Allan McClay's Galen took a hammering when it relisted on Tuesday after the disclosure that the merger with Ferring had become the latest casualty of the stock market slump. After falling almost £1 to 337p sterling, the shares have recovered a bit and at these levels look severely oversold and good value.

So why did the Ferring merger bite the dust? The main factor was that this was a merger between Ferring, a fully-owned private company and Galen, a publicly-listed company whose directors control more than two-thirds of the equity.

The all-paper nature of the proposed deal would have meant that nearly 90 per cent of the merged company's shares would have been held by directors or associated parties. That is way higher than the minimum 75 per cent free float required by the Stock Exchange and the only way that Galen-Ferring could get that free float down to 75 per cent would have been a huge equity issue - probably in the order of £250 million.

That sort of share issue would have been no problem when the merger plan was announced last June when markets were humming away merrily without a storm cloud on the horizon. Now with markets off more than 20 per cent, a share issue of that scale would have been fraught.

That said, the 23 per cent knock that Galen shares took when they relisted seems grossly overdone, especially as the pharmaceutical sector has been one of the most resilient during the recent market slump, with the European pharmaceutical shares down just 13 per cent and the US sector down only marginally in the past couple of months.

One problem caused by Galen's absence from the market for the past three months is that it lost its place in the FTSE-Mid 250, and index funds using the 250 are now sellers of the stock. That said, Galen's market capitalisation is more than enough to get back into the 250 when the new list is drawn up towards the end of the year.

Anybody wanting to get a decent weighting in tightly held Galen stock might be well-advised to move now, before the index funds are back as buyers when Galen rejoins the 250 index. But purely on the basics, Galen looks oversold and a 1998 prospective p/e of 38, and a 1999 p/e of around 30 puts the stock on a hefty discount to the sector.

P/e ratios of this scale might look pretty daunting, but this is the pharmaceutical sector where multiples tend to be a long way ahead of market averages.

Goodbody's Joan Garahy remains a big Galen fan. While conceding that the end of the Ferring merger is a setback, she believes that Galen's prospects are sound, especially if its intravaginal ring (IVR) drug delivery system for delivering hormone replacement therapy succeeds in getting its European and US patents by the end of the year.

The Goodbody analyst is wary of putting figures on the impact of the IVR product on Galen, but she says that even getting 5 per cent of the HRT market would generate sales of £70£80 million sterling. That compares with Galen's expected sales of around £50 million for the year to September 1998.

Incidentally, it is normally a good sign when a company brings forwards its financial results. Galen is speeding up the publication of its 1998 results by a month, a strong indication that Allan McClay wants to get good news into the market quickly, after the long period of suspension.