PHARMACEUTICAL company Elan will invest up to £3 million to take a 10 per cent stake in Ethical Holdings, the British company which is to be floated on the London stock exchange in early July.
Ethical recently bought the Irish chemical group Clonmel Healthcare in a £14 million sterling deal and plans to spend £7 million over the next three years on the Tipperary operation. It is aiming to raise about £20 million in the flotation.
Elan, which already has a 4.7 per cent stake in Ethical and warrants to subscribe for up to 10 per cent of the company, has agreed to take a 10 per cent stake in the enlarged company.
Elan intends to maintain its shareholding position in the post flotation ownership structure, according, to Mr Douglas Brown from Barings Brothers, the flotation sponsor.
When the flotation is completed the Irish company Cross Group - which was the major shareholder in Clonmel - will have a significant stake in Ethical. Cross chairman Mr Daniel Tierney will become a non executive director of Ethical. The company is currently owned by its management and a number of US financial institutions.
Ethical is quoted in the NASDAQ market in the US, trading yesterday at $6 (£3.97) per share. For the London flotation, Ethical shares are being placed with institutional investors. Mr Brown said the pricing would be decided in early July. The shares would have a one for one relationship with the Ethical's NASDAQ shares.
The London flotation is aimed at providing funds for the Clonmel acquisition and upgrading its manufacturing facilities, for product development and to reduce debt.
Ethical reported revenue of £13.8 million for the year to end August but the company made a loss before tax of £10.7 million. However, the figures included the buy back of product rights for £7.9 million which was treated as a expense in the profit and loss account.
Elan yesterday got a strong "buy" recommendation from brokers Merrill Lynch. In a review Merrill said the company had undergone a major transformation while maintaining an above average rate of growth in net income.
The change in Elan's revenue mix towards directly marketed drugs improved earnings quality and visability, according to Merrill. Elan's price earnings ratio, at 33.8 times, is at a substantial discount to its long term growth prospects.
Merrill forecasts more drug approvals this year and an acceleration in second half earnings as the dilution from the key strategic Athena acquisition ends.
But the acquisition of Athena and continued investment in developing new drug delivery technologies has turned Elan into "a fully integrated global speciality pharmaceutical company, with capabilities in discovery, development, drug delivery, manufacturing and marketing".
Merrill believes that Elan "has acquired the corporate skills and the product pipeline that should be sufficient to generate earnings growth in the range of 25 per cent to 30 per cent annually over the next five years and enable the company to attain its publicly stated goal of $1 billion in revenue by 2001.
Elan's price earnings ratio, which has often been at a discount to the overall market, is expected to respond positively to the higher quality of earnings and the visability of earnings growth as the revenue mix changes towards directly marketed products. Merrill forecasts that Elan's price earnings ratio will improve to 26.4 times this year followed by 20 times in 1998.
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