The AIM-listed company has received a notice from BeyondAir, previously known as AIT Therapeutics, to terminate the agreement.
In January, Circassia acquired exclusive commercialisation rights to BeyondAir's LungFit PH product, initially called AirNOvent, in the United States and China.
LungFit PH is a treatment for persistent pulmonary hypertension (PPHN) in newborns.
PPHN occurs when the pressure in the blood vessels of a baby’s lungs remains high after birth, which can restrict the amount of oxygen flowing around the body.
It is thought to occur in around one in 500 births.
Circassia has refuted the claim of a material breach of the agreement.
“The company will enforce its rights under the agreement and defend its position vigorously,” it added in a statement.
House broker Peel Hunt estimated that "even in a worst-case scenario" removing BeyondAir's contribution from its sales forecasts without any cost offset, "Circassia still turns EBITDA positive in 2020, and maintains a positive cash balance across our forecast period".