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York Pharma (YRK.L) - acquisition of specialist dermatological marketer fits “hand in glove”
YRK.L
Comment by Objective Capital , Oct 12, 2007
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York Pharma plc has announced the acquisition of Derms Development Ltd ('DDL'), a majority owned investment of Merlin Biosciences. The total acquisition cost to York Pharma is £17.5 million of which £15 million represents the initial consideration and the remaining £2.5 million is subject to product revenue and other milestones (including that Zindaclin, an acne product, reaches £15 million in revenues in a single financial year).
DDL’s product line achieved £2.30 million in 2006 and £2.36 million for the first half of 2007. 2006 gross margin was 52% which translated to an operating loss of £700k.
For the initial consideration to the Vendors (in this case Merlin Biosciences with 90% and the Management/Employees with the remaining 10%) York is issuing 11.5 million new ordinary shares at £1.30 per share.
At completion, a consideration of £250k in cash will be remitted to certain vendors through the placement of an additional 208k shares at £1.20 a share.
Of the 11.5 million shares issued as initial consideration, all except 1.04 million are subject to a nine-month lockup period. Concurrent to this transaction, a total of 4.46 million new ordinary shares will be issued also at £1.20 per share, raising £5.35 million to repay DDL's bank debt (£3 million), fund working capital and transaction costs and fees.
This placing is conditional upon a minimum of £3.25 million being raised. In toto, the initial consideration shares represent 24.1% of York Pharma’s fully diluted shares outstanding once the transaction is completed.
Objective's view:
Our preliminary assessment of this transaction is that it fits “hand in glove” with York Pharma's strategy of marketing products in selected European countries (UK and Germany). DDL, which includes Crawford Pharmaceuticals, has a fully-fledged marketing/ sales team in the UK and France providing York with an emerging specialty product line in selected dermatological conditions (acne, vitiligo and other skin disorders) and a ready-made marketing platform and network of distributors. With the £2.36m booked in the first half of 2007, it looks like this product line could reach £5+ million by year-end. After that, York have indicated that there are significant growth opportunities in this portfolio alone.
Importantly, the network of distributors can be tapped to roll out Abasol(TM) which was filed mid-2005 and is still awaiting regulatory approval from the UK MHRA. It is difficult to predict when such an approval will be forthcoming but if it does, the marketing platform acquired with DDL will enable York to jump start its sales efforts and is likely to facilitate the roll out of the product into the rest of Europe.
Overall, we feel that this acquisition makes sense from a strategic perspective.
