Company Spotlight: 'A British contender competes with the giants of healthcare'

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The Independent Online

Few british companies have made it big in some of the most exciting niches in the healthcare industry, such as biotechnology, generic drugs manufacture or drug delivery technologies. US investors are spoilt for choice, but the medicine chest is almost bare on this side of the Atlantic.

Still, there is one promising contender, SkyePharma, which looks well on its way to make the grade. It has yet to overcome major short-term hurdles to gain credibility in the City but, with a stock value of about £425m, hopes are high.

SkyePharma is a specialist drug delivery group, developing novel devices and processes to administer them. It can make pills dissolve slowly so the drug works over a longer period or after it has reached a certain part of the gut. It makes inhalers more efficient so drug-powders do not congeal with moist breath. Or it can add an ingredient to an injection-delivered drug so patients need fewer jabs, a great boon for busy nurses and those who hate needles.

The group's proprietary technology is typically used to improve the effectiveness of proven drugs that are reaching the end of their patent life. This means SkyePharma faces lower risks than pure biotech companies, whose new products may stand a small chance of gaining regulatory approval and commercial success.

SkyePharma's technology has been endorsed by major drug companies such as Britain's GlaxoSmithKline and Switzerland's Novartis, who either want to give a new lease of life to their ageing drugs, or simply to improve the quality of present treatments. In return, SkyePharma gets upfront licence payments, then ongoing royalties linked to future sales.

The group has about a dozen projects in hand, including several products on sale or poised for a market launch. In short, Skye is reaching maturity, turning from a development-stage company into a profitable business with growing revenue streams, starting this year.

It already appears to have a potential blockbuster, Paxil CR, on its hands. The drug is an improved version of Glaxo's anti-depression drug, Paxil, which has annual US sales of £2bn but faces copycat competition.

The new concoction, which gets fresh patent protection, went on sale last year and now accounts for a third of the brand's prescriptions. On present trends Paxil CR could itself hit $1bn (£637m) annual sales within two years, earning Skyepharma a 3 per cent royalty on sales. And last week Glaxo delivered further good news when it gained US approval for Paxil CR as a treatment for severe pre-menstrual tension, which affects five million women in the US, so widening the market opportunity for the new drug.

Another promising product in the Skye pipeline is an improved version of Foradil, a smokers' cough treatment from Novartis. It has also had the green light for US launch early next year and could run up annual sales of $400m. But the most lucrative drug for Skye could be one of its own concoctions, DepoMorphine, a post-operative painkiller. That has been licensed to a US company on highly attractive terms with royalties that could go as high as 60 per cent. Although DepoMorphine has yet to be approved, the drug enables a single injection to be effective for up to 48 hours, a considerable advance on present treatments.

SkyePharma's long-term future looks bright. But its profits outlook for this year and next is uncertain, because royalty streams take time to build. Until then, SkyePharma will be heavily reliant on winning new deals with upfront income to meet analysts' near-term profit expectations.

Skye has already warned it is heading for a worse-than-expected £10m loss in the first half of 2003 due to delays in signing contracts. As analysts are still predicting full-year profit of up to £20m this year, the chairman, Ian Gowrie-Smith, will need all his negotiating skills to make the numbers in the second half. But by 2005, the group's earnings visibility should become much clearer as royalty streams become the main contributor to group profits.

By 2005, Skye could be making profits of £40m, against only £1m last year. That makes it a high-risk but potentially high-reward investment for those with strong nerves.

Neil Thapar is equity strategist at the stockbroker Durlacher

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