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Skyepharma – Paxil manufacturing problems
Skyepharma bounced a little today but it is still well down on two days ago and is at low levels against historical prices – it has rarely gone below 50p since mid-2003 and has gone above 70p several times since then, most recently late last year. Of course it has always been fairly volatile but I was a little surprised at how sharp a reaction there was to the news of Glaxo’s manufacturing problems with Paxil CR.
Firstly, Skyepharma does not manufacture Paxil CR, it helped develop it and receives a (small percentage) royalty which does bring substantial income because Paxil brings Glaxo such huge revenues. On the face of it the effects of the problems should be that Skyepharma loses a fair amount of revenues (all the royalties from Paxil CR’s US sales, i.e. most of it) for about six months and then things slowly go back to normal, by next year everything should be back to normal. This does not look like something that should have much impact on how much Skyepharma is worth.
Of course the competition (manufacturers of the generic versions of the original, non-slow release, formulation of Paxil) may get a chance to gain market share, but it is hard to see why this should do more than accelerate what would happen anyway. So maybe the impact of this will hold back Skyepharma’s revenues from Paxil for longer, but it should still fade over a few years.
A few years is a long time, but Skyepharma’s value lies in its still fairly young drug pipeline and the platform for developing more drugs (its core technologies for slow release tablets and injections for example). So I would expect investors to take the view that most of Skyepharma’s value lies earnings that are still far in the future. There is a more detailed analysis of Skyepharma here.
On the fundamentals Skyepharma looks cheap, but it always has and there is no indication the market is likely to change its mind. Part of the problem is that Skyepharma has been apparently on the verge of reaching profitability for years and DCFs have always made it look severely undervalued. It has also always been very volatile and has been trading in the same range for the last three years, I recall a fund manager was very pleased that my recommendation to buy Skyepharma had made him a fast and substantial gain back in 2002 – but he had the sense to realise the gain he was sitting on without waiting for my recommendation to change.
Despite the good fundamentals, and in particular the low risk but promising pipeline, I feel a little nervous about the stock for two reasons. One is that it has simply disappointed those of us who liked it on fundamentals for too long and sustained profitability seems as far away as ever. The other is that it looks as though it will require a fairly dramatic catalyst to persuade the market to move it out of the range it has traded in over the last few years. The price suggests that the rest of the market either feels the same or does not believe the DCFs.
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