Avacta buying Launch Diagnostics for initial £24m

Clinical-stage oncology drug company Avacta has conditionally agreed to acquire Launch Diagnostics, it announced on Tuesday, for an upfront cash consideration of £24m on a debt-free, cash-free basis.

The AIM-traded firm said the acquisition, subject to customary working capital adjustments, would also have an earn-out based on future business performance, capped at £13m.

It said the deal was the first step in a mergers and acquisitions-led growth strategy for its diagnostics division, with the vision of building an “integrated and differentiated” IVD business with global reach, serving professionals and consumers.

Avacta said it believed that there was a “significant” commercial opportunity in the European Union and UK markets, which it described as “fragmented”, to build its position in the immunodiagnostics and molecular diagnostics value chain by acquiring companies that were complementary to the company’s core strengths in research and development.

The company described Launch Diagnostics as a “leading” independent IVD distributor in the UK, with a track record of more than 30 years, based in Kent and with 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 the Republic of Ireland, with around 95% repeat business.

Total consideration for Launch Diagnostics would included an initial consideration of £24m in cash payable on completion, and an additional consideration of 50% of the gross margin on sales exceeding £2m per annum of Launch Diagnostics' Covid-19 related products for three years, capped at £13m in total.

Launch generated £14.17m of non-Covid-related revenue in the 2021 financial year, with total revenues including Covid-19 products of £32.75m.

Since 2019, the gross margin in total sales has consistently been in the range 44% to 50% across all products.

Avacta siad 73% of Launch Diagnostics' revenue in 2021 was generated in the UK, and 27% was generated in France and the Benelux region.

The acquisition valued Launch Diagnostics at 1.35x its 2021 revenue, including an 80% discount of revenues derived from Covid-19 related products.

Key management of Launch Diagnostics would remain in place, with the exception of the principal selling shareholder, who would retire and be replaced by a managing director from within the business.

The global IVD market was expected to reach sales of $113.1bn by 2026, which comprises a wide range of test products into multiple healthcare settings from hospitals to home testing.

“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,” said chief executive officer Dr Alastair Smith.

“It is the landmark first step in our ambitious merger and acquisition-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.”

Dr Smith said it was a “transformational moment” for Avacta, 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 preCISION technology as it progresses with the fourth cohort of patients in the phase one dose escalation study ALS-6000-101.”

At 1117 BST, shares in Avacta Group were up 0.16% at 99.15p.

Reporting by Josh White at Sharecast.com.