Investors breathe sigh of relief on SkyePharma bond move

Under ordinary circumstances the share price of a company announcing a financial restructuring that results in its equity holders being diluted by 48% would be expected to take quite a hit. Not so SkyePharma’s.

The company reached agreement to renegotiate its £83m ($131.7m) convertible bond in the small hours of this morning, and after announcing it to the markets today its stock rose by as much as 8% in early trading. SkyePharma had made no secret of the fact that it would have been put out of business had the bond holders asked for their money back, which they could have done next year; as such, the share price reaction is probably equivalent to equity holders letting out a collective sigh of relief.

The convertible bond was a considerable overhang on the shares at a time when operationally SkyePharma had at last started scoring important successes (After Flutiform EU approval SkyePharma needs to pull a bigger rabbit out of the hat, July 4, 2012). As of the close of play yesterday only around 15% of the company’s enterprise value of £145m was reflected in its equity.

2017 vision

Admittedly, it could be argued that all SkyePharma has done is kick the bond can down the road to 2017, when the bondholders can next request that it be repaid in full. But over the next five years the company is due to undergo several events that could change its prospects, and without the bond distraction these might start to be reflected in its stock price.

For a start, Flutiform is being launched in the EU – it was approved in the UK today – and the coming years will prove just how big a drug it can become in a shifting asthma landscape that will at some point see the entry of generic versions of GlaxoSmithKline’s dominant combination Seretide/Advair. By 2017 remaining obligations to the secured lenders Paul Capital and Christofferson Robb will likely have been paid off.

Pacira’s recent launch of Exparel will also give SkyePharma an important new line of revenue. And upcoming progress with Flutiform in other regions where it might soon be filed – such as in Japan by Kyorin Holdings and Latin America by Sanofi – provide an opportunity that might at present be underappreciated.

Principal £63.0m £20.0m   £60.8m
Annual interest 6.0% 8.0%   6.5%
Due for repayment 2024 2025   2024
First put date Nov 2013 Dec 2014   Nov 2017
Conversion price 371p 382p   not convertible
Premium payable on redemption none none   £28.8m
Additional interest on redemption none none   up to £9.3m

What remains to be seen is whether a takeover of SkyePharma, which many equity investors must surely see as a logical endgame given the success with Flutiform, is viewed any more favourably by possible acquirers under the new bond arrangement than under the previous one.

After all, given the new redemption premium, accumulated interest and some £45m in secured lender obligations, whose repayment would be triggered in a change of control, any company interested in buying SkyePharma would likely have to cut a cheque for £150m even before deciding what premium to offer equity holders – many of whom are already nursing significant losses.

Thus while Peter Grant, appointed SkyePharma’s chief executive in January and riding the crest of a 160% share price increase since then, can indeed now run the business without worrying about the bond overhang, a number of questions remain. How well will Flutiform sell? Will SkyePharma be able to generate enough cash over the next five years to avoid going back to shareholders for more money – something that would seriously dent sentiment?

Moreover, investors might still have to contend with future dilution. But, because the new bonds are non-convertible, equity holders will at least have the option of putting up more cash to preserve their percentage stakes in the event that a cash injection is needed to pay off the bond for good.

Make no mistake: a key hurdle has been cleared, and a significant overhang that had been depressing the shares has been lifted – at least for five years. As the stock attests, it could have been much, much worse.

To contact the writer of this story email Jacob Plieth in London at [email protected]

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