Institutional investors who warmly endorsed their faith in Galen Holdings, the Northern Ireland pharmaceutical group, last November, when they subscribed £36.9 million sterling for new shares, must be scratching their heads. They paid a minimum of 590p per share, a mere 3.5 per cent discount on the then pricey share. After an initial dip to 500p, they then saw the share price soar to a high of 784p two months ago, which seemed to justify their faith.

But if they were jumping with glee in March, that elation was short lived. A slide developed. And on Thursday, when the proposed acquisition of Warner Chilcott, a Dublin-based pharmaceutical company with most of its business in the US, was announced, the shares initially rose but then fell 50p on the day. On Friday they fell a further 32.5p to 530p. Does the continued share weakness reflect the vagaries of the market, or is something else afoot?

Considering that Galen expects the acquisition to be "earnings accretive on a pre-exceptional and pre-amortisation of goodwill and intangible asset basis in the first full year post-acquisition", the shares should have responded positively. But Warner Chilcott, which has a share quotation on Nasdaq, is highly leveraged, with eight-year junk bonds of $196 million in its balance sheet. They have a high coupon of 12 per cent and will weigh heavily on the enlarged group; it should try to refinance them. The decline in Galen's shares was also attributed to US traders who sold the shares to buy Warner Chilcott as a cheaper way to own Galen shares, but currency fluctuations have also to be taken into account.

Another possible perceived negative was that Warner Chilcott recorded negative earnings over the past few years. But its annual results disguised what was going on behind the scenes. Its last annual report noted that the strategic initiatives begun in 1997 to return Warner Chilcott to its roots as a branded pharmaceutical company had been largely accomplished. "With the majority of the costs and expenses of that transformation process behind us, we are now positioned to turn our growth potential into a profitable reality, beginning in 2000 and accelerating in the years ahead. The recent acquisition of three branded women's healthcare pharmaceuticals from Bristol-Myers Squibb strengthens our focus on women's healthcare and will generate substantial increases in revenues and profits. This ability to generate significant cash flow will enable us to continue to pursue our strategic initiatives and to capitalise on future growth opportunities", according to Mr James Andress, chairman and CEO.

And the group's latest results, just out, confirm those sentiments and show the company is entering a new era. It achieved its first quarterly net earnings of $581,000, or $0.05 per share fully diluted in the three months to March 31st 2000, compared with a net loss of $1,997,000, or a loss of $0.16 per share, in the three months to March 1999. Despite the high interest costs - these amounted to $3.1 million - it said it was "solidly cash flow positive and at March 31st 2000 had $36.1 million in cash and equivalents on hand, providing ample funding for internal growth and development".

SO Galen appears to be buying Warner Chilcott on the turnaround. Its earnings per share for the first quarter were $0.05. US brokers, on average, are forecasting eps of $31 for this year and $51 for 2001. And over the next five years, eps is expected to grow by 38 per cent per annum, outstripping the estimated 24.6 per cent for the med-drugs sector, and 15.2 per cent for the S&P 500 index.

And Galen (without the acquisition) was also expected to continue with its strong growth. Eps was expected to rise from 12.6p sterling in 1999 to 15.6p in 2000 and to about 19p in 2001.

But with the acquisition, growth should be a good deal better. The deal - 2.5 Galen shares for each Warner Chilcott share - values Warner Chilcott at €330 million (£260 million) and will be effected by a scheme of arrangement for two reasons. First, it will save stamp duty - around £1 million sterling. Second, it overcomes some of the technical problems that might arise from a British company acquiring an Irish company, listed on Nasdaq, which has to adhere to SEC rules.

The fully diluted split in the combined company will be 25 per cent for Warner Chilcott shareholders and 75 per cent for Galen shareholders. The equitableness of the split cannot be deduced from Warner Chilcott's historic record but the 33 per cent premium on the pre-bid price of $18 is fair enough. Also, with just two Warner Chilcott directors joining the enlarged Galen board, the Galen directors will control that board. This is reinforced with the appointment of Dr John King, Galen's chief executive officer to the position of executive chairman. The deal which will give Galen a Nasdaq quotation should accelerate its move into the niche and expanding women's healthcare market in the US. It will allow it to sell new products in the US without having to pay fees to a marketing partner. One direct benefit would be the promotion of Galen's transmucosal intravaginal ring (IVR) drug delivery system for hormone replacement therapy (HRT).

The deal has all the ingredients for success; the only fly in the ointment is the portfolio of junk bonds.

Bill Murdoch is at bmurdoch@irish-times.ie