Skyepharma hit by sell-off after collapse of refinancing negotiations

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The Independent Online

Nervous holders of Skyepharma shares sold the stock in droves yesterday after the drugs group said that initial negotiations over the restructuring of two convertible bonds had collapsed.

The stock was down 32 per cent on the day, to just 3.73p, after the company, which believes it will make significant revenues from its asthma delivery treatment, Flutiform, in the next few years, blamed dire conditions in the markets on its decision to halt talks with financial institutions. "Although there was significant support, in the light of current capital market conditions the discussions on the specific proposal are not being pursued at the present time," Skyepharma said in a statement.

The £89m of debt is convertible into equity at the behest of the bondholders. However, given that the group has lost more than 86 per cent of its value in the last 12 months, this is not an attractive option. The real problem for Skyepharma is that, unusually, the debt is puttable on given dates next year and in 2010. This option allows the creditors to hand the bonds back to the company in return for the face value of the instrument, a scenario Skyepharma is desperately trying to avoid as it lacks the funds to meet the puts.

Peter Grant, Skyepharma's finance director, refused to comment on the nature of the failed discussions so far, or on what the group planned to do next to resolve the situation, saying that he "did not want to carry out the negotiations in the media". He did insist, however, that the company would now seek an alterative solution.

Flutiform is in the last stages of passing its final phase trials, a feat the majority of experts expect it to achieve. Skyepharma then plans to apply for an FDA licence in the US at the start of next year, and in Europe at the end of 2009.

While Skyepharma will receive milestone payments before then – cash from the drugs giant Abbot, which has a licence to make Flutiform in the US, and from Kyorin Pharmaceutical, which has a similar agreement in Japan – substantial revenues from the usage of Flutiform are not expected until 2011, after the final put date on the bonds.

Robin Campbell, an analyst at Jefferies, speculated that the discussions so far had centred on trying to persuade existing debt holders to accept a deal to push back the date of the put options. "I imagine they [Skyepharma] have not persuaded investors, who might themselves be in distressed situations and in need of the cash, to roll over the option to a later date. If that is the case it is likely that the group will have to go to the equity or credit markets to raise funds."

Another option available to Skyepharma would be to try to attract private equity investors, although Mr Grant suggested that this was unlikely as the group is already highly geared. Mr Campbell suggested that Abbot might be persuaded to come to the group's aid as it tries to safeguard its position with regard to Flutiform.

Any option will be expensive for Skyepharma. Banks have recently been reluctant to lend to even the most financially solid companies, and would expect Skyepharma to pay high interest charges on new debt. Likewise, given the price of Skyepharma shares, any equity raising would leave the stock worth very little, something existing shareholders will be reluctant to agree to.

Skyepharma said it would next update the market on 28 August.

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