Acquisition of the Solvay product line is a company-transforming event –
Adding products annualizing around £8million in revenues with growth
potential to the mix is a quintessentially strategic move for York.
While at a ‘valuation’ price, it brings York closer to its stated objective of
self‑sustainability – From our last published valuation of £3.68 in January,
2008, we estimate that with this transaction, our valuation drops 55 percent
to £1.58. A heavy price to pay, but the tradeoff off seems worth it to
management and to ourselves.
This tradeoff is in tune with the market environment – Investors are looking
for companies to be self-financing so the fact that the stock got cut in half post
this transaction which, is consistent with the general level of disbelief and/or
apathy as regards this sector.
York has pulled a creative, if expensive, transaction coup out of the hat –
The ingenuity and persistence in managing to complete this in the current
market environment, and acquire this strategically important asset at a
relatively low 2.7x revenues is impressive. The heavy ‘dilution’ price paid
by shareholder has also moved York towards a more attractive business
model in tune with their wishes.
The Solvay anti-infective wound care products acquired fit perfectly into
the York portfolio – With its marketing platform up and running after the DDL
acquisition, York can hit the ground running benefiting from ready inventory,
pricing flexibility and geographic expansion potential built into the ‘orphan’
status the product had under Solvay.
Flammacerium for burn victim wound care in the US is a significant
‘sleeper’ for York – Superior efficacy demonstrated in the medical literature,
combined with a post-September 11th US FDA-sanctioned ‘Orphan Drug’
Status, and a complete clinical package ready for full US registration holds
significant potential.
With our projection of £27 million in revenues for 2009 a speciality topical
derm products company is born – York is now set to sail into the sunset as
a profitable, self-sustaining company. This is not a bad thing in a difficult
stockmarket environment and major credit crisis, where outside funding
for clinical development programmes, if it can be raised at all, comes at
an exorbitant price.
Debt servicing and repayment under the terms negotiated looks to be
comfortably doable! – On our estimation, York will have no problem paying
the interest and repaying the principle of the debt taken on assuming that
Solvay’s ‘vendor note’ is settled and does not trigger a significant increase in
transfer price. If revenues develop according to our plan, the debenture and
note could even be paid off early if it is attractive to do so.
Investor risk appetite aside, the markets may be missing a beat here – Patient
investors are likely to be rewarded handsomely as on our estimates for 2011,
York would earn around 59p fully diluted (based on inking partnerships with
upfront payments). At a low 6x multiple on earnings (for a 30% grower) that
would imply a stock price of around £3.50-£4.00, a 20-fold gain from today’s
market price.
