue increased 12% to £21.8mln, with the largest element of the increase being the maiden first-half contribution from the PSR acquisition completed in October 2017.

The Clinical Research Services (CRS) segment saw net service fee revenue rise to £9.8mln from £8.8mln (restated) the year before and reimbursement revenue rise to £3.4mln from £3.3mln.

The Pharmacovigilance (PV) segment’s net service fee revenue rose to £12.0mln from £10.7mln while reimbursement revenue remained steady at around £100,000.

The backlog of contracted revenue stood at £91.4mln, up from £66.2mln a year earlier.

Gross profit eased to £8.6mln from £8.8mln in the first half of the year before. Adjusted underlying earnings (EBITDA) turned negative, at £400,000, after a positive outcome the year before at £1.8mln.

The group ended the half-year period with cash and cash equivalents of £7.4mln, up from £2.4mln a year earlier.

READ: Ergomed unveils €5.7mln acquisition of Dutch-based PSR Group, part-funded by £2.9mln placing

Ergomed said the cost-cutting programme will result in a one-off charge but will otherwise benefit underlying profitability in the second half of this year and a more significant improvement in 2019 and beyond.

"The reasons for the disappointing first half were well documented in our trading statement at the end of June. Since then, the management team has addressed the company's cost base by terminating or re-negotiating vendor contracts and reducing headcount, with an emphasis on non-billable headcount,” said Stephen Stamp, the chief executive officer of Ergomed.

“These measures are expected to have a positive net impact for the remainder of 2018 and an annualised benefit of around £4.0mln next year. Our focus on services is beginning to show promise in terms of the scale of pharmacovigilance opportunities and the number of orphan drug development opportunities and we remain confident in our strategy and ability to deliver future growth," he added.

The shares have lost a third of their value since the late June update and Ergomed’s joint broker, Numis Securities, thinks the time is right to start accumulating the shares again.

“Today's statement provides an encouraging update on the backlog, with a strong c.1.2x book-to-bill in the first half leaving good visibility of full year revenues, which we leave unchanged today, with cash flow also a positive, on collection of the Cel-Sci receivables,” Numis said, as it upgraded the stock to ‘add’ from ‘hold’.

“The key new news is that management have addressed the growing cost base, reducing headcount in non-billable areas, which is set to drive c.£4m in annual cost savings and protect profitability,” Numis added.

Numis has a price target of 190p for Ergomed. At noon, the company’s shares were trading at 163p, up 2p.

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