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Why Shares In Clinigen Group PLC Jumped More Than 10% Today

Clinigen (LSE: CLIN), the speciality pharmaceutical company, surged more than 10% in early trade today after the company announced that it has agreed to acquire Idis Group Holdings Limited. The deal will create a market leader in the market for the supply of ethical unlicensed medicines. 

With over 25 years of history behind it, Idis is a strong brand and a perfect acquisition for Clinigen. The company is a global market leader in providing access to unlicensed medicines in over 100 countries. Idis is already the leading supplier for ethical on-demand products to UK hospitals, and the global market is estimated to be worth more than $5bn per annum. 

Clinigen is paying £225m for Idis. The deal will be financed by a fully underwritten vendor placing to raise £135m. An additional £104m will be drawn down under Clinigen’s new debt facilities. 

In the year to 28 February 2015, Idis reported revenue of £197m and adjusted earnings before interest, tax, depreciation and amortisation of £15.6m. 

 Commenting on the deal Peter George, Chief Executive Officer of Clinigen, said:

“This acquisition satisfies a number of our key strategic goals – achieving the market leader position in the $5+ billion unlicensed medicine supply sector and strengthening our leading position in the $2 billion clinical trial supply market…The acquisition will also accelerate our growth and gives us a much better balanced portfolio of businesses, whilst extending our unique business model.”

Market leader

A merged Clinigen-Idis will create a market leader in the $5bn market for the supply of ethical unlicensed medicines. And the enlarged group’s size should help it grab an even greater share of the market.  

According to Clinigen’s management, the acquisition is expected to be immediately earnings enhancing. £2.5m of annual cost synergies have already been identified. Moreover, Clinigen’s management believes that opportunities for further revenue and cost synergies are likely to be identified.

That being said, looking at Idis’ historic figures the group is hardly a star performer.

Gross profit has fallen by more than 10% over the past three years, despite a 23% increase in sales. Profit before tax has also fallen over the past three years from £11m to £7.8m.

Meanwhile, over the past two years net debt has more than doubled while shareholder equity has slumped from £2.7m, down to negative £14.9m. Idis was also forced to undergo a significant restructuring during 2013.

High valuation 

Idis’ historic figures are not overly impressive but by combining with Clinigen, the two companies will be a force to be reckoned with. 

As of yet, City analysts have not had a chance to weigh in on the deal. Still, based on current figures, Clinigen is currently trading at a forward P/E of 21.4, a high valuation that leaves little room for error if the Idis deal fails to yield results.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Clinigen. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.