Small Talk: Sinclair boosts portfolio with £21m Advanced Bio-Technologies deal

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The Independent Online

Sinclair Pharma and IS Pharma agreed to merge in April, with shares in the combined business (imaginatively christened Sinclair IS Pharma) starting trading in late May. Since then, the stock has been under pressure, easing as volatility in the wider market gathered pace. But the share price received a shot in the arm last week, after the company, which specialises in dermatological and wound care treatments, unveiled plans to buy the privately held US biotech company, Advanced Bio-Technologies (ABT).

The £21m cash and share deal, which has been structured to exclude ABT's US business, will boost Sinclair's suite of skincare products. The main offering is its Kelo-cote scar treatment, which will become Sinclair's second largest brand after Flammazine.

Sinclair gets ownership of the flagship (and high margin) product in all markets outside the US. Since it wasalready licensed for Kelo-cote in its core European markets, the deal opens up fast growing countries such as Brazil, Korea and China. In all, ABT's international business delivered revenues of $6.1m last year. That works out to growth of 19 per cent on the year before. And things are looking up.

"Based on the results in the first ten months of the current financial year to [the end of October], ABT's international revenues are expected to grow by approximately 40 per cent by the end of 2011, including revenues from Sinclair IS in Europe," the company said when it unveiled the deal on 8 December. Looking more closely at Kelo-cote, Sinclair said the treatment already has a foothold in Brazil, with the country, which will serve as a springboard for expansion into other Latin American markets, generating around $2m in revenues. On the other side of the world, in Asia, Kelo-cote boasts $1.1m in revenues in South Korea. It is also sold in other countries in the region, including China.

It's also worth noting that ABT has been pushing the treatment quite strongly in terms of marketing. This means that while Sinclair is looking to bolster the efforts, it will only need two additional staff to fulfil its ambitions in that regard.

The reaction in the markets was certainly positive, with the stock up 10 per cent since the announcement. The City was also welcoming. Pointing to Kelo-cote, Finncap analysts said the deal was essentially an "asset purchase". "We estimate that the incremental Kelo-cote revenues in the year ending June 2013 will be of the order of $8m," they said.

"This is a high gross margin product (we estimate more than 70 per cent) and the incremental costs (sales, marketing and shipping) we estimate will be about $1m... the net contribution to the bottom line will of the order of $4m."

Their counterparts at Singer Capital Markets added that the deal, which comes after Sinclair sold off its Mysoline epilepsy treatment, fitted with the company's strategy of focusing on its core areas.

"We note that the company has successfully recycled income from the divestment of Mysoline (a less attractive portfolio product) in order to fund this acquisition," Singer said.