With a little help from biotech fever, SkyePharma throws off its albatross

A year ago it would have been impossible for SkyePharma to pull off the trick of repaying its bond overhang and limit further dilution to equity holders to 56%, but then its share price is more than four times higher now than it was then.

Today’s announcement that an equity raise would pay off the bond thus owes much to the wave of biotech enthusiasm that has swept from the US and helped Circassia raise $334m, for instance. But such an outcome is also due to management’s ability over the past two years to juggle the bond liability as well as drive the operational advances that should now take centre stage for SkyePharma investors.

The bond had hung like an albatross around SkyePharma’s neck since around 2007, when it became apparent that unless it was dealt with it would overshadow anything else the UK group managed to achieve.

A major restructuring in 2012 still left an effective £120.8m ($201.0m) bond liability against SkyePharma’s then market cap of just £22m (Investors breathe sigh of relief on SkyePharma bond move, August 23, 2012).

Setting the stage

But since then SkyePharma’s market cap has surged, reaching £92m on Friday, and with equity investors showing such confidence the group has been able to consign the bond to history.

An equity raise at a discount of just 4% to Friday’s close brings in £112m before costs, and 79% of the holders of the bond have already agreed to accept a 14.85% premium to the debt’s face value, meaning that the remaining 21% can simply be squeezed out.

As the table below shows, this represents a total saving for SkyePharma of about £25.2m to the state of play that would have existed had the bond been repaid in 2017 under its normal terms – assuming that the company were at that time able to repay it. 

Earlier bond liability Actual cost of redeeming now
Nominal principal value £60.8m Principal value £83.2m
6.5% interest to 2017 £21.9m 14.85% redemption premium £12.4m
Extra 3% interest to 2017 £9.3m
47.3% redemption premium £28.8m
TOTAL £120.8m TOTAL £95.6m
2013 shares out (m) 46.1
New shares issued (m) 58.7
Dilution 56.0%
Gross equity raise £112.0m
Broker fees (£8.0m)
Bond redemption (£95.6m)
Bond redemption fees (£0.4m)
Remainder of raise available for corporate use £8.0m

On such terms it makes perfect sense for SkyePharma to seize the moment and take an immediate financial hit to remove a significant future liability. The secured lenders Paul Capital and Christofferon Robb remain, but only until 2014 and 2016 respectively and only to the tune of £31.5m.

It should be straightforward for the now-profitable group to manage these from operating cash flows; Flutiform and Pacira Pharmaceuticals’ Exparel generated in-market sales of €19.4m ($26.8m) and $76.2m respectively last year, and SkyePharma receives a royalty on both drugs.

Management should therefore be commended for retaining a focus on the fundamental business while allaying the bond’s most onerous aspects until it was possible to reach an outcome acceptable to bond holders on the one hand and not excessively punitive to equity holders on the other.

One remaining question, however, is whether holders of the debt have not in fact given too much away too early. Since on the face of it the deal looks so good for equity holders – certainly nowhere near as bad an outcome as had seemed inevitable not so long ago – could bond holders have held out for more?

Presumably, however, they looked at SkyePharma’s 320% one-year stock price increase and realised that debt was no longer the most advantageous security to own to benefit from the company’s operating progress. Indeed, this morning’s further 18% rise shows instant upside for those holders who switch from debt to equity at the £1.91 offering price.

Now all they have to do is make sure they get out before the biotech bubble bursts.

To contact the writer of this story email Jacob Plieth in London at [email protected] or follow @JacobEPVantage on Twitter

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