Clock ticking for SkyePharma

SkyePharma announced today that efforts to renegotiate the terms of £89m in debt due next May have so far proved fruitless. Given the current market environment and the group’s rock bottom share price, options are running out to raise the money needed to pay back bondholders next year, a situation which is rightly scaring the market.

Shares in the British company lost a third of their value on the update today, slumping to an all time low. The market is highly pessimistic that the management team, who have to be fair largely inherited the situation, can do anything to salvage value for equity investors. The dire predicament means the company’s most highly prized asset, phase III asthma drug Flutiform, might have to be used as a bargaining chip.

Flutiform, a combination asthma drug which would compete with GlaxoSmithKline’s Advair and AstraZeneca’s Symbicort, has successfully completed two of three pivotal trials, and is on track to be filed in both Europe and the US next year. Launch in 2010 is the aim.

Being third to launch in an already well-served market means many commentators are dubious about the drug’s potential. These concerns are exacerbated by the fact that generic versions of both incumbents are known to be in development, and cheaper competition is possible as early as 2011. Flutiform will have to demonstrate significant efficacy advantages, or compete on price, to hope to gain market share.

However, considering the sheer size of the market, analysts do believe the drug will attain some traction; marketing partners Abbott Laboratories in the US and Mundipharma in Europe should help. According to EvaluatePharma, analysts have forecast royalties of $54m in 2012.

Partner to the rescue?

Analysts covering Abbott have pencilled in sales of $95m in 2012, giving the product a consensus NPV of $196m. The group inherited the project when it bought Kos Pharmaceuticals last year, and although it has said it remains committed, might not be willing to come to SkyePharma’s rescue over a product which is largely insignificant to the group as a whole.

If it does decide to, it will be on its terms, and is likely to involve SkyePharma giving up a good deal of any future revenues. A similar situation is likely to exist with Mundipharma.

Another source of funds could lie with other assets but, considering the group mainly generates royalties, monetising them will be complicated and time consuming; not an ideal situation considering the clock is ticking. And the equity markets must surely be ruled out, with the share price at 3.95p.

Power games

By the looks of it, bond holders are holding out for incredibly advantageous conversion terms, terms that are very unlikely to benefit stock holders.

The company said today that conditions in the capital markets caused its refinancing proposal to be rejected; while that might be true, if the holders of the debt have decided to play hard ball, the situation could be as bad as the market clearly fears.

SkyePharma said today that talks with "a small number of stakeholders to discuss an alternative plan" are ongoing, and further details will come alongside interim results at the end of August. A renegotiation of the terms of the bonds is in both the best interests of both bondholders and shareholders, but currently, the power is sitting firmly in the former's camp.

Thus, the situation looks bleak for investors, who have had to withstand a gradual decline in the share price over the last five years. Any hope that the new board, who were appointed after a highly public spat in 2006 with rebel shareholders amid claims of corporate excess and mismanagement, could prompt a turnaround appears to be fading.

Unfortunately, the SkyePharma that emerges from this crisis is likely to look a lot weaker.

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