REG - Avacta Group PLC - Proposed acquisition of Launch Diagnostics

AvactaAnnouncement

18/10/2022 09:15

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RNS Number : 2472D  Avacta Group PLC  18 October 2022

 

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THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.

 

18 October 2022

 

Avacta Group plc

Proposed acquisition of Launch Diagnostics

 

Launch Diagnostics is a leading independent distributor in the UK in-vitro
diagnostics (IVD) market

 

Acquisition accelerates Avacta's diagnostics strategy and is the first step in
its drive towards building an integrated and differentiated IVD business with
global reach

 

Avacta Group plc ("Avacta" or the "Company"), a clinical stage oncology drug
company and developer of powerful diagnostics based on its Affimer(®) and
pre|CISION™ platforms, is pleased to announce that it has conditionally
agreed to acquire Launch Diagnostics Holdings Limited ("Launch Diagnostics")
for an upfront cash consideration of £24 million (on a debt-free/cash-free
basis and subject to customary working capital adjustments) with an earn-out
based on future business performance capped at £13 million (the
"Acquisition").

 

The Acquisition is the first step in a M&A-led growth strategy by Avacta
for its diagnostics division, with the vision of building an integrated and
differentiated IVD business with global reach serving professionals and
consumers. The Company believes that there is a significant commercial
opportunity in the EU and the UK markets, which are fragmented, to build its
position in the immunodiagnostics and molecular diagnostics value chain by
acquiring companies that are complementary to Avacta's core strengths in
research and development.

 

Transaction highlights:

 

·      Launch Diagnostics is a leading independent IVD distributor in
the UK with over 30 years' track record, with its headquarters in Kent and
around 70 staff. It provides immunodiagnostic and molecular test products,
technical support and maintenance to healthcare providers. Launch Diagnostics
serves private and public sector customers throughout the UK, France, Belgium,
Luxembourg and Republic of Ireland, with c. 95% repeat business.

·      Total consideration for Launch Diagnostics includes an initial
consideration of £24 million in cash payable upon completion of the
Acquisition and an additional consideration of 50% of the gross margin on
sales exceeding £2 million per annum of Launch Diagnostics' COVID-19 related
products for 3 years capped at £13 million (in aggregate).

·      Launch Diagnostics generated £14.17 million of non-COVID-19
related revenue in FY21, with total revenues including COVID-19 related
products of £32.75 million. Since FY19, the gross margin in total sales has
consistently been in the range 44-50% across all products. 1  (#_ftn1)

·      73% of Launch Diagnostics' revenue for FY21 was generated in the
UK and 27% was generated in France and the Benelux region.

·      Acquisition values Launch Diagnostics at 1.35x its FY21 revenue,
including an 80% discount of revenues derived from COVID-19 related products.

·      Key management of Launch Diagnostics will remain in place with
the exception of principal selling shareholder who will retire and will be
replaced by a Managing Director from within the business.

·      The global IVD market is projected to reach sales of $113.1
billion by 2026 2  (#_ftn2) which comprises a wide range of test products into
multiple healthcare settings from hospitals to home testing.

 

M&A strategy for growing shareholder value

 

The Acquisition provides Avacta with an established route to market in the UK
and several European IVD markets for existing and future products that it
distributes, develops or acquires. It is the first step in building an
integrated IVD business with global reach that has the advantage of Avacta's
proprietary Affimer(®) platform to differentiate its immunodiagnostic
products in a competitive market. Avacta has been working for a year on this
M&A-led growth strategy for its diagnostics division and the establishment
of a pipeline of potential acquisitions in the European diagnostics sector.

 

To that end, Avacta has formed a dedicated integration team which has a
successful track record of integrating acquisitions, across multiple business
sectors. Avacta believes a number of potential growth opportunities are open
to Launch Diagnostics, including the cross-selling of tests for a wide range
of pathogens into the recently expanded installed base of PCR equipment
post-COVID-19 (e.g. legionella, viral meningitis, giardia, cryptosporidium),
the addition of new products to Avacta's portfolio and geographical expansion,
particularly into Germany and certain North African countries. The team will
centralise functions where appropriate to drive efficiencies across the
enlarged Group infrastructure and support autonomy where it is considered to
be efficient and productive.

 

Background and rationale for the acquisition of Launch Diagnostics

 

Established in 1990 and headquartered in Longfield, Kent UK, with a French
subsidiary and operational hubs in Ireland, Belgium and Luxembourg, Launch
Diagnostics is a leading independent distributor in the IVD market within the
UK. It combines 17,295 ft(2) offices and warehouse facilities in the UK with
230 m(2) logistics facilities in Houlle, Northern France.

 

Launch Diagnostics supplies a diverse portfolio of innovative, high-quality
devices and equipment that diagnose disease, providing complete solutions from
diagnostic tests to equipment, servicing, training and technical support. It
develops bespoke solutions via long-standing relationships and exclusive
supplier contracts with manufacturers globally, providing access to cutting
edge products and equipment. Launch Diagnostics is able to provide expertise
to key suppliers for new product development and innovation by offering
customers access to a highly knowledgeable and technically qualified team.
Revenue consists of tenders for new products to health trusts, contracts for
reagent rentals where Launch Diagnostics provides both the physical equipment
and the reagents used and annual quotations for the supply of diagnostic
reagents.

 

Launch Diagnostics is devoted to keeping abreast of new and emerging
technologies in a rapidly changing specialist diagnostics industry. Its
product portfolio includes a comprehensive range of unique tests that employ
genetic, immunoassay, enzymatic, chromatographic and microscopic techniques,
spanning over 4,000 different products.

 

Launch Diagnostics operates within a highly regulated market with high
barriers to entry and low client churn driven by detailed and lengthy client
on-boarding processes which ensure that its market position is well protected.
Its customers include both public and private sector (e.g. hospitals, clinical
trial units, cancer centres, and commercial laboratories) and it has a
long-established and experienced team with an outstanding reputation in the
industry for customer service. Launch Diagnostics has over 4,000 products from
31 suppliers, with 501 active customers and, typically, operates on 3-5 year
contracts with c. 95% repeat business.

 

In the financial year to 31 December 2021, Launch Diagnostics generated
revenues related to sales of products for COVID-19 testing and products
unrelated to COVID-19. Launch Diagnostics' core, non-COVID-19 revenues were
£14.17 million and total revenues were £32.75 million with total Adjusted
EBITDA of £8.52 million 3  (#_ftn3) and a profit before tax of £9.36
million. As of 31 December 2021, Launch Diagnostics had net assets of £17.0
million. Launch Diagnostics' FY21 revenues were geographically split between
the UK and France and the Benelux region, with the former accounting for
£23.85 million and the latter £8.9 million.

 

During FY20 and FY21, Launch Diagnostics' revenue growth was driven primarily
by its COVID-19 testing products and, whilst these revenues have been
discounted by 80% in Avacta's valuation of the business, the Company believes
there is still potential for some sustainable ongoing COVID test revenues from
symptomatic testing in hospitals. During the past two years, the focus on
COVID-19 testing saw Launch Diagnostics' sales of non-COVID-19 products fall
from £18.51 million in FY19 to £14.17 million in FY21, but this business is
now increasing as customers return to normal purchasing cycles.

 

Avacta intends to run Launch Diagnostics as a separate business, retaining the
brand and culture that has driven its success, combined with the potential to
benefit from synergies as Avacta's diagnostics division grows. In the UK,
Launch Diagnostics will continue operating at its current site, though in the
longer term, investment will be made to move to more modern premises. In the
short term, there will also be investment in the business' team. In Europe,
operations will continue from their current location, with further investment
in personnel and in a new facility in northern France.

 

On completion of the Acquisition, Avacta's enlarged Diagnostics division would
be an IVD developer and distributor with a broad range of over 4,000 products
covering immuno-diagnostics and molecular diagnostics for professional use,
with potential for further growth and value creation. It would have control of
key elements of the value chain from product IP to customer relationships and
the Company's existing, unique Affimer(®) platform will help differentiate
its immunodiagnostic products in a competitive market. This platform, and the
combined experienced of the Avacta and Launch Diagnostics management teams,
will put Avacta in a strong position to continue a M&A led growth strategy
to build a leading European IVD business.

 

Financing the Acquisition

 

The cash consideration for the Acquisition is intended to be financed out of
the net proceeds of a financing by way of a convertible bond issue by Addition
Finance (Jersey) Limited, a wholly-owned subsidiary of the Company
incorporated in Jersey (the "Issuer") (the "Convertible Bond Offering").
Alongside the Convertible Bond Offering, funds are also being raised by way of
a placing via an accelerated bookbuild to raise gross proceeds of
approximately £5.0 million (the "Placing") and an open offer to certain
existing shareholders of the Company (the "Open Offer") (the Convertible Bond
Offering, Placing and Open Offer together being the "Fundraise").  The
Fundraise will be launched in due course and a separate announcement will be
issued today setting out further details of this.

 

The Acquisition is conditional on the Company being in receipt of not less
than £45 million from the Convertible Bond Offering before 6.00 pm on 14
November 2022. The initial cash consideration for the Acquisition is £24
million, payable on completion, on a debt-free/cash-free basis and subject to
customary working capital adjustments. The earn-out consideration of 50% of
gross margin on sales exceeding £2 million per annum of Launch Diagnostics'
COVID-19 related products is payable in respect of each of the next three
years, which an overall cap of £13 million (in aggregate) over that period.

 

The funds raised pursuant to the Fundraise will also provide Avacta the
balance sheet flexibility to continue to execute an M&A led growth
strategy for its Diagnostics business, invest in those acquired businesses to
drive growth, and to provide working capital for the wider Avacta group.

 

Dr Alastair Smith, Chief Executive Officer of Avacta, commented:

"This acquisition will add an established distribution channel to Avacta with
three decades of customer relationships and deep market knowledge to drive
future product development, strategy and growth. It is the landmark first step
in our ambitious M&A-led growth strategy for Avacta's diagnostics division
that has been a year in the making.

 

"Our vision is to build an integrated, differentiated, global reach IVD
business serving professionals and consumers, that uses the benefits of its
Affimer(®) platform to differentiate immunodiagnostic products in a
competitive market. This is a transformational moment for Avacta Diagnostics,
adding a well-established route to market for existing and future in-house and
acquired products in the UK and across several key European markets.

 

"Avacta's Therapeutics division continues to make good progress as expected in
the clinical development of AVA6000, its first therapeutic product based on
its proprietary pre|CISION™ technology as it progresses with the fourth
cohort of patients in the phase 1 dose escalation study ALS-6000-101."

 

John Twycross, Managing Director of Launch Diagnostics, commented:

"For over 30 years, the senior leadership team have built Launch Diagnostics
to become one of the largest independent diagnostics distributors in the
United Kingdom, providing pathology solutions encompassing high quality
diagnostic reagents and instrumentation from world leading manufacturer's to
the health services of the United Kingdom, Belgium, Luxemburg, France and the
Republic of Ireland.

 

We are delighted that, as Launch Diagnostics becomes part of the diagnostics
division of Avacta, there is a shared ambition to continue the growth of the
group with a continuing focus on excellence and the ability to offer a wide
range of trusted and efficient diagnostics solutions, both from existing and
emerging technologies, to all our customers."

 

 

For further information from Avacta Group plc, please contact:

 

 Avacta Group plc                                                                Tel: +44 (0) 844 414 0452

 Alastair Smith, Chief Executive Officer                                         www.avacta.com (http://www.avacta.com)

 Tony Gardiner, Chief Financial Officer

 Michael Vinegrad, Group Communications Director

 Stifel Nicolaus Europe Limited (Nomad and Broker)                               Tel: +44 (0) 207 710 7600

 Nicholas Moore / Nick Adams / Samira Essebiyea / Nick Harland / Dhiren Suares   www.stifel.com (http://www.stifel.com/)
 / William Palmer-Brown

 FTI Consulting (Financial Media and IR)                                         Tel: +44(0) 203 727 1000

 Simon Conway / Alex Shaw / George Kendrick                                      Avacta.LS@fticonsulting.com (mailto:Avacta.LS@fticonsulting.com)

 Zyme Communications (Trade and Regional Media)                                  Tel: +44 (0)7891 477 378

 Lily Jeffery                                                                    lily.jeffery@zymecommunications.com
                                                                                 (mailto:katie.odgaard@zymecommunications.com)

 

Important Notices

THIS ANNOUNCEMENT, INCLUDING THE INFORMATION CONTAINED IN IT, IS RESTRICTED
AND IS NOT FOR PUBLICATION, RELEASE, TRANSMISSION, FORWARDING OR DISTRIBUTION,
DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES OF
AMERICA, ITS TERRITORIES AND POSSESSIONS, ANY STATE OF THE UNITED STATES OR
THE DISTRICT OF COLUMBIA (COLLECTIVELY, THE "UNITED STATES"), AUSTRALIA,
CANADA, JAPAN OR SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH SUCH
PUBLICATION, RELEASE OR DISTRIBUTION WOULD BE UNLAWFUL. FURTHER, THIS
ANNOUNCEMENT IS FOR INFORMATION PURPOSES ONLY AND IS NOT AN OFFER OF
SECURITIES IN ANY JURISDICTION.

This announcement or any part of it does not constitute or form part of any
offer to issue or sell, or the solicitation of an offer to acquire, purchase
or subscribe for, any securities in the United States, Canada, Australia,
Japan or South Africa or any other jurisdiction in which the same would be
unlawful. No public offering of any securities is being made in any such
jurisdiction.

The securities referred to herein have not been and will not be registered
under the US Securities Act of 1933, as amended (the "Securities Act"), or
with any securities regulatory authority of any State or other jurisdiction of
the United States, and may not be offered, sold or transferred, directly or
indirectly, in or into the United States except pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the
Securities Act and in compliance with the securities laws of any State or any
other jurisdiction of the United States.

Certain statements contained in this announcement constitute "forward-looking
statements" with respect to the financial condition, results of operations and
businesses and plans of the Company and its subsidiaries from time to time
(including after the Acquisition completes) (the "Group"). Words such as
"believes", "anticipates", "estimates", "expects", "intends", "plans", "aims",
"potential", "will", "would", "could", "considered", "likely", "estimate" and
variations of these words and similar future or conditional expressions, are
intended to identify forward-looking statements but are not the exclusive
means of identifying such statements. These statements and forecasts involve
risk and uncertainty because they relate to events and depend upon future
circumstances that have not occurred. There are a number of factors that could
cause actual results or developments to differ materially from those expressed
or implied by these forward-looking statements and forecasts. As a result, the
Group's actual financial condition, results of operations and business and
plans may differ materially from the plans, goals and expectations expressed
or implied by these forward-looking statements. No representation or warranty
is made as to the achievement or reasonableness of, and no reliance should be
placed on, such forward-looking statements. The forward-looking statements
contained in this announcement speak only as of the date of this announcement.
The Company, its directors, Stifel Nicolaus Europe Limited ("Stifel"), their
respective affiliates and any person acting on its or their behalf each
expressly disclaim any obligation or undertaking to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise, unless required to do so by applicable law or regulation
or London Stock Exchange plc.

Stifel is authorised and regulated in the United Kingdom by the FCA. Stifel is
acting exclusively for the Company and the Issuer and no one else in
connection with the Acquisition, the Placing, the Convertible Bond Offering,
the contents of this announcement or any other matters described in this
announcement. Stifel will not regard any other person as its client in
relation to the Acquisition, the Placing, the Convertible Bond Offering, the
content of this Announcement or any other matters described in this
announcement and will not be responsible to anyone other than the Company and
the Issuer for providing the protections afforded to its clients or for
providing advice to any other person in relation to the Acquisition, the
Placing, the Convertible Bond Offering the content of this announcement or any
other matters referred to in this announcement.

This announcement has been issued by and is the sole responsibility of the
Company. No representation or warranty, express or implied, is or will be made
as to, or in relation to, and no responsibility or liability is or will be
accepted by Stifel or by any of its affiliates or any person acting on its or
their behalf as to, or in relation to, the accuracy or completeness of this
announcement or any other written or oral information made available to or
publicly available to any interested party or its advisers, and any liability
therefore is expressly disclaimed.

 1  (#_ftnref1) All Launch Diagnostics financial information presented in UK
GAAP.

 2  (#_ftnref2)
https://www.globenewswire.com/en/news-release/2022/06/23/2468227/0/en/In-Vitro-Diagnostics-Market-worth-113-1-billion-by-2026-Report-by-MarketsandMarkets.html
(https://www.globenewswire.com/en/news-release/2022/06/23/2468227/0/en/In-Vitro-Diagnostics-Market-worth-113-1-billion-by-2026-Report-by-MarketsandMarkets.html)

 3  (#_ftnref3) Adjusted EBITDA is defined as earnings before income tax,
depreciation and amortisation, adjusted for a market rate Managing Director
salary and the removal of non-recurring professional fees.

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