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York Pharma (YRK.L) - forced to return Flammazine/Flammacerium to Solvay
YRK.L
Comment by Objective Capital , Jan 14, 2009
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York Pharma announced today that it has returned flammazine/flammacerium to Solvay.
The transaction was originally structured as a series of two payments, the first of which for €17 million was completed in July and the remainder of €11.5 million, to be completed by the end of the year. The first tranche of this transaction was funded by an asset-based loan provided by Fortress Credit Corporation, an offshoot of the large New York-based hedge fund Fortress Investment Group with the second being funded by other investors.
Given the extremely difficult capital market circumstances of the last 6 months, York Pharma was unable to raise the second part of this transaction in cash and had instead, negotiated with Solvay a 'vendor note' to enable the transaction to complete and York to take full posession of the drug portfolio. However, Fortress decided in light of this to activate a provision of its loan which required York Pharma to compete the second trash as a cash transaction thereby triggering a demand for repayment of the original €17 million loan.
York announced that this has been achieved and that it has then been obligated to return the drug portfolio to Solvay while seeking an alternative way to complete the transaction. York also announced that it will be engaging in a full business review to see where its business needs to be restructured to take account of this new situation.
Objective's view:
After a heroic effort to complete what we see as a synergistic and attractive transaction, the credit crunch and poor capital market conditions have finally caught up with York Pharma. Clearly, with redemptions raging, Fortress saw this as an opportunity to get their money back and acted accordingly.
Where does this leave York Pharma? First, the transaction appears to still be 'live' and Solvay has given York a limited amount of time to seek an alternative. Whether this is possible is unknown but, given the market situation, the prospects for this do not look too encouraging; one should never say never though! Second, if York is unable to find such an alternative and the Solvay transaction truly does go away, it is likely that York will have to restructure its business, reduce its costs and bring the company into a cash flow positive mode even at the expense of some longer term projects.
We believe that York Pharma will focus in 2009 on ramping up the sales of its existing product line to maximise cash flow while hoping that Abasol will finally come through the MHRA perhaps by the spring of 2009 (18 months later than the company originally thought).
All in all a sad and difficult episode for Terry Sadler and his team who worked so hard to make this a reality. Obviously, this would have a significant impact on the valuation that we published late last year if it does finally prove not to happen.
