2nd Mar 2006 07:40
North Atlantic Value LLP02 March 2006 1 March 2006 NORTH ATLANTIC VALUE LLP Dear Shareholder, I am writing to you as Chief Investment Officer of North Atlantic Value LLP ("NAV"). Discretionary investment management clients of NAV, Insight Investment ("Insight") and Morley Fund Management ("Morley") together hold 15.25 per cent. of SkyePharma plc ("SkyePharma") and have requisitioned an Extraordinary GeneralMeeting ("EGM") of SkyePharma, which is to be held on 9 March 2006, to appointMr Bob Thian to the Board of SkyePharma. This letter is to ask for your supportand to correct some of the misleading statements made by SkyePharma followingour requisition of the EGM (see Appendix 4). Reasons for the EGM NAV, Insight and Morley have been forced to call this meeting in order toappoint a board member who they believe will address and reverse the inexorabledecline in shareholder value at SkyePharma and rectify a number of corporategovernance issues at the Company (see Appendix 2). SkyePharma was admitted to the Official List in May 1996 at a placing price of75p, but by the close of business on 28 February 2006, the share price hasfallen to 40.5p. Despite management promises over many years that it would doso, SkyePharma has never achieved sustainable profitability and the company hasundertaken frequent equity fundings, often non-pre-emptively, which have causedfurther dilution and diminution in shareholder value. Over-promising butunder-delivering has been a constant theme in the years since the flotation. Nothwithstanding this, the current Board has seen fit to: 1. Spend millions of dollars over the life of the lease renting a prestige property in mid-town Manhattan from a company owned by the former chairman, Mr Gowrie-Smith and a Gowrie-Smith family trust. 2. Waste millions of pounds of the Company's money in establishing and running large and expensive offices overlooking Green Park in Central London for the use of the Chairman and a small number of other executives. 3. Invest and lose millions of pounds not on developing new drugs but in acquiring companies which appear to have added little or no value, or investing in other companies where the Directors either have personal interests or serve on the board (see Appendix 2). Following Mr Gowrie-Smith's departure, SkyePharma appointed Dr Argeris "Jerry"Karabelas as Chairman. Appointed as a director of SkyePharma in November 2000,Dr Karabelas has been a member of a board which has failed either to resolve theCompany's continuing under-performance or address a number of corporategovernance issues which should be of serious concern to all shareholders. DrKarabelas and investors in companies chaired by him are used to losses - he ischairman of three public companies, all of which lose money. Whatever assurances Dr Karabelas may give shareholders today, the fact remainsthat he has served as a director of SkyePharma for over five years and musttherefore assume his fair share of responsibility for this dismal track record.He has had years to rectify the problems at SkyePharma. Why should shareholdersbelieve that he will reform the Company now? SkyePharma's Future SkyePharma has an excellent and potentially very valuable portfolio of druglicensing opportunities, but the Company needs a strategy which will createvalue for its shareholders, delivered by a Chairman who has proved that he candeliver shareholder value and who is untainted by a legacy of underperformance. Mr Thian has an outstanding record of building shareholder value. He hasextensive experience (see Appendix 3) in the pharmaceutical and biotechnologyindustries, having worked at GlaxoSmithKline, Abbott Laboratories and NovoNordisk in a wide range of senior management roles, including seven years as anon-executive director of Celltech. He has turned around and been chiefexecutive or Chairman of several substantial private and public companies. He iscurrently non-executive Chairman of two companies and would be able to devotesubstantially all of his time to SkyePharma if elected. Bob Thian, our proposed Chairman, said: "That this company urgently needs aclean-up is evident; but the far greater challenge is to unlock SkyePharma'spotential by refocusing efforts on those projects which clearly add value - anddisposing of those that do not. In the past, the current Board has not shownmuch interest in or ability to face up to either challenge. It is now time forclear thinking, professional risk management and the speedy implementation of awell thought through recovery plan. More of the same will not do. With grandioseplans, but limited funding, this company is in urgent need of change." The EGM Resolutions You should note that resolution 1 to be proposed at the EGM is for theappointment of Bob Thian solely as a director of SkyePharma, not as Chairman.This is because the Articles of Association of the Company do not enableshareholders to seek the appointment of a Chairman, which is a matter for theBoard alone. Notwithstanding this, a vote in favour of the resolution will leavethe Directors in no doubt as to the wishes of the majority of shareholders andwe would expect Bob Thian to be appointed chairman by the Board shortlyfollowing an EGM where resolution 1 is carried. In relation to resolution 2, shareholders have been informed by the Company thatno director will be appointed to the board before the date of the EGM, and sothe resolution has become redundant and will not be put to the meeting. But Iwould ask you to vote in favour of resolution 2 in any event. Please vote FOR the resolutions. Even if you have voted against the resolutions,you can change your vote by signing and returning the enclosed Proxy Card. Smallshareholders own 40 per cent. of this company and we believe you deserve betterthan Dr. Karabelas and the incumbent Board. To be valid, proxies must be returned to Capita Registrars, The Registry, 34Beckenham Road, Beckenham, Kent BR3 4TU so as to be received no later than 11.00a.m. on Tuesday, 7 March 2006. Alternatively, shareholders may wish to attendthe EGM in person. The meeting is to take place at 11.00 a.m. at the Sheraton Park Lane Hotel, Piccadilly, London W1J 7BX. Shareholders are also able to record a proxy vote electronically. Certificatedshareholders who would like to vote on-line may do so by visiting theRegistrars' website, www.capitaregistrars.com. and following the instructions.You will need your share certificate to hand as you will be required to insertyour Investor Code before you are able to vote. In addition, the Registrarswould like to take the opportunity to register your email address for futurecommunications. If your shares are held electronically via CREST, you may register your votesvia your usual CREST link following established CREST procedures. Yours sincerely Christopher Mills Chief Investment Officer North Atlantic Value LLP A History of Disappointing its Shareholders • Over-promising on licensing partners: SkyePharma has been attempting to find a licensing partner for its asthma drug Flutiform since 2002. The Company finally announced in its 2004 full year results in April 2005 that Heads of Terms with a "major global pharma company" had been signed for the licensing of Flutiform, yielding "double digit" royalties and up to US$160 million in milestone payments and development cost re-imbursement. After two years of waiting the announcement was welcomed by shareholders. For no less than five months following the full year results announcement, the Company continued to suggest in the public domain that the licensing deal was on course, with Mr Gowrie-Smith stating on 18 July that the agreement was "subject to final contract" and had "the potential to deliver very significant value to our shareholders". Expectations of " significant value" quickly evaporated when, in late September, the Company announced that discussions had been terminated and this was swiftly followed by a deeply discounted 1 for 5 rescue rights issue to raise £35 million. • Over-promising on profitability: SkyePharma has promised sustained profitability over many years but has wholly and consistently failed to deliver it. Three years ago, in April 2003, management stated that "we are proud to have successfully achieved our objective of moving into profit... we believe current and future years will show a pattern of sustained profitability and significant growth". Despite these promises and repeated assurances that the Company faces the future with confidence, SkyePharma has incurred losses ever since and continues to do so. • Failure to create value: SkyePharma was admitted to the Official List in May 1996 and raised approximately £141 million at a placing price of 75p. Today, almost ten years later, SkyePharma's share price stands at 40.5p, a fall of 46 per cent. A further £74.7 million has been raised by the Company in equity financings and ADR issues since May 1996, £39.7 million of which was raised non-pre-emptively. Shareholders who acquired SkyePharma shares in the May 1996 flotation but not taken up their rights or placing entitlements during SkyePharma's numerous capital raisings since would, by February 2006, have seen their holdings significantly diluted. A. Contracts with Questionable Value to Shareholders Management's stated strategy has been to transform the business from a companythat develops drugs under contract for a low royalty to one that develops andmarkets its own drugs for significantly higher margins. It would therefore bereasonable to expect SkyePharma to focus on large licensing contracts withsignificant profit potential. Shareholders should therefore question the truevalue to the company of contracts such as: • Vital Living Inc ("Vital Living"): In 2002, SkyePharma entered into an agreement with e-nutriceuticals Inc for the use of its Geomatrix technology in consideration for which it was issued with convertible preferred stock in the company. In August 2003, e-nutriceuticals Inc merged with Vital Living, a company of which Michael Ashton was a director as well as being Chief Executive of SkyePharma, as a result of which SkyePharma acquired 14.2 million common shares in Vital Living. SkyePharma continued to increase its stake in Vital Living between 2003 and 2005 so that, by 24 June 2005, it held almost 15 per cent. of Vital Living. The share price of Vital Living has fallen 98 per cent. since SkyePharma first invested and today stands at a new low. A complete waste of shareholders' money; • Micap, a UK science-based technology company which floated on AIM in August 2003 with Mr Gowrie-Smith as Chairman. By 31 December 2004 SkyePharma had built up an 18.2 per cent. stake, holding both ordinary and convertible shares in the Company acquired at a cost of over £2 million. Yet since flotation Micap's performance has been at best disappointing: its share price has collapsed and today stands at less than 10 per cent. of the original issue price; yet another waste of money; • Astralis, a Venezuelan based company specialising in Psoriasis therapies, with whom in December 2001 SkyePharma signed an agreement to provide development, manufacturing, pre-clinical and clinical development services for a second generation Psoraxine up to completion of Phase II studies in return for the option to acquire worldwide licensing and distribution rights to Psoraxine. Since January 2004, SkyePharma has invested almost US$5 million in Astralis yet in March 2005 Astralis announced that the Phase II study of Psoraxine "did not meet the primary study endpoint upon completion of the treatment phase of the study". Despite this, SkyePharma has since chosen to acquire an additional 11.16 million shares from two former Astralis directors, paid for through the issue of 5.5 million SkyePharma shares; • GeneMedix, a company with which SkyePharma signed a Joint Agreement in June 2002 to develop an extended release formulation of interferon alpha-2b using SkyePharma's DepoFoam technology. The Agreement was signed when Steve Harris was both on the SkyePharma Board and a director of GeneMedix and SkyePharma received an unsecured Convertible Loan Note convertible into GeneMedix ordinary shares as consideration. The GeneMedix share price fell sharply following the agreement and SkyePharma has since terminated its collaboration. What value have SkyePharma shareholders received for sharing the Company's technology? B. An Inflated Corporate Cost Base SkyePharma, a company floated ten years ago, has since flotation failed toreport an annual operating profit and is effectively a late stage "start-up"company. In spite of this, the Company maintains: • A substantial corporate head office overlooking Green Park in the West End of London, where average rents and rates per square foot are £80. The company also maintains offices in Canada, Japan, Switzerland and two offices in the United States; • A property in New York's Manhattan, ostensibly as a base for visiting SkyePharma executives. The building, which is believed to have been designated as a private dwelling by the planning authority, contains an apartment which has historically been used primarily by Mr Gowrie-Smith. The Company pays a rental of US$720,000 per annum for the use of the property and this is set to increase to US$942,500 per annum in August 2008. The landlord is a company owned by Mr Gowrie-Smith and a Gowrie-Smith family trust. SkyePharma is an entrepreneurial-stage company where, until relatively recently,the Board of Directors contained no less than 9 non-executive directors, two ofwhom appear to have little in the way of pharmaceuticals experience. In 2004SkyePharma's non-executives received pay and benefits in excess of £610,000, anaverage of almost £68,000 each. This represents a significant premium to the£25,000-£30,000 typically paid to non-executive directors of smaller quotedcompanies and is in our opinion totally inappropriate in an early stage company.The Group also pays its auditor non-audit fees of £1.69 million as against £0.29million in audit fees, far exceeding recommended guidelines. Bob Thian In SkyePharma's circular to shareholders dated 16 February, Dr Karabelassuggests that Bob Thian is unsuitable to become Executive Chairman of SkyePharmabecause he does not have the right experience and has too many outsidecommitments to be able to devote sufficient time to SkyePharma. NAV has examined Dr Karabelas' own commitments and professional experience,including the performance of the many companies other than SkyePharma of whichhe is a director. His own track record has been somewhat mixed since he leftNovartis after 18 months in 2000. Shareholders should note that, in addition toSkyePharma, Dr Karabelas is currently a director, on the advisory board or apartner of no less than ten other companies or partnerships, all of which arebased in the United States, and is Chairman of four of them. The performance ofsome of these companies since Dr Karabelas' appointment does not inspireconfidence that he will lead SkyePharma to commercial success: Bob Thian is a highly experienced corporate executive with a strong track recordin generating shareholder value. He has over twenty years experience in thepharmaceutical industry, having worked for GlaxoSmithKline, Abbott Laboratoriesand Novo Nordisk in a wide range of senior management roles, including sevenyears as a non-executive director of Celltech. He is currently the Chairman ofSouthern Water and Whatman and in recent years has also served as Chairman ofAstron Group and Chief Executive of North West Water and The Stationery Office(formerly HMSO). Since his appointment in 2002 as Executive Chairman of Whatman,the specialist manufacturer and distributor of laboratory filtration papers andrelated products, the company has been transformed and the share price hasappreciated by over 225 per cent. If appointed he will ensure that: • the highest standards of corporate governance will be introduced as an urgent priority; • unnecessary corporate overheads will be eliminated and the savings used to finance and accelerate the development of SkyePharma's portfolio of drugs; • licensing opportunities for Flutiform will be re-evaluated as an urgent priority; • the misalignment between shareholders' interests and the board are addressed as a matter of urgency whilst pressing forward to maximise the strategic value of the business. In recent weeks, the Board of SkyePharma has ignored the wishes of a number ofits large shareholders as regards the appointment of a new Chairman from outsidethe Company. Given the extent of his commitments outside SkyePharma, why shouldshareholders accept that Dr Karabelas is the best candidate for the position? SkyePharma's misleading claims • "A small group of shareholders is trying to take control of your company without launching a full bid" (see frequently asked questions about EGM on their website). This is clearly misleading. Shareholders are not trying to take control via a takeover bid or otherwise. The Company is fully aware that the requisitionists simply seek the appointment of an independent chairman to the board to provide a new strategic direction and introduce a proper corporate governance framework. • Dr Karabelas' "distinguished career": Dr Karabelas' career and commitments have aleady been discussed in Appendix 3. By contrast, Bob Thian has a track record of delivering value for shareholders. Mr Thian has 20 years' experience in pharmaceuticals, including at GlaxoSmithKline, (where he launched and marketed GSK's market-leading asthma drug), Abbott Laboratories, Novo Nordisk and Celltech. • "Bob Thian rejected a non-executive role": This is not the whole story - a non-executive role was offered with specific direction that he was NOT to carry out a strategic review and NOT carry out any investigation of the contracts detailed in Appendix 2, or the corporate governance practices present in the Company over a long period. • "The NAV Group is trying to dictate strategy": We are not. If an independent review of SkyePharma's present strategy endorses the Company's approach, the requisitionist shareholders would be prepared to accept it. • "The Chairman needs recent relevant pharmaceuticals experience": Bob Thian has 20 years' pharmaceuticals experience. • "Excellent new management team": Bob Thian would not join the Company with a specific objective to remove any of the recently appointed executives, or indeed Dr Karabelas. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
SKP.L