Summary

Although it has taken some time to complete, the acquisition of Solvay’s topical
Derm product line has accelerated York’s push to achieve the status of a
self‑sustaining Specialty Pharma company. The valuation reduction is notable
but it brings the company much closer to profitability and a more certain
future in this volatile capital market period.

Key points:

• Investor risk appetite aside, the markets may be missing a beat here – Patient
  investors are likely to be rewarded handsomely as on our estimates for 2011,
  York would earn around 59p fully diluted (based on inking partnerships with
  upfront payments). At a low 6x multiple on earnings (for a 30% grower) that
  would imply a stock price of around £3.50-£4.00, a 20-fold gain from today’s
  market price.

• Debt servicing and repayment under the terms negotiated looks to be
  comfortably doable! – On our estimation, York will have no problem paying
  the interest and repaying the principle of the debt taken on assuming that
  Solvay’s ‘vendor note’ is settled and does not trigger a significant increase in
  transfer price. If revenues develop according to our plan, the debenture and
  note could even be paid off early if it is attractive to do so.

• With our projection of £27 million in revenues for 2009 a speciality topical
  derm products company is born – York is now set to sail into the sunset as
  a profitable, self-sustaining company. This is not a bad thing in a difficult
  stockmarket environment and major credit crisis, where outside funding
  for clinical development programmes, if it can be raised at all, comes at
  an exorbitant price.

• Flammacerium for burn victim wound care in the US is a significant
  ‘sleeper’ for York – Superior efficacy demonstrated in the medical literature,
  combined with a post-September 11th US FDA-sanctioned ‘Orphan Drug’
  Status, and a complete clinical package ready for full US registration holds
  significant potential.

• The Solvay anti-infective wound care products acquired fit perfectly into
  the York portfolio – With its marketing platform up and running after the DDL
  acquisition, York can hit the ground running benefiting from ready inventory,
  pricing flexibility and geographic expansion potential built into the ‘orphan’
  status the product had under Solvay.

• York has pulled a creative, if expensive, transaction coup out of the hat –
  The ingenuity and persistence in managing to complete this in the current
  market environment, and acquire this strategically important asset at a
  relatively low 2.7x revenues is impressive. The heavy ‘dilution’ price paid
  by shareholder has also moved York towards a more attractive business
  model in tune with their wishes.

• This tradeoff is in tune with the market environment – Investors are looking
  for companies to be self-financing so the fact that the stock got cut in half post
  this transaction which, is consistent with the general level of disbelief and/or
  apathy as regards this sector.

• While at a ‘valuation’ price, it brings York closer to its stated objective of
  self‑sustainability – From our last published valuation of £3.68 in January,
  2008, we estimate that with this transaction, our valuation drops 55 percent
  to £1.58. A heavy price to pay, but the tradeoff off seems worth it to
  management and to ourselves.

• Acquisition of the Solvay product line is a company-transforming event –
  Adding products annualizing around £8million in revenues with growth
  potential to the mix is a quintessentially strategic move for York.

The full report can be accessed at:
http://reports.objectivecapital.com/ocreports/OC-UKHNW-full-objective-yorkpharma-oct08.pdf

For all our previous comments on this company visit:
http://www.objectivecapital.co.uk/YRK.L.asp

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