Wrigley's and where we go from here
(makemilns, yahoo #46670)
I spoke to Gum Tech's CFO, Bill Hemelt, today and he told me that Gum Tech will receive royalties on P&G's dental gum and Gum Tech's own gum brands (Love gum, for example). Wrigley is also required to make a good faith effort to market Gum Tech's branded gums. Bill wouldn't provide the specific amount of the royalty, but did say that the details are forthcoming in the proxy or 10-K. He confirmed that Wrigley will pay the $25 million in cash. Bill said that the Swedish Match joint venture is moving forward and that they don't anticipate any problems due to the transaction with Wrigley. He affirmed that the company would not have done anything to jeopordize the joint venture with Swedish Match, and that the terms of the deal ensure that there will be no effect on the joint venture.
The transaction with Wrigley is a very good deal for Shareholders. Somebody (spam?) already posted this, but consider how long it would have taken Gum Tech to earn a profit of $25 million on gum manufacturing. Assuming a net profit margin of 10 to 15 percent, Gum Tech would have had to sell about $250 million in gum to earn $25 million in profit. Based on my estimate of $15 to $20 million annually on P&G's dental gum, it could have taken about 10 years to earn $25 million profit on that product. The only thing that Gum Tech is giving up is the ability to manufacture other gum products and any growth in the P&G contract, but management decided that there isn't enough money in contract manufacturing and they don't have the resources to effectively market their own brands. Since Gum Tech was going to make nicotine gum at cost and the Wrigley transaction won't affect their agreement with Swedish Match, they aren't losing any profit potential there either. The balance sheet looks even better now because they converted fixed assets with a book value of about $5 million into $25 million in cash.
Subsequent income statements will look better because they won't have all the expenses associated with overhead on the plant. Based on historical spending, Gum Tech will save about $700,000 quarterly in operating expenses, and the company's gross margin, which was negatively affected by the high cost of sales on gum, will increase to that of Zicam, which varies between 65 and 72 percent depending on the volume. The question is what will happen on the revenue side. As articulated at the annual Shareholder's meeting, "The Company will consider acquiring or merging with existing drug delivery companies." The most likely candidate for a merger is Zensano, who owns the remaining 40% of Gel Tech that Gum Tech doesn't own. By merging with Zensano, Gum Tech and Zensano can unite to own 100% of Gel Tech under the same management. They can also eliminate the operating agreement between Gum Tech and Zensano and pursue other opportunities in the drug and OTC markets using their proprietary gel matrix. In addition, Zensano can share in the opportunities afforded by the Swedish Match joint venture and Gum Tech can participate in the opportunities afforded by Zensano's peptide and tripeptide research and products. You can read about Zengen at zengen.com In addition, Gum Tech will have about $30 million to buy other firms, and based on the focus discussed at the Shareholder's meeting, it would be fair to assume that they will either pursue biotech or drug delivery companies.
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