Surgical to buy NHS supplier in "natural next step"

​Leeds-based Surgical​​ ​said Elemental is already well known to​ the firm as ​the exclusive distributor of SI branded products in the UK​. It said that​ the acquisition of a profitable

and cash generative distributor is expected to have an immediate positive impact on Surgical’s ​margins and profitability.

​​Nigel Rogers, ​e​xecutive ​c​hairman of Surgical​, said: “Coming together was the natural next step for two businesses that have had such a long-standing and​ ​fruitful partnership​.

​​“Adam and David, the​ ​principals at Elemental, have a great pedigree in the medical device section and ​we ​look forward to benefiting​ ​from their insights into our new product initiatives and business development here and abroad.”

Elemental is owned by co-founders Adam Power and David Marsh, who will both join the Board of Surgical​ ​Innovations ​​as ​g​roup ​d​evelopment ​d​irector and ​g​roup ​c​ommercial ​director, respectively.

The business​ ​employs 19 staff ​in Berkshire, including a sales team of 12.

Surgical announced a ​p​lacing and ​s​ubscription to raise £5.5m at a placing price of 3p​ ​through stockbroker WH Ireland​ to help fund the deal.

The proceeds will be used to fund the acquisition, alongside existin​g ​cash resources and a new £2.5m debt facility with Yorkshire Bank.

Surgical will pay a total of​ ​£7.5m in cash to ​Mr ​Power and ​Mr ​Marsh, as well ​as ​issuing them shares worth £1.875m, approximately 8​ per cent​ of the​ ​enlarged company.

The Surgical ​b​oard ha​s​ also invested in the fundrais​ing​, to the tune of £82,500 between​ ​them.

​Mr Rogers said: “There are clear and obvious benefits to margins and​ ​earnings as we add a highly profitable and cash generative business to the group, but this also provides us

with access to an experienced direct sales force and the new products distributed by Elemental will widen​ ​the range of products on offer to surgeons in the NHS and UK private hospitals.

“All acquisitions have some integration risks attached to them, but having worked with the Elemental team​ ​and having such a high level of inter-dependency we expect this will ease the integration process.”

Elemental has been ​the ​distributor for SI branded products since its inception in 2007​. It also handles UK​ ​distribution of Microline Surgical​'s complementary range of laparoscopic instruments, bariatric products on​ ​behalf of GI Dynamics, hernia repair products for Cousin Biotech and P​e​ters Surgical, and breast​ ​reconstruction products for Meccellis Biotech.

Over the last year the combined businesses would have produced annual sales of around £12m and a pre-tax profit of around £1.4m.

Eric Burns, ​d​irector of ​r​esearch at WH Ireland, said: “We have argued for some​ ​time that Surgical Innovations offers investors a platform for building a much larger healthcare business on​ ​AIM and the Elemental deal is a major first step in this direction. With the substantial resources of a PLC​ ​owner behind it we think there’s good scope for Elemental to significantly increase its product portfolio as​ ​well as bringing a direct sales force to Surgical from day one.”

In March, Surgical announced a​n 11 per cent increase in annual sales to £6.1m​,​ mainly driven by favourable export​ ​conditions in what the group described at the time as a breakout year. Results for 2016 marked a return to ​the ​black with a £280,000 profit compared ​with​ a pre-tax loss of £2.1m in​ ​2015.

The share price fell initially in reaction to the discounted placing to 3.25p before recovering later in the day​ ​to finish ​at 3.5​8p.