A "substantial change in market conditions" is behind a mutual decision to terminate a merger of Zelira Therapeutics (ASX: ZLD) and Health House International (ASX: HHI), putting an end to five months of courtship between the two Perth-based medicinal cannabis companies.
The deal was at the last-mile stage following a period of consolidation in the wider industry whereby the likes of Cronos Australia (ASX: CAU) and CDA Health joined forces, as did AusCann (ASX: AC8) and CannPal.
“The proposed merger was borne out of a perception that the shareholders of Health House and Zelira would derive significant benefits from a combination of the two businesses, with significant operational and strategic advantages perceived to be achievable in the medium- to long-term,” Health House founder and chairman David Wheeler said.
“However, the recent substantial change in market conditions affecting both entities has required a re-evaluation of that approach.
“In conjunction with input from key stakeholders, the board now takes the view that alternative strategies must be explored. To that end, we expect to be able to provide a further update to the market in due course.”
As the merger will no longer progress, Health House will make an immediate payment of $50,000 to Zelira and repay ZLD a $1.5 million working capital facility loan, plus interest, within 60 days.
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Today’s announcement sends up in smoke what would have been a bit of a homecoming moment for Zelira (formerly known as Zelda Therapeutics), which has been operating out of the US following the appointment of Philadelphia-based Oludare Odumosu as global managing director in 2021.
Health House would have taken a 19.45 per cent interest in the expanded Zelira, giving the parent company access to the target’s existing supply agreements with many pharmaceutical grade Good Manufacturing Practice (GMP) certified manufacturers and producers of high-quality medicinal cannabis products.
When the scheme implementation deed (SID) between the companies was executed in April, HHI CEO David Attwood hoped the merger would give both companies a leg-up in the intellectual property space.
"Medicinal cannabis is playing catch up with the mainstream pharmaceutical sector that has intellectual property at its core,” Attwood said at the time.
“The Health House team is excited to join forces with Zelira as the merger provides a short- and long-term opportunity to leverage Zelira’s leading research and development capabilities by offering unique products into the major markets.”
Health House generated $8.5 million in revenue during FY21, a small part of which came from Zelira, which had an exclusive distribution agreement in place with the business for its CBD toothpaste products in the UK. In addition to distributing Zelira products, HHI sells many major Australian and international medicinal cannabis brands including those made by Little Green Pharma (ASX: LGP), ANTG, Satipharm, Ananda Hemp and Maali.
The two companies are also already partially linked, albeit in a minor way, when it comes to ownership.
Two Zelira directors, Harry Karelis and Tim Slate, are already shareholders in Health House with stakes of 6.38 per cent and 0.67 per cent respectively. Karelis also holds 1.5 per cent of Zelira shares, so a transaction committee was established to make sure neither director had a say in assessing or recommending a deal to the board.
As it is no longer pursing this deal, Zelira will likely continue to focus on its existing operations - developing and clinically validating its branded cannabinoid-based medicines for the treatment of conditions including insomnia, autism and chronic non-cancer pain.
These research programs have been part-funded by a US$5 million ($6.9 million) capital raise from US-based family office fund, Quincy Street Capital and a $1.2 million cash refund under the Australian Federal Government’s R&D Tax Incentive Scheme in 2021.
Successful clinical trial results for its cannabinoid-based medicine Zenivol were published in the journal ‘Sleep’ in 2021, following the completion of its first Phase 1b clinical trial for patients with chronic insomnia.
Following the publication, Zelira signed its first distribution agreements to market Zenivol outside of Australia and the US, agreeing to deals with local medicinal cannabis players Adjupharm in Germany and NUBU Pharmaceuticals in New Zealand.
Over the past year, Zelira also launched a range of acne treatments, including cannabis-based Zylorma, through its dermatology subsidiary.
Shares in ZLD are up 5 per cent to 1.05 per share at 1.57pm AEST.
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