Skyepharma shares dive on sales warning

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Skyepharma, the drug delivery group, stunned an otherwise quiet stock market yesterday with a warning that sales for 2003 had gone into reverse and would plunge below the £70m generated in 2002. Michael Ashton, Skyepharma's chief executive, also revealed that the company was in dispute with GlaxoSmithKline over royalty payments arising from the anti-depressant drug Paxil, which his company helped develop.

Skyepharma shares crashed 20 per cent after the trading update but later recovered to finish just 6.5 per cent down as the company promised a raft of good news on drug development projects for the first quarter of this year. It also insisted the row with Glaxo would not result in a reduction of its royalty income from Paxil, but only that it might restrict a potential increase.

However, during a presentation to British and US investors yesterday afternoon, some analysts remained sceptical about the company's ability to deliver on its promises, having heard similar undertakings last year on development deals that did not materialise.

Nevertheless, Mr Ashton struck an upbeat note, insisting the company had three projects close to completion that could lift revenues by $200m in 2004. He also promised the group would be profitable this year.

Mr Ashton blamed delays in concluding the deals before 31 December for a "substantial" fall in revenues that would be below the £85m-£100m range indicated in September and below the £70m achieved in 2002.

The three deals affected represented up-front payments, known as milestone payments, of $200m, plus future royalty revenues expected to be worth more than 10 per cent of each product's sales.

One of the drugs involved, formoterol, an asthma treatment, could have sales of $1bn, according to Mr Ashton, on which Skyepharma could receive substantial royalties.

Mr Ashton said prospects for 2004 were extremely positive, with long-term royalty payments from its drug products expected to triple, more than covering its operating costs. The company is keen to move its revenue streams away from milestone payments to the more stable royalty payments.

"It's all pretty exciting stuff," said Mr Ashton. "We are disappointed we didn't achieve the revenue targets we set in April last year and that revenues will be below 2002 but we are not going to accept sub-optimal agreements."

The dispute with Glaxo represented "only upside" for the company, he said.

"Our reading of the agreement is that we are entitled to higher royalty rates on the slow-release version of Paxil. Not surprisingly our partner disagrees. If it goes to arbitration and that goes against us we will still receive the same royalty rate that we are currently enjoying."

The company believes it is due an increase in royalties from Glaxo because of the introduction of generic competition to standard Paxil in the US, making its slow release version more valuable.

Analysts now expect Skyepharma to make a loss of £30m for 2003.