Omega sells Scots plant, raises £7m in cash call
Drug and food testing company Omega Diagnostics has raised £7m from shareholders and is selling its manufacturing facility in Scotland to reduce its losses.
The firm, which will relocate its remaining product line to a new plant under construction in Ely, Cambridgeshire, said losses have largely been incurred as a result of the UK government failing to license its Covid test kits.
The £1 million cash sale of the Alva facility to Accubio, a wholly-owned subsidiary of Zhejiang Orient Gene Biotech, will see 109 full-time employees transfer to the new owner.
The agreement also covers the sale of certain fixed assets, including plant and equipment as well as the assignment of the lease for the Alva site.
Longer-term, Omega plans to move to a sub-contract manufacturing model for its VISITECT COVID-19 antigen test, which is expected to significantly reduce manufacturing costs.
The company has confirmed that it will raise £5m via a placing and subscription of 100m shares to new institutional investors and a number of wealth managers at an issue price of 5p. It will raise a further £2m through a 2-for-9 open offer to qualifying shareholders at the same price.
Shares in the AIM-quoted firm plummeted 27% to 7.25p yesterday when it confirmed it was considering the cash call. They closed today 1.38p (18.97%) lower at 5.87p in 50m trades.
Problems beset Omega last year after it was awarded a contract in February with the Department of Health and Social Care to provide manufacturing capacity for COVID-19 antigen lateral flow tests.
As a result, and with pre-production funding provided by the DHSC as well as the group’s own cash resources, Omega expanded the manufacturing site in Alva “in good faith”, increasing the site footprint, staffing levels and equipment, as well as installing Government funded-equipment to seek to support UK-based manufacturing capacity for COVID-19 LFTs, as required by the DHSC.
This substantially increased the cost base of the Alva site and for the company as a whole. But the DHSC failed to licence a third-party developed test to technology transfer to Omega’s Alva site for Omega to manufacture on their behalf and allowed the contract to expire, as confirmed in the company’s announcement on 10 December 2021.
As a result of the DHSC not progressing the contract to the Phase 2 manufacturing stage, Omega was left with insufficient demand for production volume and a manufacturing cost-base in Alva that was accordingly not sustainable.
The Alva site generated a £4.9m loss in the nine months to 31 December 2021. As stated in the interim results announcement on 25 November, the company highlighted the need to re-size its LFT manufacturing capacity, to improve operational efficiency and to substantially reduce costs. The sale of the Alva site and the corresponding step-change in the company’s cost base represents the first stage of the implementation of this strategy.
As part of the Alva exit plan, Omega is facilitating discussions with several manufacturing partners who may be willing to purchase the Government-funded equipment from the DHSC. Omega does not intend to purchase the equipment for its own use and remains in discussion with the DHSC with regards to the £2.5m pre-production payment provided.
Jag Grewal, who was recently installed as CEO, said: “Today’s news is the first stage of a planned strategy to deliver on our stated objectives to see an increase in revenue across the Group and to reduce losses.
“We had previously highlighted our need to re-size our COVID LFT manufacturing capacity and it is hugely disappointing that having acted in good faith to establish UK manufacturing for Government-issued COVID tests, we find that these tests are, in the main, sourced from China instead.
“The deal with Orient Gene allows the historical Alva site, which has been producing diagnostics products since September 2003, to continue to thrive, and importantly provides greater job security for the 109 employees who will be transferring to Accubio.
“The sale will significantly reduce the group’s fixed cost base and eliminate a number of potential future liabilities, whilst generating funds for further investment and growth.
“The focus of the Omega team is on delivering significant growth in the profitable Health & Nutrition division, determining the best way to deliver shareholder value from our CD4 product, which is now building momentum, and executing on a sub-contract production model for COVID-19.”
The net proceeds of the fundraising, amounting to between £4.6m and £6.6m, depending on the take up of the Open Offer, will be used to drive growth in the profitable and growing Health and Nutrition Business, whilst also providing the necessary finance to relocate CD4 production to the company’s new, purpose-built manufacturing facility in Ely, Cambridgeshire, as well as supporting a transition to a sub-contract model for COVID-19 test manufacture.
In a trading update, the company said it remains focused on improving operational efficiencies and sensibly controlling costs. It is confident that revenues in the second half will see significant growth in both Health and Nutrition and for its CD4 product, whilst COVID-19 revenues are now likely to be minimal given the delays in gaining CTDA approval for the company’s professional antigen test and the very recent CE-marking of the antigen self-test.
Overall, the company believes that it will see an improved sales performance across the group for the full year as compared with the year ended 31 March 2021 and to see trading losses slightly reduced in the second half.
As a result of the agreement to exit the Alva site, the company will be reporting an exceptional, non-cash impairment charge of approximately £3.5m, reflecting the impairment of assets associated with the Alva site.