ProStrakan's debt pile casts dark shadow on drug delays

ProStrakan left little room for optimism with today’s announcement. Setbacks for two key products means a long-promised profitability target is highly likely to be missed, an eventuality that no doubt played a large part in the departure of long standing chief executive, Wilson Totten, whose resignation was also revealed.

However, something not referred to in today’s news release is a looming £46.5m ($71.2m) debt pile that the loss making company is supposed to start paying back in December. This elephant in the room probably has as much to do with the catastrophic 32% slump in ProStrakan’s share price today as the other calamities. The decline reflects real fear that the company is facing its own credit crunch, and that difficult choices need to be made.


The next few months were always going to be critical for ProStrakan, with three crucially important growth drivers nearing launch in the all-important US market (Event - Painful wait for ProStrakan on Abstral, August 16, 2010).

Firstly, approval of cancer pain therapy Abstral is being held up by discussions around a Risk Evaluation and Mitigation Strategy (REMS). A decision, initially expected in June, was delayed to September 4 and will be missed again, the company said today, although it remains confident of approval “in the near term”.

The second setback with anti-sickness patch Sancuso is more concerning. In August alongside interim results ProStrakan revealed that its US manufacturing partner had temporarily shut up shop for 8 to 12 weeks to make changes following an FDA inspection. Today it announced that will translate into stock shortages and unfilled orders from early October, a situation it hopes to remedy by the first quarter of 2011.

However, operating profits will be hit to the tune of £5m this year, a damaging blow considering the company was only expected to creep into the black this year anyway. Consensus from EvaluatePharmahad £1m of operating profit for 2010, meaning another year in the red is likely.

Possible reprieve

However, the third growth driver could yet provide a reprieve. Testosterone gel Fortesta is due to hear on FDA approval by the end of December, and a green light would prompt a milestone from US partner Endo Pharmaceuticals, which analysts believe should total £8m.

This would provide the company with some much needed financial breathing space as demands on cash are only set to grow in the coming months.

In April, ProStrakan emptied a £46.5m debt facility in place with Fortress Investment Group, Morgan Stanley and Och-Ziff Capital Management. Repayments are due to commence in December, totalling at least £1m a month until February 2012, when the remaining sum becomes due.

Despite the set backs to Abstral and Sancuso the US sales team is already in place, and must be paid. All three products are also being rolled out in Europe, a region now carrying responsible for generating the cash but also requiring significant investment.

Unfortunately, ProStrakan has yet to generate any cash; in the first half of the year group cash outflow reached £1.3m. This picture is improving – cash outflow totalled £8.6m in the same period in 2009 – but with the loan repayments looming and now the product delays, it is not improving fast enough.

Considering options

ProStrakan ended June with £23.9m in cash, which is forecast to fall to around £15m by the end of the year. Without the Abstral and Sancuso sales, reserves will soon dwindle and the Fortesta decision is now even more crucial.

A debt refinancing now looks likely sooner rather than later, assuming this can be negotiated with the creditors. Considering no reference was made to this issue today, no doubt investors and analysts will be seeking more information on the terms and covenants of this loan.

"Refinancing in 2011 is inevitable in our view," analysts at Credit Suisse wrote in a research note today, slashing their price target on the stock to 62p from 94p.

Towards the end of trading today ProStrakan shares had dropped to 54 pence, a two-and-a-half year low. The company now has a market value of £109m.

This would all probably not be such a bitter pill to swallow for shareholders had it not seemingly come out of the blue, although eyebrows were raised when the otherwise upbeat interim statement issued less than three weeks ago omitted financial guidance for the year. However the departure of the chief executive is understandable after a long time promising three substantial US product launches and profits this year (EP Vantage Interview – ProStrakan heading to the top of the stocks, December 11, 2008).

Still, if Fortesta is delayed again and the issues with Sancuso and Abstral drag on, ProStrakan may have to consider options more drastic than a debt refinancing and boardroom shake up.

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