SkyePharma risk is worth taking

It has always seemed to be a case of "mañana, mañana" at SkyePharma. The biotech firm has developed an interesting array of drug delivery technologies but has never seemed able to covert them into real profits. Until now.

It has always seemed to be a case of "mañana, mañana" at SkyePharma. The biotech firm has developed an interesting array of drug delivery technologies but has never seemed able to covert them into real profits. Until now.

There's a bit of a buzz about the shares now that figures for the year just ended will confirm it has passed break-even and is heading for a full-year profit in 2002. That was in doubt right up until the last minute, as Bioglan Pharma came close to bankruptcy owing a $10m milestone payment. An innovative deal last month, though, transferred the US marketing rights to Solaraze, the exciting skin cancer prevention cream, from Bioglan to a new partner and the sales launch will be announced this morning.

The start of US sales will be another step on the way to ensuring that a healthier proportion of SkyePharma's revenues are from recurring royalties. Xatral, for swollen prostates, and Foradil, an asthma treatment, are also both close to making significant contributions. Until now the top line has been top heavy with one-off milestone payments from its product development partners.

Not that those payments or those partnerships should be sniffed at. AstraZeneca hired the company yesterday to develop a new CFC-free inhaler for its asthma drug pulmicorta. The deal adds another blue chip client to SkyePharma's impressive list, and adds up to $12m of milestone payments.

There is plenty of scope for disappointments along the way, of course. DepoMorphine, a slow-release painkiller, is in expensive Phase III trials at the moment when many thought its earlier trial data had not justified taking the project further. Also there for the dashing are lingering hopes of a launch for SkyePharma's slow-release version of GlaxoSmithKline's blockbuster anti-depressant Paxil. And sales of Solaraze could still be hit if Bioglan is forced into liquidation.

Investors should be wary of some of SkyePharma's circular partnership deals – where a development contract and future milestone payments are effectively bought by investing in the partner company. SkyePharma is still agreeing such deals despite the balance sheet problems they wreaked on Bioglan.

Although the health warnings are serious, SkyePharma shares are, at 74p, worth the risk. Investors should be ready to bank any profits early.

Photo-Me

Photo-Me International, the photo booth maker and operator, is another of those companies that always seems to be offering jam tomorrow.

Yes, it is one of only two manufacturers worldwide of digital photo-labs (the other is Fuji). And yes it has a huge network of photo booths across the globe. But the group is struggling to make the technology pay at the moment and the result is a share price that has slid relentlessly downhill. It now stands at just 38.5p, compared with 138.5p in April and 436.5p at the height of the dot.com boom.

There was further pain yesterday as the group issued a fresh warning alongside halved interim profits of £8.2m. The outlook remains uncertain, it says, and the second half will see break-even at best. The full year dividend looks vulnerable.

Photo-Me has a dreadful record for disappointing investors and the last 12 months has seen full-year profit forecasts cut from over £30m, to £22m to just £6m. In October, management said it was considering selling parts of the business and that process is continuing. However, a total break-up seems unlikely as management owns 52 per cent of the shares and seems to think it can trade its way through to future glory.

So while there is a potential break-up value of 100p per share, investors should be wary. The UK business is under threat from Snap Digital, a venture capital backed company that is undercutting Photo-Me and has already snatched the valuable Post Office contract. The US market has been hit by lower sales at airports after 11 September.

On the positive side, net cashflow is still strong and at some stage this business must surely deliver or be snapped up. But now is not the time to buy.

Chorion

Takings at Chorion's late night bars were up 4 per cent in December, proving there is no absence of revellers in London's West End. The expanding business, which includes Tiger Tiger and other swanky venues, is being fattened up for demerger from the group's intellectual property business, which combines the detective brains of Miss Marple, Poirot, Maigret and Noddy.

A ban on new late night licences in the West End is giving the bars business a respite from competition. It is expanding across the UK, hoping to create clusters of venues in major cities, and is also looking to dip its toe across the Channel. At 26.75p the shares are on 13 times 2002 earnings, while the May demerger should prompt a re-rating. Buy.