27 Mar 2008 07:02
Skyepharma PLC27 March 2008 SkyePharma PLC Preliminary statement of annual results for the year ended 31 December 2007 SkyePharma PLC (LSE: SKP), LONDON, ENGLAND, 27 March 2008 Summary of Results 2007 *2006 (see note) £'m £'mResultsContinuing Operations: Revenue 41.6 43.0 Continuing Operations: Operating loss before exceptionals 15.7 15.3Continuing Operations: Loss before tax after exceptionals 23.7 19.3 Continued and Discontinued Operations: Net loss after tax 27.0 79.1 Net debt and liquidityTotal debt less cash including convertible bonds at face value 122.6 111.7Liquidity - cash and cash equivalents plus undrawn facilities 33.1 47.6 \* The 2006 results have been restated for certain prior period adjustments, asset out in the Operating and Financial review. Highlights • Successful divestment of Injectable Business relieves a significant cash burn. • £50m financial restructuring: Paul Capital refinancing facility, CRC financing (approx. £35 million) and £15 million equity placing. • Continued progress with Flutiform(TM) development: o Completion of Phase-III long term safety study. o Full enrolment of three Phase-III clinical efficacy trials. o Renegotiated Flutiform(TM) agreement with Kos (now a wholly owned subsidiary of Abbott). Kos now funds additional development costs for the USA. o Filing expected in Europe around end of 2008 and in USA in Q1 2009. • Approvals and launches of Requip(R) Once-a-day in Europe, ZYFLO CR(TM) in USA and Sular(R) in the USA. • SKP-1041 (oral sleep product) licensed to Somnus Therapeutics, US$4 million received up front. • Partnership with Dr Reddy's for potential development utilising two of SkyePharma's proprietary technologies. Jeremy Scudamore, Non-Executive Chairman, said: "The Board believes that theunderlying potential of SkyePharma's business is starting to take shapefollowing the launch of a number of new products and the Company's financialrestructuring during 2007. Our objectives are to renegotiate or refinance theconvertible bonds in a timely manner, on reasonable terms, and turn SkyePharmainto a profitable business over the next two years. Once Flutiform(TM) isapproved and launched in the US and Europe, the Board believes that there areexciting prospects for growth in both revenues and positive cashflow atSkyePharma." The results presentation has been published on the Company's website and awebcast of the analysts' conference will be available shortly after theconference is concluded. For further information please contact: SkyePharma PLC Frank Condella, Chief Executive OfficerKen Cunningham, Chief Operating Officer +44 207 491 1777Peter Grant, Finance Director Financial Dynamics (London enquiries)David Yates / Deborah Scott +44 207 831 3113 Trout Group (US enquiries)Christine Labaree / Seth Lewis +1 617 583 1308 About SkyePharma PLC Using its proprietary drug delivery technologies, SkyePharma develops newformulations of known molecules to provide a clinical advantage and life-cycleextension. The Group has twelve approved products in the areas of oral,inhalation and topical delivery. The Group's products are marketed throughoutthe world by leading pharmaceutical companies. For more information, visitwww.skyepharma.com. Chairman's statement 2007 has been another year of progress for SkyePharma. The completion of therefinancing in March and the sale of the Injectable Business helped strengthenthe financial position of the Company. Further progress was made with thedevelopment of Flutiform(TM) including the completion of the Phase-III long-termsafety study and full enrolment in the three Phase-III clinical efficacy trialsto support registration filings in the USA. Following the acquisition of KosLife Sciences LLC ("Kos") by Abbott the agreement with Kos has beenrenegotiated. Kos has assumed responsibility for filing the New DrugApplication ('NDA') for Flutiform(TM) in the USA and funding the additionalclinical work needed to support the NDA. We have also focused on building our pipeline of oral and inhalation productsduring the year based on our expertise in drug delivery technologies and haveentered into several collaborative early stage development projects. OnceFlutiform(TM) is approved and launched in the US and Europe, the Board believesthat there are exciting prospects for growth in both revenues and positivecashflow at SkyePharma. Consolidated results The Continuing Operations (the Group excluding the Injectable Business) achievedrevenues of £41.6 million in the year, 3.3% below the £43.0 million reported in2006. The reduction was primarily due to exchange rate fluctuations. Atconstant exchange rates, using 2006 rates, revenues would have been the sameyear on year. The Continuing Operations incurred an operating loss of £15.7 million (2006:loss of £15.3 million). The loss was after spending £25.2 million (2006: £22.9million) on research and development, mainly on the continuing development ofFlutiform(TM). After net finance costs, the Continuing Operations incurred aloss before tax and exceptionals of £23.7 million (2006: £26.4 million). The sale of the Injectable Business was completed on 23 March 2007. The lossafter tax from the Injectable Business was £4.4 million in the period from 1January 2007 to 23 March 2007 (2006 loss after tax: £22.0 million) which isreported in the result from Discontinued Operations. Following the impairmentof goodwill of £37.0 million in 2006, the residual gain on sale of theInjectable Business was £1.4 million, included as an exceptional gain fromDiscontinued Operations. The change from the previously disclosed £1.0 millionloss on sale is due to a reassessment of the net asset value of the InjectableBusiness eliminated on sale. The net result for the Continuing Operations after exceptional items, netfinance charges and tax was a loss of £24.0 million (2006: £20.1 million). Thenet result for the Group after exceptional items, net finance charges, tax andDiscontinued Operations was a loss of £27.0 million (2006: £79.1 million). Products Selected product highlights are given below. More detailed information isprovided in the Operating and Financial Review section. Flutiform(TM) The Phase-III clinical trial program for Flutiform(TM) (formoterol, fluticasonecombination in a metered-dose inhaler) has made further progress. The long-termsafety study has been completed and the results, which were announced inNovember 2007, are consistent with the known safety profile of fluticasone andformoterol. The three pivotal Phase-III clinical efficacy studies have beenfully recruited and we will begin to see data from these from Q2 2008. Aspreviously announced, discussions with the USA Food and Drug Administration ("FDA") at a pre-NDA meeting in July 2007 led to a requirement to carry out someadditional clinical work, including a further efficacy study in approximately375 patients, and two Phase-1 studies. This additional work is now underway. As announced on 20 December 2007, the agreement with Kos Life Sciences LLC ("Kos") (now a wholly-owned subsidiary of Abbott), our licensee forFlutiform(TM) in the USA, has been renegotiated so that Kos has taken over theresponsibility and costs for completing the additional clinical work. Kos isalso now responsible for compiling and filing the NDA. In return for Kos takingon these additional responsibilities and costs (estimated at approximatelyUS$20.5 million (£10.3 million)) SkyePharma has agreed to a reduction of US$25.5million (£12.8 million) in possible future filing and approval milestones. Thisreduction is in addition to any reductions in time-based milestones which haveoccurred or will arise due to delays in the programme. SkyePharma remainsresponsible for the existing Phase-III core clinical programme developmentcosts, which comprise the completed safety study and three efficacy trials. Based on the latest project plan the Directors expect that the NDA will be filedwith the FDA in Q1 2009. The core clinical trials needed for regulatory approval of Flutiform(TM) inEurope remain on track. Filing is scheduled for around the end of 2008. If the regulatory process follows normal timelines, the Directors believe thatFlutiform(TM) could be approved and launched in Europe and the US by late 2009or 2010. Paxil CR(TM) In October 2007, GlaxoSmithKline ("GSK") entered into a settlement agreementwith Mylan Laboratories in respect of Paxil CR(TM), extended release serotoninre-uptake inhibitor for depression, which has delayed the launch of Mylan'sgeneric until up to October 2008. In the meantime, SkyePharma is receiving upto 5% royalties on GSK's sales of Paxil CR(TM). Requip(R) Once-a-day GSK received an approvable letter from the FDA in December for Requip(R) XL(TM),extended release tablets for Parkinson's Disease. The FDA is scheduled to makeits decision in Q2 2008 and, if approved, the product should be launched in theUSA shortly thereafter. Requip(R) Once-a-day is currently approved in 16European countries and a mutual recognition procedure was completed in Novemberwhich the Directors expect to result in the approval of Requip(R) XL(TM) in anadditional nine European countries. Requip(R) Once-a-day was launched in Franceas Requip(R) LP in the first quarter of 2008. Sular(R) All four dosage strengths of the new formulation Sular(R), a calcium channelblocking agent for the treatment of high blood pressure developed with ScielePharma Inc. ("Sciele"), were approved by the FDA in January 2008, triggering thefinal milestone of US$2 million (£1.0 million), and the product was launched inMarch 2008. SkyePharma will receive low mid single digit royalties on the netsales of the new formulation of Sular(R) and is also manufacturing the productfor Sciele. ZYFLO CR(TM) ZYFLO CR(TM), extended release zileuton for the treatment of asthma, which islicensed to Critical Therapeutics Inc. ("Critical Therapeutics"), was approvedin May 2007 by the FDA for marketing in the USA and was launched nationwide inSeptember. This product is being co-promoted by Critical Therapeutics and itspartner Dey Laboratories. SKP-1041 In June 2007 an exclusive agreement was reached with Somnus Therapeutics Inc. ("Somnus") for the worldwide development and commercialisation of the sleeptherapeutic SKP-1041. Under the terms of the agreement, SkyePharma received aUS$4 million (£2.0 million) signing fee, could receive up to a further US$31million (£15.5 million) in milestone payments (mainly launch and sales-related)and will also receive a royalty on future sales escalating upwards from a highmid single digit. Feasibility agreements Research and Development and out-licensing activities are continuing to increasethe pipeline of both oral and inhalation products including developments with,and largely funded by, collaboration partners some of which, the Directorsbelieve, could lead to significant products if successful. One suchcollaboration, announced in February 2008, is with Dr. Reddy's LaboratoriesLimited ("Dr Reddy's"), to complete feasibility work on a product that uses twoof SkyePharma's proprietary drug delivery technologies. The Group received asmall upfront payment and Dr. Reddy's is funding most of the development costs.We are continuing to seek an outlicensing partner to work with us to completethe development and market SKP-1032, a product for the relief of pain/inflammation. Financing As at 31 December 2007 SkyePharma had cash and cash equivalents, net ofoverdrafts, of £31.7 million (2006: £10.6 million) and total liquidity (cash andcash equivalents plus undrawn facilities) of £33.1 million (2006: £47.6million). The increase in net cash and cash equivalents is primarily due to thefull drawdown of £35.8 million on the CRC loan facility and receipt of the £14.8million net proceeds from the share placing which took place in March 2007. In March 2007 the Group completed the renegotiation of its agreements with PaulCapital replacing the royalty-sharing agreement with an amortisable note ("Note"). As well as facilitating the sale of the Injectable Business, this hashelped to simplify and give better transparency to the financing of thebusiness. Due to the nature of the Note it has also significantly reduced thefuture financing costs in respect of the obligations to Paul Capital. As set out in Note 1 to the Financial Statements, the Directors have carried outa detailed appraisal of a number of potential approaches to renegotiate orrefinance the convertible bonds well before their earliest put date in May 2009.In selecting the approach to be implemented, the Directors will have regard tothe Group's working capital requirements and the likelihood of success of thepotential approaches. The Board has a reasonable expectation that theconvertible bonds can be renegotiated or refinanced in a timely manner. Board In July 2007 Jean-Charles Tschudin was appointed to the Board as a Non-ExecutiveDirector and has since joined the Audit and Nomination & Governance Committees.Jean-Charles, 64, is an experienced senior-level pharmaceutical executive withover 40 years' experience in the pharmaceutical industry. Previously, he was asenior executive at Yamanouchi Europe (now Astellas Europe), Cardinal Health,Johnson & Johnson and Schering-Plough. In October 2007, I was delighted to join the Board as Non-Executive Chairman andmember of the Nomination & Governance Committees. At the same time, JerryKarabelas stepped down as Non-Executive Chairman, but we were very pleased thathe agreed to remain a Non-Executive Director and has taken on the role asChairman of the Remuneration Committee. After more than nine years' service as a Non-Executive Director, Steve Harrishas decided to retire from the Board at the close of the AGM on 21 May 2008. Hewill be replaced as Chairman of the Nomination & Governance Committee by JeremyScudamore and as a member of the Remuneration Committee by Jean-CharlesTschudin. The Board thanks him for his services to the Company over the years. Outlook The Directors are optimistic about prospects for growth of the business. Despitesome delays in the expected launch dates of Requip(R) XL and Lodotra(TM), theBoard expects to see growth in revenues from sales from these products togetherwith the recent launch of the new formulation of Sular(R). Expenditure onresearch and development is expected to reduce as the core clinical program forthe NDA filing of Flutiform(TM) reaches a conclusion and we expect costs to befurther offset, in the medium term, by our strategy of developing products incollaboration with third parties. Our objectives are to renegotiate orrefinance the convertible bonds in a timely manner, on reasonable terms, andturn SkyePharma into a profitable business over the next two years. OnceFlutiform(TM) is approved and launched in the USA and Europe, the Board believesthat there are exciting prospects for growth in both revenues and cash inflows. Jeremy Scudamore Non-Executive Chairman OPERATING AND FINANCIAL REVIEW Strategy SkyePharma's strategy is to become one of the world's leading speciality drugdelivery companies based on excellence in its oral and inhalation technologies. SkyePharma strives to deliver clinical benefits for patients by using itsmultiple delivery technologies to create enhanced versions of existingpharmaceutical products. Review of Products INHALATION PRODUCTS Flutiform(TM) HFA-MDI Flutiform(TM) HFA-MDI is a fixed-dose combination of formoterol and fluticasonein a metered dose inhaler ('MDI'). The product incorporates a fast onset long-acting beta-agonist (formoterol) with the most commonly prescribed inhaledsteroid (fluticasone) in combination with an environmentally-friendly aerosolpropellant (hydrofluoroalkane ('HFA')) and is being developed for asthma.Flutiform(TM) is aimed at the market for combination steroid and long-actingbeta-agonist inhalers which is forecast to be approximately US$10 billionworldwide by 2010, which is when the Board expects Flutiform(TM) to be in themarket in both the USA and Europe. An update on progress towards filingFlutiform(TM) in the USA is given in the Chairman's statement and a financialupdate is contained in the Financial Review section below. In November, the Company announced that the Phase-III, long-term, open label,safety study for Flutiform(TM) had been completed and the results wereconsistent with the large safety database already accumulated on the individualconstituents, fluticasone and formoterol. The study involved 472 patients whowere treated with Flutiform(TM) for 6 or 12 months and was designed to form partof the NDA filing for Flutiform(TM). The Phase-III core clinical program alsoincludes three double-blind comparative efficacy trials, involving nearly 1,400patients, and is designed to provide clinical data for the NDA as well assupporting the European Marketing Authorisation Application (MAA). The trialsare designed to demonstrate the superiority of Flutiform(TM) over the individualcomponents and, in two of the studies, also over placebo. The Directors expectthat data from the core clinical efficacy studies will begin to be seen in Q22008. Kos (a wholly-owned subsidiary of Abbott) has exclusive rights to marketFlutiform(TM), subject to FDA approval, in the USA, and a right of firstnegotiation for Canada. As announced on 20 December 2007, the contract with Kos for the development andcommercialisation in the USA of Flutiform(TM) has been revised. Under the termsof the amended agreement, Kos assumed the responsibility and costs foradditional clinical work required by the FDA to support NDA filing. SkyePharmawill no longer incur the planned research and development expenditures ofapproximately US$20.5 million (approximately £10.3 million) on the additionalFDA-required studies. Kos is also responsible for compiling and submitting theNDA. In addition to the US$25 million (£12.5 million) signing payment alreadyreceived, the revised agreement provides for SkyePharma to receivetime-dependent milestones on acceptance of filing and approval together with upto US$60 million (£30 million) sales-related milestones. Based on the amendedagreement and the current project plan, the milestone receivable on acceptanceby the FDA of the NDA is expected to be US$2 million (£1 million) and themilestone receivable on approval is expected to be US$37.5 million (£18.8million) or US$25 million (£12.5 million), depending whether approval is in 2009or 2010. The royalty rate on sales in the USA remains unchanged and escalatesupwards from a mid teen percentage. If certain of Abbott's development costsexceed $20.5m the excess is recoverable out of up to 25% of post-approvalmilestones and royalties. Kos continues to be responsible for managing and funding any trials needed foradditional indications, as well as any required post-registration studies. TheGroup remains responsible for the Phase-III core clinical development programcosts, which comprise the completed safety study and three efficacy trials.Additionally, the Group continues to manage the chemistry, manufacture andcontrol program and is responsible for the supply chain for Flutiform(TM). Mundipharma has exclusive rights in Europe to Flutiform(TM) and otherterritories outside the Americas and Japan. The licensing agreement providesfor the Group to earn up to €82 million (£55.2 million) in milestones, of which€15 million (£10.1 million at that time) was paid upfront, up to €12 million(£8.1 million) are earmarked to cover specific development costs, up to €15million (£10.1 million) are due on launch and up to €40 million (£26.9 million)are sales related. In addition, the Group is entitled to royalties as apercentage escalating upwards from 10% on net sales. Clinical trials ("EUTrials") are being conducted in Europe for a paediatric indication and tocompare Flutiform(TM) with existing marketed products and are designed tosupport initial regulatory filing of Flutiform(TM) in Europe. The EU Trials arebeing paid for by Mundipharma but are part reimbursable by the Group, up to atotal of €12 million (£8.6 million), out of a milestone of that amount, thebalance of which, if any, is payable to SkyePharma on completion of the trials. The EU Trials for the lower and middle strengths in adults and paediatricsremain on track and filing is scheduled for around the end of 2008. Furtherdevelopment work is being carried out for Europe on a higher strength version ofFlutiform(TM) funded by Mundipharma and partially reimbursed by the Groupthrough reductions in royalties and sales-related milestones for a limitedperiod of time. Progress has been made on outlicensing discussions forFlutiform(TM) for Japan but it has been decided to delay partnering the productin Latin America until after FDA filing. Pulmicort(R) HFA-MDI This new HFA-MDI containing AstraZeneca's inhaled corticosteroid Pulmicort(R)(budesonide), which was developed for territories outside the USA, was filed formarketing authorisation between June and September 2005 on a country-by-countrybasis in Europe for the treatment of asthma. The HFA-MDI is intended to replacethe currently available CFC MDI formulation of Pulmicort(R). The product hasbeen approved in 13 countries and has now been launched in seven countries: inLatvia in 2006 and in Finland, Denmark, Hungary, Portugal, Spain and Sweden in2007. SkyePharma earns a mid teens' royalty on AstraZeneca's net sales ofPulmicort(R) HFA-MDI. Foradil(R) Certihaler(TM) The Foradil(R) Certihaler(TM) is the multi-dose dry powder inhaler version ofNovartis's long-acting beta-2-agonist Foradil(R) (formoterol fumarate). Foradil(R) Certihaler(TM) is already approved in 30 countries and the modifiedinhaler was approved by the FDA in December 2006. The dialogue with Novartisregarding commercialisation options for Foradil(R) Certihaler(TM) is continuing,including looking for a third party to market the product in the USA. Otheravenues for potential applications for the SkyeHaler(TM) device are also beingexplored. ORAL AND TOPICAL PRODUCTS Paxil CR(TM) Paxil CR(TM) is an improved formulation of the anti-depressant Paxil(R) and wasdeveloped by SkyePharma with GlaxoSmithKline ("GSK") using SkyePharma'sGEOMATRIX(TM) technology. Sales of Paxil CR(TM) in 2007 were £153 million, downby 4% (using constant exchange rates) compared with 2006. The majority of thesesales (£136 million) were in the USA on which the Group earned a royalty of 4%on net sales until the end of June 2007, thereafter increasing to 5% untilgeneric competition enters the market, when it will reduce to a low single digitpercentage. A new USA patent covering a delayed and controlled releaseformulation of paroxetine hydrochloride ("Paxil CR(TM)") was issued to GSK inJune 2007 and filed in the FDA Orange Book. On 25 June GSK filed an action inthe USA District Court for the District of New Jersey against MylanPharmaceuticals Inc. for infringement of that newly issued patent, including amotion for a temporary restraining order preventing Mylan from launching itsgeneric form of Paxil CR(TM) (Mylan received final FDA approval for its genericversion on 29 June 2007). As announced in October 2007, Mylan Inc. and itssubsidiary Mylan Pharmaceuticals Inc. have entered into a patent license andsettlement agreement with GSK relating to Paroxetine Hydrochloride (HCl)Extended-release (ER) Tablets, the generic version of GSK's Paxil CR(TM). Alllitigation between Mylan and GSK relating to Paroxetine HCl ER Tablets has beendismissed. Mylan has reported that, under the agreement with GSK and anassociated supply and distribution agreement, Mylan has been provided withpatent licenses under GSK patents and the right to market all three strengths ofParoxetine HCl ER Tablets, 12.5 mg, 25.0 mg and 37.5 mg, beginning no later than1 October, 2008. Xatral(R) OD Xatral(R) OD (Uroxatral(R) in the USA) is a once-daily version of sanofi-aventis' Xatral(R) (alfuzosin hydrochloride), a treatment for the signs andsymptoms of benign prostatic hypertrophy (BPH). In 2007, reported sales of allforms of Xatral(R) were €333 million (£245.4 million), down 2.9% (using constantexchange rates) on 2006. European sales have been affected by genericcompetition after the expiry of European patents starting in May 2006, withsales for 2007 reported as €167 million (£123.1 million), down by 20.5%. Thisdecline was partially offset by strong growth in the USA, where sales ofUroxatral(R) were €107 million (£78.8 million), up 25.9%. Sales in othercountries were also up 22.9% to €59 million (£43.5 million). The term of usepatent in the USA has been extended by patent term extension from 2008 toJanuary 2011 (with the GEOMATRIX(TM) patent reaching to August 2017). A numberof companies have filed abbreviated new drug applications ("ANDA's") with theFDA seeking approval to market a generic once-daily alfuzosin hydrochrloridedrug product in the USA. Sanofi-aventis has taken legal action in response, andsuch legal action remains pending. SkyePharma earns low single digit royaltieson net sales of Xatral(R) OD (Uroxatral(R)). Solaraze(R) Solaraze(R) (diclofenac), a topical gel treatment of actinic keratosis, ismarketed in the USA by Doak Dermatologics, a subsidiary of BradleyPharmaceuticals, Inc. ("Bradley"), which was acquired by the Nycomed Group ("Nycomed") in February 2008. Sales in 2007 were approximately US$31 million(£15.5 million), up by approximately 40% on 2006. The acquisition of Bradleyhas added further branded dermatologics to the PharmaDerm division of Nycomed USInc. ("Nycomed US") and will provide an enhanced platform for in-licensing andco-promotion of dermatology products. Nycomed plans to leverage itsmanufacturing and distribution capabilities to support the Bradley productlines, improve customer service and optimise the cost structure. In addition,Nycomed US will leverage the combined sales and marketing capabilities toenhance both the Bradley and Nycomed product lines. SkyePharma's low teensroyalty on net sales is unaffected by the acquisition. 2007 sales in Europe and certain other territories by Shire plc ("Shire") wereUS$15.5 million (£7.8 million) compared with the US$13.2 million (£6.6 million)reported in 2006. In October 2007, it was announced that the distribution andmarketing rights for Solaraze(R) were being divested by Shire to LaboratoriosAlmirall, S.A. ("Almirall") together with a portfolio of other products and thistransaction has now been completed. In the third quarter of 2007, the productwas launched in Australia by CSL Biotherapies under an agreement with Shire (nowtaken over by Almirall). SkyePharma's low teens royalty on relevant net salesis not affected by the transfer from Shire to Almirall in respect of which theGroup has received a small consent fee. Triglide(R) Triglide(R) (fenofibrate), an oral treatment for elevated blood lipid disorders,is marketed in the USA by Sciele Pharma, Inc. ("Sciele") and was launched inJuly 2005. Triglide(R) new prescriptions increased 37% and total prescriptionsincreased 47% in 2007 compared with 2006. Triglide(R) had a 2.4% market shareof new prescriptions and a 1.9% share of total prescriptions at the end of 2007.SkyePharma is entitled to receive 25% of Sciele's net sales, which also coversSkyePharma's supply of the product for sale. In May 2007, Sciele in-licensedfrom LifeCycle Pharma A/S ("LifeCycle") a fenofibrate product in 120mg and 40mgdosage strengths. This product was approved by the FDA in August 2007. Scielestates that it is the lowest approved dose of fenofibrate currently availablefor patients, although the current approval requires it to be taken with meals. SkyePharma negotiated an agreement with Sciele to allow the launch of theLifeCycle product prior to 31 July 2008, which would otherwise have beenprecluded under the current Triglide(R) license agreement. The LifeCycleproduct was launched in February 2008 under the brand name Fenoglide(TM). Under the new agreement with Sciele, SkyePharma will make no further marketingcontributions in respect of Triglide(R) to Sciele, which has agreed to purchaseand distribute minimum numbers of samples of Triglide(R) and to share revenuesfrom Fenoglide(TM) with SkyePharma. The share of revenues starts at 8% andreduces to 4% from 31 July 2008 to 31 December 2009, or 1% once SkyePharmamanufactures Fenoglide(TM) at its plant in Lyon, France, which the Directorsbelieve is unlikely to happen before 2010. Sciele intends to market anddistribute both Triglide(R) and Fenoglide(TM). Requip(R) Once-a-day Requip(R) (ropinirole) is a once daily formulation for Parkinson's disease whichwas developed in partnership with GSK. The new Requip(R) once daily formulationuses SkyePharma's patented GEOMATRIX(TM) technology and is designed to provide asteady rate of absorption in the body to help reduce fluctuations in bloodplasma concentration. In addition the new Requip(R) once daily formulationoffers physicians and patients a simpler titration schedule compared to therecommended titration schedule for immediate-release Requip(R), which is dosedthree times a day. Requip(R) Once-a-day was filed for approval at the end of2005 in Europe, and, in March 2007, the French Ministry of Health was the firstmajor European regulator to grant authorisation (as "Requip(TM) LP"). GSKlaunched Requip(R) LP in France in January 2008 and, to date, fifteen otherapprovals have been received in Europe. The Directors believe that furtherlaunches and approvals will take place during 2008. The USA new drug application for Requip(R) Once-a-day (as "Requip(R) XL") wasaccepted for filing by the FDA in April 2007 and GSK received an approvableletter in December 2007. Following the approvable letter GSK submitted aresponse to the FDA and the Directors understand that final decision is nowexpected in the second quarter of 2008. Upon approval, SkyePharma will earn low mid single digit royalties on net salesof Requip(R) Once-a-day. GSK's worldwide sales of Requip(R), the immediaterelease form for Parkinson's disease and restless leg syndrome, in 2007 were£346 million, up by 36% (using constant exchange rates) on the prior year.Parkinson's disease makes up about 40% of current Requip(R) immediate releaseproduct sales in the USA. ZYFLO CR(TM) (zileuton) Extended-Release Tablets The Group has developed an extended release formulation of the oral asthma drugzileuton for Critical Therapeutics, Inc. ZYFLO CR(TM) extended-release tablets,taken twice daily, utilise the Group's proprietary GEOMATRIX(TM) technology, andthe product was approved by the FDA in May 2007 for the prophylaxis and chronictreatment of asthma in adults and children aged 12 years and older. ZYFLOCR(TM) and ZYFLO are the only FDA-approved leukotriene synthesis inhibitors forthe prophylaxis and chronic treatment of asthma in adults and children 12 yearsof age and older. Critical Therapeutics launched ZYFLO CR(TM) in the USAtogether with its co-promotion partner, Dey, L.P., at the end of September 2007,targeting approximately 18,000 allergists, pulmonologists and primary carephysicians throughout the USA. SkyePharma receives a high mid single digitroyalty on net sales of ZYFLO CR(TM) and also manufactures the product. Sular(R) In May 2006, the Group entered into an agreement with Sciele (the USA licenseefor Triglide(R)) to develop an improved new version of Sciele's leading productSular(R) (nisoldipine), a calcium channel blocker antihypertensive agent usingthe Group's proprietary GEOMATRIX(TM) drug delivery system. The clinical trialprogramme was successfully completed in May 2007 and the new formulation wasfiled for approval in the USA, as planned, at the end of June 2007. FDAapproval was given on 2 January 2008 for all four dosage strengths asbioequivalents to the existing formulations and the product was launched inMarch 2008. SkyePharma will receive a low mid single digit royalty on netsales. SkyePharma has also received a total of up to US$5.0 million (£2.5million) in milestone payments, of which US$3.0 million (£1.5 million) wasreceived prior to the end of 2007, and the USA approval in January 2008triggered the final US$2.0 million (£1.0 million) milestone. SkyePharma ismanufacturing the new Sular(R) formulation at its plant in Lyon, France. Lodotra(TM) Lodotra(TM), developed together with Nitec Pharma AG ("Nitec"), is a novelsingle-pulse night-time release formulation of low dose prednisone, a well-characterised glucocorticoid used in the treatment of a number of inflammatoryconditions including rheumatoid arthritis where it is used as a core treatment.Lodotra(TM) represents a new class of therapeutics, known as circadian cytokinemodulators ("CCMs"). In rheumatoid arthritis, nocturnally elevated cytokines,such as interleukin-6 (IL-6) and tumour necrosis factor-alpha (TNF-alpha),are known pro-inflammatory factors involved in morning stiffness, one of themost disabling symptoms of rheumatoid arthritis. Using the Group's proprietaryGeoclock(TM) delivery system, Lodotra(TM) can be taken at bedtime, but theactive pharmaceutical is only released in the early hours of the morning. Inthis way prednisone release is synchronised with the sufferer's circadiancytokine rhythm and thus is designed to take effect at a physiologically optimaltime to inhibit cytokine over-production and hence treat morning stiffness andpain. Phase-III trials were carried out on 288 patients in 26 European centres.The primary endpoint of the trials were to show significantly reduced morningstiffness. The results have been published and, in a recent article in TheLancet (Lancet 2008; 371: 205-214), Buttgereit et al. concluded "... thatmodified-release prednisone provides an improvement with respect to conventionalglucocorticoids for the treatment of rheumatoid arthritis." Nitec filed aEuropean Marketing Authorisation Application in 2006 and the Directorsunderstand that approval is now expected in the second half of 2008. Nitec haslicensed Merck KGaA to market the product in Germany and is in negotiations withpotential licensees for other markets. SkyePharma will receive a mid singledigit royalty on net sales and is manufacturing the product at its plant inLyon, France. SKP-1041 On June 26, 2007, SkyePharma announced that it has entered into an exclusiveagreement with Somnus for the worldwide development and commercialisation of itshypnotic compound SKP-1041. SKP-1041 is a new controlled release formulation ofa non-benzodiazepine chemical utilising SkyePharma's Geoclock(TM) technology. As part of the agreement, SkyePharma will formulate and manufacture SKP-1041.Under the agreement, SkyePharma could receive up to US$35 million (£17.5million) in milestone payments, of which US$4 million (£2.0 million) wasreceived on signature, up to US$11 million (£5.5 million) is payable during thedevelopment phase, mainly on product approval, and US$20 million (£10 million)is sales-related. SkyePharma is entitled to receive a royalty on future salesescalating upwards from high mid single digit. In addition, Somnus will beresponsible for the majority of the development and clinical trial costs. Inline with most oral drug delivery programmes, the development is expected totake several years. Manufacturing Operations The Group's manufacturing facility in Lyon, France, manufactures a number of theGroup's products, including Coruno(R), diclofenac-ratiopharm-uno, Triglide(R),Sular(R), Foradil(R) Certihaler(TM) and Lodotra(TM). Madopar DR(R) ismanufactured at the Group's facility in Switzerland. During 2007, work commenced on the implementation of a new line, owned bySciele, for the manufacture of the recently approved new formulation of Sular(R)in SkyePharma's plant in Lyon, France. This has been a significant project forthe factory, including adding to the existing buildings and re-locating a numberof operations on the site, whilst maintaining GMP status and quality productionoutput. It is a credit to the local workforce that this project has beenimplemented quickly resulting in the launch of the new formulation of Sular(R)in March 2008. The Directors believe that the launch of ZYFLO CR(TM) and thenew formulation of Sular(R), coupled with the planned launch later in the yearof Lodotra(TM), should help to improve manufacturing capacity utilisation andreduce the level of losses from the Group's manufacturing operations. Under the agreements with Kos and Mundipharma, the Group is responsible forsupplying Flutiform(TM), and has committed to capital expenditure on tooling attwo subcontractors as well as certain minimum volume commitments. The Group hasentered into an agreement for the product to be manufactured in a sanofi-aventisfactory in Holmes Chapel, UK. The Group is responsible for supplying thevarious components and ingredients to sanofi-aventis and is sourcing these fromvarious suppliers located in Europe. Whilst the volumes of Flutiform(TM) areexpected to be significant, the mark-up on these supplies is modest. Financial Review Continuing Business and Discontinued Operations The Injectable Business, which was sold on 23 March 2007, is included asDiscontinued Operations in line with its classification in the 2006 accounts.Accordingly, the consolidated income statement shows the net results of theInjectable Business separately (described as Discontinued Operations) and allother lines (including revenues, gross profit and operating loss) are for theContinuing Operations. Except where otherwise stated, all commentary in theChairman's Statement and the Operating and Financial Review relates to theContinuing Operations. Restatement - prior period adjustment As set out in Note 1(z) to the Financial Statements, the comparative figures for2006 have been restated to correct prior period errors relating to exchangetranslation gains and the convertible bonds as described below. As announced with the interim results on 20 September 2007, certain exchangegains have been reallocated between the income statement and translation reservein equity. The adjustment has no net effect on Total Shareholders' Equity in2007 or prior periods. During 2007, a detailed review was carried out of the accounting treatment onIFRS transition of the convertible bonds and related intra-group loans. Thisidentified an incorrect accounting treatment of an intra-group loan betweenSkyePharma Jersey and SkyePharma PLC. This has been corrected by way of a prioryear adjustment. As a result, in the Company balance sheet, the equity relatedcomponent of the intra-group debt relating to the convertible bonds is now shownin share premium rather than in liabilities, and the deferred tax, recorded as aprior year adjustment in the 2006 accounts, has been reversed as the revisedaccounting treatment does not give rise to temporary differences for taxpurposes. The re-statement has a minimal impact on current or prior year IncomeStatements and has increased Total Shareholders' Equity by £7.6 million. The Chairman's Statement and Operating and Financial Review reflect the restatedfigures where appropriate. Revenue The Continuing Operations achieved revenues of £41.6 million for 2007, 3.3%below the £43.0 million reported in 2006. This reduction was primarily due toexchange rate fluctuations. At constant exchange rates, using 2006 rates,revenue would have been the same year on year. Revenues recognised from signing and milestone payments amounted to £10.4million in 2007, compared with £12.7 million in 2006. For 2007, the Group hasrecognised a further £7.1 million (2006: £6.9 million) of the upfront paymentsreceived in 2006 relating to Flutiform(TM). These comprised recognition of afurther £4.8 million of the upfront payment from Kos (cumulatively £10.4 millionfrom a total of £12.5 million (US$25.0 million)) and £2.3 million of the upfrontpayment from Mundipharma (cumulatively £3.5 million from a total of £10.2million (€15 million)). Contract research and development costs recharged increased £1.6 million to £3.2million compared with £1.6 million in 2006, the increase primarily relating tocosts of the extra Flutiform(TM) study required by the FDA being recharged to Kosunder the amended agreement. Royalty income was £17.8 million (2006: £18.1 million), a decrease of £0.3million (1.7%) due to exchange rate effects offset by growth in royalties. Atconstant exchange rates, using 2007 rates, royalty income would have increasedby £2.3 million primarily due to increased receipts from Paxil CR(TM),Solaraze(R) and Budesonide. Manufacturing and distribution revenue decreased by £0.4 million to £10.2million, compared with £10.6 million in 2006. This includes a £5.4 million(2006: £4.4 million) contribution from Novartis towards maintainingmanufacturing capacity for Foradil(R) Certihaler(TM), of which a substantialpart was passed on to a sub-contractor for maintaining its capacity to producedevices. Deferred income During 2007, there was a net decrease in deferred income of £5.2 million asincome is recognised from upfront payments over the period of development ofproducts in excess of payment received, mainly in respect of Flutiform(TM) asnoted above. The movement in deferred income was as follows: 31 December 2006 Received Recognised 31 December 2007 £m £m £m £mContract development and licensing income 18.2 3.0 (8.2) 13.0 Cost of sales Cost of sales comprises: expenditure on research and development conducted forthird parties; costs of chemistry, manufacturing and control development andclinical work incurred on behalf of collaborative partners; the direct costs ofcontract manufacturing; direct costs of licensing arrangements; and royaltiespayable. Cost of sales decreased by £1.9 million to £16.1 million in 2007, andgross profit increased 2.0% to £25.5 million compared with £25.0 million in2006. Selling, marketing & distribution and administration expenses Selling, marketing and distribution expenses, which mainly comprise Triglide(R)marketing contribution costs and selling expenses, decreased to £0.5 million in2007, compared with £3.0 million in 2006. Under an agreement reached withSciele in May 2007, no further marketing contributions were then payable inrespect of Triglide(R). Amortisation and impairment of other intangibles included in Administrationexpenses for the Continuing Operations of the Group totalled £2.7 million (2006:£1.5 million). The charge in 2007 includes a goodwill impairment charge of £1.9million relating to the Insoluble Drug Delivery ("IDD(R)") technology. This isdue to the Directors estimating lower prospects for growth than previouslyanticipated for Triglide(R) given the launch of Fenoglide(TM) by Sciele. Theremaining carrying value of goodwill is £27.3 million, supported by an assesmentby the Directors of the prospects for sales of Triglide(R) and other potentialapplications of SkyePharma's insoluble drug delivery technologies. If otherpotential applications are not realised there may need to be a substantialimpairment of the carrying value of the related goodwill. Other administration expenses for the Continuing Operations of the Group were£12.8 million (2006: £13.7 million). The reduction is primarily due to therelease of certain provisions for legal actions which have now been settled. Research and development expenses Research and development expenses comprise the Group's internally fundedexpenditure on projects, feasibility studies and technology development. Research and development expenses in the year increased by £2.3 million to £25.2million and included £22.0 million on developing Flutiform(TM) (2006: £19.0million). The Directors estimate that, as at 31 December 2007, further costs tobe incurred by the Group in respect of development of Flutiform(TM) for the USA(not including the expenditure being incurred by Kos) totalled approximatelyUS$40 million (£20 million), comprising US$27 million (£13.5 million) of revenueexpenditure plus US$13 million (£6.5 million) of capital expenditure. It isexpected that most of this expenditure will be incurred in 2008. Following the amendment of the agreement with Kos, Kos has taken over theresponsibility and costs for the additional clincial work required by the FDAand for submitting the NDA in the USA. Kos is entitled to recover any overspendout of future approval, sales milestones and/or royalties (up to a maximum of25% of any milestones and royalty payments). If Flutiform(TM) were notregistered in the USA there would be no obligation on SkyePharma to reimburseKos for the costs it is incurring. SkyePharma remains responsible forcompleting the core clinical program (which is fully recruited) and providingthe data to Kos to file the NDA in the USA. The amendment to the agreement withKos has, therefore, reduced the risks of SkyePharma facing additional cashrequirements on the Flutiform(TM) development for the USA. Further development work is being carried out for Europe on a higher strengthversion of Flutiform(TM) funded by Mundipharma and partially reimbursed bySkyePharma by reductions in royalties and sales-related milestones for a limitedperiod of time. Additional trials are being conducted in Europe to support apaediatric indication and to compare Flutiform(TM) with an existing marketedproduct. These are being paid for by Mundipharma but part reimbursed bySkyePharma up to a total of €12 million (£8.6 million) out of a milestone ofthat amount, the balance of which, if any, is payable to SkyePharma oncompletion of the trials. Results The operating loss before exceptional items from Continuing Operations was £15.7million, compared with £15.3 million in 2006. This is primarily due to exchangelosses incurred in the second half of the year and the impairment charge asdescribed above. The finance costs of £12.4 million (2006: £14.1 million) comprise £3.1 millioninterest payable on the CRC finance, £2.6 million (2006: £6.9 million) interestattributable to the Paul Capital finance, £6.3 million (2006: £6.3 million)interest payable on the convertible bonds and £0.4 million (2006: £0.5 million)arising on other bank borrowings. The finance charge in respect of therenegotiated agreements with Paul Capital is substantially less than with theprevious agreements due to the effective interest rate being 11.2% per annum(based on the interest rate in the comparable CRC finance agreement at inceptionof the new Paul Capital agreements) compared with the 24.5% to 29.8% per annumapplicable to the original Paul Capital royalty sharing arrangements. Financeincome before exceptional items totalled £4.4 million (2006: £3.0 million)comprising interest income on cash balances of £1.6 million (2006: £1.1 million)and translation gains on finance facilities, due to the relatively weak dollar,totalling £2.8 million (2006: £1.9 million), The Group's income tax expense was £0.3 million (2006: £0.8 million), mainlyrelating to irrecoverable withholding taxes. The loss for the year after exceptionals from Continuing Operations increased by£3.9 million to £24.0 million, due primarily to the exceptional credit in 2006relating to the reduction in future estimated payments to Paul Capital. The loss for the year after exceptionals from Continuing and DiscontinuedOperations decreased by £52.1 million to £27.0 million, primarily due to the£46.6 million total impairment charges in 2006. Earnings per share The loss per share from Continuing Operations amounted to 3.1 pence (2006: 2.7pence). The pre-exceptional loss per share from Continuing Operations amountedto 3.1 pence (2006: 3.6 pence). As at 31 December 2007, there were 814,988,636ordinary 10 pence shares and 12,000,000 deferred 10 pence "B" shares in issue.The deferred "B" shares have negligible participation rights in the Company. In addition there were outstanding as at 31 December 2007 a number of warrants,options, bond conversion rights and employee share schemes as follows: Description Number of ordinary 10p Exercise price Expiry conditions sharesWarrants 5,000,000 73.75p December 2008Deferred consideration (Krypton) 37,500,000 252.0p increasing at 10% None per annumEmployee share option schemes 8,196,195 43.0p to 89.3p Various dates 2008 to 2013Employee share schemes* 26,742,818 Nil Various performance and service conditionsConvertible bonds 2024 73,263,158 95.0p May 2024Convertible bonds 2025 34,482,759 58.0p June 2025Total at 31 December 2007 185,184,930Total at 31 December 2006 222,185,858 * Employee share schemes include the deferred share bonus plan, long termincentive plans and international share purchase plan. More details of the convertible bonds, warrants and share scheme arrangementsare set out in notes 24, 27 and 28 to the financial statements. As at 26 March2008, the Company's mid-market share price was 12.5 pence. Cash flows In 2007 there was a cash outflow before taxation from operating activities of£17.6 million, compared with £8.7 million in 2006. During the year the Groupspent £3.7 million on property, plant and equipment. The Group received cash of £14.8 million from the Share Placing in March 2007and £35.8 million from the drawdown on CRC financing. Borrowings of £3.5 million were repaid in the year, primarily comprisingamortisation payments of the Paul Capital Note. In addition, the Group paid£11.1 million of interest during in 2007, mainly relating to the convertiblebonds, Paul Capital, CRC Finance and a property mortgage. Interest received oncash deposits amounted to £1.6 million. In March 2007, the Company disposed of its interest in GeneMedix for £1.2million cash proceeds and disposed of the Injectable Business for £2.1 million(net of costs) plus deferred consideration. Key performance indicators The Board considers the following Key Performance Indicators (KPIs) to be themost relevant to the Continuing Operations: Key performance indicators for continuing business 2003 2004 2005 2006 2007Number of approved and marketable products at year end 8 9 10 9 *11Revenue excluding milestones £'m 26.7 33.8 34.4 30.3 31.2Signing and milestone payments received £'m 26.6 26.6 24.1 30.0 3.0Research and development expenditure £'m 17.9 15.4 14.3 22.9 25.2Manufacturing output Units (millions) 65.1 120.1 103.2 98.2 98.8 * In January 2008 Sular(R) was approved in the USA bringing the number ofapproved and marketable products to 12. The above figures exclude the Injectable Business which is included inDiscontinued Operations. Balance sheet As at 31 December 2007, the Group balance sheet showed total shareholders'equity of £59.2 million deficit (2006: £40.8 million deficit). The decrease inshareholders' equity has arisen mainly due to the £27.0 million loss fromContinuing and Discontinued Operations and a £7.4 million net currencytranslation effect offset by a £14.8 million increase from the share placing inMarch 2007. As set out in note 1(z) to the Financial Statements, the comparative figures for2006 have been restated to correct a prior period error by reallocating exchangetranslation gains between the income statements and equity and to correct theaccounting and related deferred tax treatment of the intra-group loan. Borrowings and liquidity The Group's total net debt, including convertible debt at face value, comprises: 2007 2006 £m £m Convertible bonds at face value 89.6 89.6Paul Capital funding liabilities (included at amortised cost) 21.0 24.3CRC funding liabilities 36.2 -Property mortgage 6.4 6.2Bank borrowings 0.8 2.0Finance lease liabilities 0.1 0.2Bank overdraft 0.2 1.3Total debt 154.3 123.6Less cash and cash equivalents (31.9) (11.9)Net debt 122.4 111.7 Convertible bonds The convertible bonds comprise £69.6 million 6% convertible bonds due May 2024and £20.0 million 8% convertible bonds due June 2025 outstanding as at 31December 2007. The £69.6 million May 2024 bonds may be converted into ordinaryshares at 95 pence per share, and may be called for repayment by the bondholders at par in May 2009, May 2011, May 2014 or May 2019. The £20.0 millionJune 2025 bonds may be converted into ordinary shares at 58 pence per share, andmay be called for repayment by the bond holders at par in June 2010, June 2012,June 2015 or June 2020. The Directors have carried out a detailed appraisal of a number of potentialapproaches to renegotiate or refinance the convertible bonds well before May2009. In selecting the approach to be implemented, the Directors will haveregard to the Group's working capital requirements, including the cash requiredto service debt obligations, operate the Lyon facility, complete certain productdevelopment programmes and establish the supply chain for Flutiform(TM), and ofthe likelihood of success of the potential approaches. The Board has areasonable expectation that the convertible bonds can be renegotiated orrefinanced in a timely manner. Paul Capital Finance In March 2007, in conjunction with the disposal of the Injectable Business, theGroup restructured its arrangements with Paul Capital from the sharing ofroyalties from a number of specified products ("Products") into a fixedamortisable note ("Note") of US$105.0 million (£52.5 million) of which US$12.5million (£6.4 million) is contingent and is only payable if worldwide sales ofDepoDur(TM) (a product of the Injectable Business) reach certain thresholds. TheNote is repayable in accordance with an amortisation schedule through to 2015. The Injectable Business was sold on the basis that it retains its obligations inrespect of the Paul Capital finance to share royalties received in respect ofDepoCyt(R) and DepoDur(TM) and to the extent that payments are made insatisfaction of such obligations, the liability of the Group under the Note isreduced accordingly. The value in the financial statements of the Group'sliability, therefore, depends on estimates of the sales of DepoCyt(R) andDepoDur(TM) by the Injectable Business, now called Pacira Pharmaceuticals Inc. ("Pacira Pharmaceuticals"). In August 2007 it was announced that EKRTherapeutics, Inc. had acquired the marketing and distribution rights forDepoDur(TM) for North, South and Central America from Pacira Pharmaceuticals andin October 2007 it was announced that Flynn Pharma had acquired the marketingand distribution rights for DepoDur(TM) for Europe. As at 31 December 2007, the net present value of the Group's liability under theNote (net of anticipated payments by Pacira Pharmaceuticals to Paul Capital),discounted at an annual rate of 11.2%, is US$41.9 million (£21.0 million)compared with the value of US$47.6 million (£24.3 million) included in the 31December 2006 balance sheet. As at 31 December 2007 a total of US$10.7 million(£5.4 million) had been paid against the Note, including payments made by PaciraPharmaceuticals from 23 March 2007 to 31 December 2007 totalling US$1.1 million(£0.5 million). The discount rate of 11.2% has been applied as being thecomparable rate for an equivalent facility at the date that the Note wasimplemented. An amortisation schedule determines the minimum amounts payable, includingpayments made by Pacira Pharmaceuticals, under the Note which are accounted foras payments of principal and interest, and is as follows: Notional interest Repayment of principal Total US$m US$m US$m2007 (actual) 6.6 4.1 10.72008 6.1 4.6 10.72009 5.6 5.1 10.72010 5.1 7.9 13.02011 4.2 8.8 13.02012 3.2 9.8 13.02013 2.1 10.9 13.02014 0.8 7.6 8.42015 - - -Total 33.7 58.8 92.5 The above table excludes (i) the contingent payments due if sales of DepoDur(TM)reach certain thresholds and (ii) any reductions for future sales-relatedpayments by Pacira Pharmaceuticals for DepoDur(TM) and DepoCyt(R). The Note is to be prepaid out of 50% of any milestones and signing fees receivedin respect of Flutiform(TM) from January 2009 onwards, up to an aggregate totalof $10 million. Any such prepayment would reduce the total outstanding balanceof the Note. CRC Finance In December 2006, SkyePharma announced an agreement with a specialist lendingentity, domiciled in Ireland, and advised by Christofferson Robb, for a 10 yearsecured amortising loan facility of approximately £35.0 million. The facilitycomprises initial commitments of US$35.0 million and €26.5 million repayableover 10 years based on a minimum amortisation schedule. Half of the committedprincipal on each loan was drawn down in January 2007 and a further US$11.5million and €9.0 million was drawn down in March 2007. The remaining US$6.0million and €4.25 million were drawn down on 31 December 2007. There areprovisions for the facility to be increased by a further US$15.0 million subjectto due diligence and progress with a specific product development. The amortisation schedule determines the minimum amounts payable under the CRCFinancing as follows: Euro Part of Loan US$ Part of Loan Principal Principal Principal Principal repayment in outstanding at end repayment in outstanding at end year of year year of year •'m •'m $'m $'m2007 (actual) 0.0 26.5 0.0 35.02008 0.2 26.3 0.2 34.82009 1.8 24.5 2.5 32.32010 3.1 21.4 4.0 28.32011 3.9 17.5 5.3 23.02012 4.1 13.4 5.3 17.72013 3.6 9.8 4.7 13.02014 3.3 6.5 4.5 8.52015 3.4 3.1 4.3 4.22016 3.1 0.0 4.2 0.0 Interest payable on the above facility is set quarterly. Interest is chargedon the US$ part of the loan at US$ three month LIBOR plus 5.85%. On the first€7.5 million of the Euro part of the loan, interest is charged at three monthEURIBOR plus 10.85% and the balance is charged at three month EURIBOR plus5.85%. The above table shows the principal outstanding at the end of each year and theminimum repayment schedule assuming the cumulative milestones and royalties fromCoruno(R), Lodotra(TM), and Requip(R) XL 24-hour(TM) do not exceed the principaland interest payments; if there is any excess it will be applied to repay theprincipal early without penalty. In addition to the repayments shown above, theloan is to be prepaid to an aggregate amount of US$10 million out of 50% of anymilestones and signing fees received in respect of Flutiform(TM) from January2009 onwards. Any such repayment would be part principal and part a make-wholeamount based on a pre-agreed calculation designed to compensate CRC's loss offuture margin. Approximately half of the facility is denominated in US dollar and half in Euro. Other borrowings and cash Bank and other borrowings amounted to £7.5 million at 31 December 2007 (2006:£8.4 million), consisting principally of a £6.4 million property mortgagesecured on the assets of SkyePharma AG (2006: £6.2 million). As at 31 December 2007, SkyePharma had net cash and cash equivalents of £31.7million, comprising cash and cash equivalents of £31.9 million net of a bankoverdraft of £0.2 million, compared with £10.6 million net cash at 31 December2006. As at 31 December 2007, the Group had total liquidity (cash and cashequivalents plus undrawn facilities) of £33.1 million (2006: £47.6 million). Going concern basis As noted above, the Directors have made an assessment of the general workingcapital requirements for the next twelve months, including the cash required toservice debt obligations, operate the Lyon facility, complete certaindevelopment programmes and establish the supply chain for Flutiform(TM), and ofthe likelihood of success of the potential approaches to renegotiating orrefinancing the convertible bonds. Based on this assessment the Board has areasonable expectation that the convertible bonds can be renegotiated orrefinanced in a timely manner and that the Group will have adequate resources tocontinue in operational existence for the foreseeable future and have,therefore, prepared the financial information contained herein on a goingconcern basis. The auditors' report on the financial statements for 2006, theauditors' conclusion on the unaudited statements for the first half of 2007 andthe auditors' report on the financial statements for 2007 include emphasis ofmatter paragraphs to draw attention to the disclosures made in Note 1 to thesefinancial statements indicating material uncertainties. The auditors' reportsare not qualified in this respect and the Directors believe that these risks canbe managed to a successful outcome. Foreign exchange Almost all of the Group's Continuing Operations are based in Continental Europe,and licence royalty payments are typically denominated in various currencies,with sales-related payments based on underlying sales in local currencies. Thisgives rise to direct and indirect exposures to changes in foreign exchangerates, notably the Swiss Franc, Euro and US Dollar. To minimise the impact ofany fluctuations, the Group's policy has historically been to maintain naturalhedges by relating the structure of borrowings to the underlying trading cashflows that generate them. Exchange differences relating to borrowing areincluded in finance income/costs, other exchange differences are included withinadministration expenses. Where subsidiaries are funded by the Company and this is achieved by the use oflong-term intercompany loans and settlement of these loans is neither plannednor likely to occur in the forseeable future, they are treated as part of thenet investment and related exchange translation differences are taken toreserves. Use has been made of forward currency options during 2007 to minimisethe currency exposure on operational transactions. Injectable Business In March 2007, SkyePharma sold the Injectable Business to Blue Acquisition Corp(now Pacira Inc.) for an initial cash consideration of US$20 million (£10million) (less costs of US$2 million (£1.0 million) paid into escrow, a workingcapital adjustment and certain liabilities) and deferred consideration of up toUS$62 million (£31 million) of contingent milestone payments and a percentage ofsales for certain future products for a defined period of time. Subsequent tothe sale, the working capital adjustment has been agreed and resulted in areduction of the purchase price of US$0.3 million (£0.1 million) which has beensettled from the escrow account. As noted above, the Injectable Business alsoretained responsibility for certain royalty based payments which, when made,will reduce SkyePharma's debt to Paul Capital. Following the impairment ofgoodwill of £37.0 million in 2006, the residual gain on sale was £1.4 million asdetailed in Note 12 to the Financial Statements. The change from the previouslydisclosed £1.0 million loss on sale is due to a reassessment of the net assetvalue of the Injectable Business eliminated on sale. The gain on sale, which is shown as an exceptional gain from DiscontinuedOperations, has been calculated without taking account of any deferredconsideration in respect of DepoBupivacaine(TM) and Biologics products, since thisdepends on the successful outcome of the long-term development programme forDepoBupivacaine(TM) and identification, initiation and completion of programmesfor Biologics. The Injectable Business generated a loss before tax of £4.4million from 1 January 2007 until the date of sale of 23 March 2007. Forward looking statements The Chairman's Statement and Operating and Financial Review contain certainforward looking statements. Although the Directors believe that theexpectations reflected in these forward looking statements are reasonable, theycan give no assurance that these expectations will materialise. Because theexpectations are subject to risks and uncertainties, actual results may varysignificantly from those expressed or implied by the forward looking statementsbased upon a number of factors. Such forward looking statements include but arenot limited to, the timescales for regulatory timings for Flutiform(TM), theexpectations for renegotiating or refinancing the convertible bonds, thestatements under "Outlook" including the timescales for the successfuldevelopment, approval and launch of new products and the objective for movinginto operating profit and the target for becoming profitable, the forecast salesof Flutiform(TM), the risks associated with the development of new products,risks related to obtaining and maintaining regulatory approval for existing, newor expanded indications of existing and new products, risks related toSkyePharma's ability to manufacture products on a large scale or at all, risksrelated to SkyePharma's and its marketing partners' ability to market productson a large scale to maintain or expand market share in the face of changes incustomer requirements, competition and technological change, risks related toregulatory compliance, the risk of product liability claims, risks related tothe ownership and use of intellectual property, and risks related toSkyePharma's ability to manage growth. SkyePharma undertakes no obligation torevise or update any such forward looking statement to reflect events orcircumstances after the date of these Financial Statements. CONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2007 Year to 31 December 2007 Pre - Exceptional Notes Exceptional (note 6) Total Continuing operations £m £m £mRevenue 2 41.6 - 41.6Cost of sales (16.1) - (16.1) _____ _____ _____Gross profit 25.5 - 25.5Selling, marketing and distribution expenses (0.5) - (0.5)Administration expenses Amortisation and impairment of other intangibles (2.7) - (2.7) Other administration expenses (12.8) - (12.8) (15.5) - (15.5)Research and development expenses (25.2) - (25.2)Other income/ (expense) - - - _____ _____ _____Operating loss (15.7) - (15.7)Finance costs 4 (12.4) - (12.4)Finance income 4 4.4 - 4.4 _____ _____ _____Loss before income tax (23.7) - (23.7)Income tax expense (0.3) - (0.3) _____ _____ _____Loss for the year from continuing operations (24.0) - (24.0) _____ _____ _____Profit/(Loss) for the year from discontinued 6 (4.4) 1.4 (3.0)operations _____ _____ _____Profit/(Loss) for the year from continuing and (28.4) 1.4 (27.0)discontinued operations _____ _____ _____ Basic and diluted earnings per share 5Continuing operations (3.1)p - (3.1)pContinuing and discontinued operations (3.7)p 0.2p (3.5)p Year to 31 December 2006 (restated) Pre - Exceptional Notes Exceptional (Note 6) TotalContinuing operations £m £m £mRevenue 2 43.0 - 43.0Cost of sales (18.0) - (18.0) _____ _____ _____Gross profit 25.0 - 25.0Selling, marketing and distribution expenses (3.0) - (3.0)Administration expenses Amortisation and impairment of other intangibles (1.5) (8.8) (10.3) Other administration expenses (13.7) (4.9) (18.6) (15.2) (13.7) (28.9)Research and development expenses (22.9) - (22.9)Other income/ (expense) 0.8 0.7 1.5 _____ _____ _____Operating loss (15.3) (13.0) (28.3)Finance costs 4 (14.1) - (14.1)Finance income 4 3.0 20.1 23.1 _____ _____ _____Loss before income tax (26.4) 7.1 (19.3)Income tax expense (0.8) - (0.8) _____ _____ _____Loss for the year from continuing operations (27.2) 7.1 (20.1) _____ _____ _____Profit/(Loss) for the year from discontinued 6 (22.0) (37.0) (59.0)operations _____ _____ _____Profit/(Loss) for the year from continuing and (49.2) (29.9) (79.1)discontinued operations _____ _____ _____ Basic and diluted earnings per share 5Continuing operations (3.6)p 0.9p (2.7)pContinuing and discontinued operations (6.6)p (4.0)p (10.6)p See notes to the preliminary announcement. CONSOLIDATED BALANCE SHEETas at 31 December 2007 31 December 2007 31 December 2006 (restated) Notes £m £mASSETSNon-current assetsGoodwill 7 27.3 29.2Other intangible assets 8 8.7 8.7Property, plant and equipment 26.1 25.1Investments in associates - -Available-for-sale financial assets 0.1 0.1 ____ ____ 62.2 63.1Current assetsInventories 0.9 0.5Trade and other receivables 11.7 14.5Financial assets at fair value through profit or loss 0.1 0.6Cash and cash equivalents 9 31.9 11.9 ____ ____ 44.6 27.5Non-current assets classified as held for sale 6 - 17.1 ____ ____Total Assets 106.8 107.7 LIABILITIESCurrent liabilitiesTrade and other payables (20.8) (22.9)Corporation tax creditor (0.6) (0.5)Other borrowings 10 (6.8) (8.6)Deferred income (5.0) (10.8) ____ ____ (33.2) (42.8)Non-current liabilitiesConvertible bonds 10 (64.7) (64.1)Other borrowings 10 (57.9) (25.4)Deferred income (8.0) (7.4)Other non current liabilities - (0.2)Provisions 11 (2.2) (1.9) ____ ____ (132.8) (99.0)Liabilities directly associated with non-current assets 6 - (6.7)classified as held for sale ____ ____Total Liabilities (166.0) (148.5) ____ ____ Net Liabilities (59.2) (40.8) ____ ____ SHAREHOLDERS' EQUITYShare capital 82.7 76.6Share premium 382.8 374.1Translation reserve (4.1) 3.3Fair value reserve (0.2) (0.2)Retained losses (529.8) (504.0)Other reserves 9.4 9.4 ____ ____Total Shareholders' Equity (59.2) (40.8) ____ ____ See notes to the preliminary announcement. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the year ended 31 December 2007 Year to 31 December Year to 31 December 2007 2006 (restated) £m £mNet currency translation effect (7.4) 4.3Available for sale financial assets Fair value movement taken to equity - (0.2) Transfer to the income statement on disposal - (0.2)Actuarial losses on defined benefit plans - (0.1) _____ _____Net (losses)/profits recognised directly in equity (7.4) 3.8Loss for the year from continuing operations (24.0) (20.1)Loss for the year from discontinued operations (3.0) (59.0) _____ _____Total recognised income and expense for the year (34.4) (75.3) _____ _____ See notes to the preliminary announcement. CONSOLIDATED CASH FLOW STATEMENTfor the year ended 31 December 2007 Note Year to Year to 31 December 31 December 2006 2007 (restated)Continuing operations £m £m Cash flow from operating activitiesCash used in operations (a) (17.6) (8.7)Income tax paid (0.3) (0.3) ____ ____Net cash used in operating activities (17.9) (9.0) Cash flows from investing activitiesPurchases of property, plant and equipment (3.6) (2.0)Purchases of intangible assets - (1.4)Proceeds from disposal of available for sale investments 1.2 1.3Net proceeds from disposal of subsidiary 4.6 -Interest received 1.6 1.0 ____ ____Net cash generated by/(used in) investing activities 3.8 (1.1) Cash flows from financing activitiesRepayments of borrowings (b) (3.5) (6.9)Interest paid (b) (11.1) (6.3)Net proceeds from issue of ordinary share capital 14.8 -Proceeds from loan drawdown 35.8 - ____ ____Net cash generated from/(used in) financing activities 36.0 (13.2) Effect of exchange rate changes (0.8) (0.1) ____ ____Net increase/(decrease) in net cash and cash equivalents 21.1 (23.4) Net cash and cash equivalents at beginning of the year 10.6 34.3Net increase/(decrease) in cash and cash equivalents 21.1 (23.4)Less cash and cash equivalents included in discontinued - (0.3)operations ____ ____Net cash and cash equivalents at end of the year 31.7 10.6 ____ ____Analysis of Net Cash:Cash and cash equivalents 9 31.9 11.9Bank overdraft 10 (0.2) (1.3) ____ ____Net cash and cash equivalents 31.7 10.6 ____ ____ See notes to the preliminary announcement. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Cash flow from operating activities Year to Year to 31 December 2007 31 December 2006 (restated) £m £mLoss for the year from continuing operations (24.0) (20.1)Loss for the year from discontinued operations (3.0) (59.0) _____ _____Loss for the year from continuing and discontinued operations (27.0) (79.1) Adjustments for: Tax 0.3 0.8 Depreciation 4.4 5.5 Amortisation 0.9 2.2 Impairments 1.9 46.6 Fair value loss on derivative financial instruments - 0.2 Finance costs 13.2 18.2 Finance income (4.4) (23.1) Profit on disposal of available for sale financial assets - (0.6) Gain on sale of subsidiary (1.4) - Share based payments charge 1.2 2.5 Other non-cash charges (1.1) 1.6 _____ _____Operating cash flows before movements in working capital (12.0) (25.2) Changes in working capital (Increase)/ decrease in inventories 0.1 2.1 Increase in trade and other receivables (1.5) (2.4) Increase in trade and other payables 1.2 6.5 (Decrease)/increase in deferred income (5.5) 10.3 Increase in provisions 0.1 - _____ _____Cash used in operations (17.6) (8.7) _____ _____ (b) Payments under Paul Capital finance In 2006, payments under the Paul Capital arrangements were included in repaymentof borrowings. In 2007, the interest element of payments made under the newPaul Capital Note is included in interest payments and the principal repaymentis included in repayment of borrowings. Notes to the preliminary announcement The preliminary announcement was approved by the Board on 26 March 2008. 1 Basis of preparation The preliminary announcement has been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") adopted by the European Union. AllIFRS's issued by the International Accounting Standards Board ("IASB") that wereeffective at the time of preparing the financial statements and adopted by theEuropean Commission for use inside the EU were applied by SkyePharma. The preliminary statement has been prepared in accordance with IFRS and theinterpretations issued by the International Financial Reporting InterpretationsCommittee ("IFRIC") and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS. In preparing this preliminary announcement theGroup has applied consistently the accounting policies as set out in the Group'sconsolidated financial statements for the year ended 31 December 2006 to whichno material changes were required. The financial information in this preliminary announcement does not constitutestatutory accounts within the meaning of Section 240 of the Companies Act 1985for the years ended 31 December 2006 and 2007. The financial information for theyears ended 31 December 2006 and 2007 has been extracted from the Group'saudited consolidated financial statements for the year ended 31 December 2007.The auditors' report on those accounts was unqualified and did not contain astatement under Section 237 (2) or (3) of the Companies Act 1985. Certaincomparative figures as at 31 December 2006 have been restated to include priorperiod adjustments as detailed in Note 1 (b). The audited financial statements for the year ended 31 December 2006 have beendelivered to the Registrar of Companies. The preliminary announcement has been prepared under the historical costconvention, as modified by the revaluation of financial instruments at fairvalue through profit and loss and available for sale financial instruments. (a) Going concern As set out in Note 10: Borrowings, the Group has in issue £69.6 million bondswhich may be converted into Ordinary Shares at 95 pence per share, and £20.0million bonds which may be converted into Ordinary Shares at 58 pence per share. The bond holders may call for repayment at par on certain dates starting on 4May 2009, in respect of the £69.6 million bonds and starting on 3 June 2010 inrespect of the £20.0 million bonds. The Directors have carried out a detailedappraisal of a number of potential approaches to renegotiate or refinance thebonds well before May 2009. In selecting the approach to be implemented, theDirectors will have regard to the Group's working capital requirements,including the cash required to service debt obligations, operate the Lyonfacility, complete certain product development programs and establish the supplychain for Flutiform(TM). The ability to refinance the convertible bonds in atimely and cost-effective manner depends upon market conditions as well ascontinued progress with the Group's business, especially the development,approval and launch in the USA and Europe of Flutiform(TM), which the Directorsexpect will lead to significant net cash inflows. Although the application ofdrug delivery technologies to known molecules is lower risk than drugdevelopment, there can be no absolute certainty that Flutiform(TM) willsuccessfully complete development and be launched. Nevertheless, the Directorshave a reasonable expectation that these risks can be managed to a successfuloutcome and that the convertible bonds can be renegotiated or refinanced in atimely manner. The Directors have made an assessment of the general working capitalrequirements for the next twelve months and of the likelihood of success of thepotential approaches to renegotiating or refinancing the bonds. Based on thisassessment the Board has a reasonable expectation that the convertible bonds canbe renegotiated or refinanced in a timely manner and that the Group will haveadequate resources to continue in operational existence for the foreseeablefuture and have, therefore, prepared the financial information contained hereinon a going concern basis. The financial statements do not reflect anyadjustments that would be required to be made if they were to be prepared on abasis other than a going concern basis. (b) Prior Period Adjustments During 2007 a detailed review has been carried out of the accounting treatmenton IFRS transition of the convertible bonds and related intra-group loans. Thishas identified an incorrect treatment of the intra-group loan between SkyePharma(Jersey) Limited and SkyePharma PLC which under IFRS, should have been separatedinto debt and equity components and recorded at fair value, but was incorrectlyrecognised at nominal value. The accounts of SkyePharma (Jersey) Limited for2006 are being restated, including a prior year adjustment for 2005, to correctthis incorrect treatment. The accounts of the Group and Company have beencorrected by way of a prior year adjustment. As a consequence the followingprior year adjustments have been included in these financial statements: -The Corporation Tax Charge and Loss for the period have increased by £18,000for the year ended 31 December 2006. -Corporation Tax creditor has increased by £41,000, and the Deferred TaxLiability decreased by £7.6 million as at 31 December 2006. -Share Premium is increased by £28.5 million as at 31 December 2005 and 31December 2006. -Other reserves have decreased by £19.9 million as at 31 December 2005 and 31December 2006. -Cumulative retained losses are increased by £0.9 million as at 31 December 2005and 31 December 2006 -There is no impact on Earnings per Share for either year As a consequence of the above adjustments the deferred tax liability in relationto the convertible bonds, which was recorded as a prior year adjustment in the2006 accounts, has been reversed as the revised accounting treatment does notgive rise to timing differences for tax purposes. As announced on 20 September 2007, following an internal review of accountingprocesses it has been identified that the previous practices had led to anincorrect allocation of exchange translation gains between the income statementand equity. The comparative figures for 2006 consolidated results have beenrestated to correct this as follows: -Other administration expenses, operating loss and loss for the year haveincreased by £1.4 million for the year ended 31 December 2006 -Retained losses and cumulative translation reserves are increased by £0.2m asat 31 December 2005 and £1.6 million as at 31 December 2006. These adjustments have no tax effect and have no impact on Total Shareholders'Equity. 2 Segment information Revenue by business segment: Year ended Year ended 31 December 2007 31 December 2006 £m £mContinuing operations 41.6 43.0Discontinued operations 0.8 6.3 _____ _____Total revenue from continuing and discontinued operations 42.4 49.3 _____ _____ Revenue earned can be analysed as:Signing and milestone payments 10.4 12.7Contract research and development costs recharged 3.2 1.6Royalties 17.8 18.1Manufacturing and distribution 10.2 10.6 _____ _____Continuing operations 41.6 43.0Discontinued operations 0.8 6.3 _____ _____Total revenue from continuing and discontinued operations 42.4 49.3 _____ _____ Operating loss by business segment: Year ended 31 Year ended 31 December December 2007 2006 (restated) £m £mContinuing operationsOperating loss pre exceptional items (15.7) (15.3)Exceptional items - (13.0) _____ _____Operating loss (15.7) (28.3)Net finance (costs)/income (8.0) 9.0Tax (0.3) (0.8) _____ _____Loss after tax from continuing operations (24.0) (20.1)Loss after tax from discontinued operations (3.0) (59.0) _____ _____Loss after tax from continuing and discontinued operations (27.0) (79.1) _____ _____ 3 Operating expenses Year ended Year ended 31 December 2007 31 December 2006 (restated)Continuing operations £m £mCost of sales 16.1 18.0Selling, marketing and distribution expenses 0.5 3.0Depreciation 4.2 4.7Amortisation 0.8 1.5Impairment 1.9 -Research and development expenses 25.2 22.9Other operating expenses 8.6 9.0 _____ _____Operating expenses before exceptional items 57.3 59.1Impairments - 9.6Corporate restructuring - 2.1Legal claims - 1.5EGM costs - 0.5 _____ _____Total operating expenses after exceptional items 57.3 72.8 _____ _____ 4 Finance costs and income Year ended Year ended 31 December 2007 31 December 2006Continuing operations £m £mInterest and similar expense:Interest: Bank borrowings (0.4) (0.5) Paul Capital finance (2.6) (6.9) CRC finance (3.1) - Convertible bonds (6.3) (6.3) _____ _____Total interest expense (12.4) (13.7) _____ _____Foreign exchange on intercompany balances - (0.4) _____ _____Total finance costs (12.4) (14.1) _____ _____ Finance income:Exceptional credit arising from change in the estimated future - 20.1payments to Paul CapitalTranslation difference on finance facilities 2.8 1.9Interest income 1.6 1.1 _____ _____Total finance income 4.4 23.1 _____ _____ 5 Earnings per share Year to Year to 31 December 2007 31 December 2006 (restated)Continuing operations £m £mAttributable loss before exceptional items (24.0) (27.2)Exceptional items - 7.1 _____ _____Basic and diluted attributable loss (24.0) (20.1) _____ _____ Continuing and discontinued operationsAttributable loss before exceptional items (28.4) (49.2)Exceptional items 1.4 (29.9) _____ _____Basic and diluted attributable loss (27.0) (79.1) _____ _____ Number Number m mBasic and diluted weighted average number of shares in issue 769.8 748.8 _____ _____ Continuing operationsLoss per Ordinary Share before exceptional items (3.1)p (3.6)pExceptional items - 0.9p _____ _____Basic and diluted loss per Ordinary Share (3.1)p (2.7)p _____ _____ Continuing and discontinued operationsLoss per Ordinary Share before exceptional items (3.7)p (6.6)pExceptional items 0.2p (4.0)p _____ _____Basic and diluted loss per Ordinary Share (3.5)p (10.6)p _____ _____ There is no difference between basic and diluted loss per share since in a lossmaking year all potential shares from convertible bonds, stock options, warrantsand contingent issuance of shares are anti dilutive. Shares held by the SkyePharma PLC General Employee Benefit Trust have beenexcluded from the weighted average number of shares. EPS information for Discontinued Operations is presented in Note 6. 6 Discontinued operations The Injectable Business was sold to Blue Acquisition Corp, now called Pacira,Inc. ("Pacira") on 23 March 2007. The Injectable Business has changed its nameto Pacira Pharmaceuticals Inc. The consideration for the disposal was asfollows: 1. Cash payments by Pacira of US$20 million to SkyePharma: a) of US$18 million (£9.2 million) at completion; b) of US$2 million (£1.0 million) into an escrow account; and c) an adjustment to the payments above based upon the net asset value of thebusiness at completion in relation to a specified target amount of the net assetvalue. Subsequently this has been agreed resulting in a reduction in purchaseprice of US$0.5 million (£0.3 million), which has been paid from the escrowaccount. 2. Milestone payments, by Pacira to SkyePharma: a) US$10 million (£5.1 million) upon the first commercial sale in the USA ofDepoBupivacaine(TM); b) US$4 million (£2.0 million) upon the first commercial sale of DepoBupivacaine(TM) in a major country of the EU; c) US$8 million (£4.1 million) if worldwide annual net sales of DepoBupivacaine(TM) reach US$100 million (£51 million); d) a further US$8 million (£4.1 million) if worldwide annual net sales ofDepoBupivacaine(TM) reach US$250 million (£128 million); e) a further US$32 million (£16.3 million) if worldwide annual net sales ofDepoBupivacaine(TM) reach US$500 million (£255 million). 3. Ongoing payments subject to certain conditions for the period of protectionby existing patents, of: a) 3% of worldwide net sales of DepoBupivacaine(TM); and b) 3% of worldwide net sales of Biologics (not to exceed 20% of the royaltyincome of Pacira Pharmaceuticals Inc.). In addition, Pacira Pharmaceuticals Inc. retains responsibility for makingpayments to Paul Capital related to sales of DepoCyt(R) and DepoDur(TM). Thisobligation was included as debt in the balance sheet of the Injectable Businessprior to disposal. The gain on disposal of the Injectable Business was £1.4 million as analysedbelow: £mConsideration:Cash 10.2Purchase price adjustment (0.3)Total cash consideration 9.9Less: Disposal costs and provisions (5.3) _____Net proceeds 4.6Net assets of Injectable Business at disposal (see note below) (5.8)Attributable goodwill (1.6)Realisation of translation reserve 4.2 _____Gain on disposal 1.4 _____ Note: The net assets of the Injectable Business at disposal take into accountthe transfer of liabilities to Paul Capital with the business and therestructuring of the Group's Paul Capital finance liabilities on 23 March 2007,as the Paul Capital finance restructuring was inextricably linked with thedisposal of the Injectable business. The residual gain on disposal was £1.4 million. The change from the previouslydisclosed £1.0 million loss on sale is due to a reassessment of the InjectableBusiness net asset value eliminated on sale. (a) Results of discontinued operations Year to 31 December 2007 Pre - Exceptional Total Exceptional (Note 12b) £m £m £mRevenue 0.8 - 0.8Cost of sales (1.5) - (1.5) _____ _____ _____Gross loss (0.7) - (0.7)Selling, marketing and distribution expenses (0.5) - (0.5)Administration expenses Amortisation of other intangibles (0.1) - (0.1) Other administration expenses (0.7) - (0.7) (0.8) - (0.8)Research and development expenses (1.6) - (1.6)Gain on disposal of subsidiary undertaking - 1.4 1.4 _____ _____ _____Operating loss (3.6) 1.4 (2.2)Finance costs (0.8) - (0.8) _____ _____ _____Loss for the year from discontinued operations (4.4) 1.4 (3.0) _____ _____ _____ Year to 31 December 2006 Pre - Exceptional Total Exceptional (Note 12b) £m £m £mRevenue 6.3 - 6.3Cost of sales (8.5) - (8.5) _____ _____ _____Gross loss (2.2) - (2.2)Selling, marketing and distribution expenses (0.1) - (0.1) _____ _____ _____Administration expenses Amortisation of other intangibles (0.7) - (0.7) Other administration expenses (4.4) (37.0) (41.4) _____ _____ _____ (5.1) (37.0) (42.1)Research and development expenses (8.7) - (8.7)Gain on disposal of subsidiary undertaking - - - _____ _____ _____Operating loss (16.1) (37.0) (53.1)Finance costs (5.9) - (5.9) _____ _____ _____Loss for the year from discontinued operations (22.0) (37.0) (59.0) _____ _____ _____ The loss for 2007 relates to the period 1 January 2007 to 23 March 2007, beingthe date of disposal. (b) Exceptional items Year to Year to 31 December 2007 31 December 2006Discontinued operations £m £mImpairments - (37.0)Gain on disposal of subsidiary undertaking 1.4 - The exceptional item for 2006 of £37.0 million relates to the impairment of theinjectable business goodwill. Following the completion of the disposal in March2007 the impairment of the discontinued operation is based on a fair value lesscosts to sell of £2.1 million, further details of which are given in Note 7:Goodwill. (c) Operating expenses Year to Year to 31 December 2007 31 December 2006Discontinued operations £m £mCost of sales 1.4 8.5Selling, marketing and distribution expenses 0.5 0.1Depreciation 0.4 0.8Amortisation - 0.7Research and development expenses 1.6 8.7Other operating expenses 0.5 3.6 _____ _____Operating expenses before exceptional items 4.4 22.4Impairments - 37.0 _____ _____Total operating expenses 4.4 59.4 _____ _____ (d) Assets and liabilities classified as held for sale 31 December 2006 £mASSETSNon-current assetsGoodwill 1.6Other intangible assets 7.4Property, plant and equipment 5.8 _____ 14.8Current assetsInventories 0.9Trade and other receivables 1.1Cash and cash equivalents 0.3 _____ 2.3 _____Total Assets 17.1 LIABILITIESCurrent liabilitiesTrade and other payables (2.3)Deferred income (0.6) _____ (2.9)Non-current liabilitiesDeferred income (0.9)Other non current liabilities (2.9) _____ (3.8) _____Total Liabilities (6.7) _____ Net Assets 10.4 _____ (e) Cash flow from discontinued operations included in the ConsolidatedCash Flow Statement Year to Year to 31 December 2007 31 December 2006 £m £mCash flow from operating activities (2.9) (21.4)Cash flows from investing activities - (1.1)Cash flows from financing activities - (1.8) _____ _____ (2.9) (24.3) _____ _____ (g) Earnings per share Year to Year to 31 December 2007 31 December 2006Discontinued operations £m £mAttributable loss before exceptional items (4.4) (22.0)Exceptional items 1.4 (37.0) _____ _____Basic and diluted attributable loss (3.0) (59.0) _____ _____ Number Number m mBasic and diluted weighted average number of shares in issue 769.8 748.8 _____ _____ Discontinued operationsLoss per Ordinary Share before exceptional items (0.6)p (2.9)pExceptional items 0.2p (4.9)p _____ _____Basic and diluted loss per Ordinary Share (0.4)p (7.8)p _____ _____ 7 Goodwill TotalGroup £mCostAt 1 January 2006 82.7Transfer to discontinued operations (49.0) _____At 1 January 2007 and 31 December 2007 33.7Accumulated amortisationAt 1 January 2006 14.0Impairment 0.9Transfer to discontinued operations (10.4) _____At 1 January 2007 4.5Impairment 1.9 _____At 31 December 2007 6.4 _____Net book valueAt 31 December 2006 29.2 _____At 31 December 2007 27.3 _____ Goodwill at 31 December 2007 and 31 December 2006 relates to the cash generatingunit comprising insoluble drug delivery ("IDD(R)") technologies and relatedproducts. This has been allocated to the following business segments/ cash-generatingunits: As at As at 31 December 2007 31 December 2006 £m £mInjectable BusinessBeginning of the year - 38.6Impairment - (37.0)Transfer to discontinued operations - (1.6) _____ _____End of the year - - Oral and inhalationBeginning of the year 29.2 30.1Impairment (1.9) (0.9) _____ _____End of the year 27.3 29.2 _____ _____ 27.3 29.2 _____ _____ Goodwill is not amortised but is tested annually for impairment or morefrequently if there are indications that goodwill might be impaired. Fair valueless costs to sell and value in use calculations are generally utilised tocalculate the recoverable amount. Value in use is calculated as the net present value of the projectedrisk-adjusted cash flows of the cash generating unit to which goodwill isallocated. The cash flow projections are based on the most recent businessplans approved by management which cover a period of 10 years, and are adjustedwhere necessary to take account of longer patent lives. The discount rateapplied may vary depending on the risk profile of the asset being valued but istypically 15%, which is the Group's average pre-tax discount rate derived from acapital asset pricing model. The key assumptions for the value in use calculations are those regarding thelaunch dates of products employing these technologies, their growth rates, thediscount rates used and the period over which the cash flows are projected. Theassumptions made reflect past experience, market research and expectations offuture market trends. Goodwill was tested for impairment at both 31 December 2006 and 31 December2007. At 31 December 2007, the Group incurred an impairment loss of £1.9 million(recorded in administration expenses) relating to the IDD(R) technologygoodwill. This is due to the Directors estimating lower prospects for growththan previously anticipated for Triglide(R) given the launch of Fenoglide(TM) bySciele. The remaining carrying value of goodwill is £27.3 million, supported byan assesment by the Directors of the prospects for sales of Triglide(R) andother potential applications of SkyePharma's insoluble drug deliverytechnologies. If other potential applications are not realised there may needto be a substantial impairment of the carrying value of the related goodwill. At 31 December 2006, the Group incurred a total impairment loss of £37.9million. Of the £37.9 million, £37.0 million relates to the impairment of theInjectable Business goodwill (recorded in exceptional other administrationexpenses). Following the completion of the disposal in March 2007 theimpairment of the discontinued operation is based on a fair value less costs tosell of £2.1 million. The remaining £0.9 million (recorded in administrationexpenses) was the result of impairing the goodwill in SkyePharma AB. 8 Other intangible assets Intellectual Software Development Total property costs CostsGroup £m £m £m £mCostAt 1 January 2006 41.0 1.0 1.0 43.0Exchange (3.2) - (0.1) (3.3)Additions 1.2 - - 1.2Disposals - (0.2) - (0.2)Transfer to discontinued operations (12.7) (0.2) - (12.9) _____ _____ _____ _____At 1 January 2007 26.3 0.6 0.9 27.8Exchange 3.6 0.1 - 3.7Additions - 0.1 - 0.1Disposals (0.9) (0.2) (0.6) (1.7) _____ _____ _____ _____At 31 December 2007 29.0 0.6 0.3 29.9 _____ _____ _____ _____ Accumulated amortisationAt 1 January 2006 14.4 0.8 1.0 16.2Exchange (2.2) - (0.1) (2.3)Amortisation charge 1.4 0.1 - 1.5Disposals - (0.2) - (0.2)Impairment 7.9 - - 7.9Transfer to discontinued operations (3.8) (0.2) - (4.0) _____ _____ _____ _____At 1 January 2007 17.7 0.5 0.9 19.1Exchange 2.9 - - 2.9Amortisation charge 0.8 - - 0.8Disposals (1.0) - (0.6) (1.6) _____ _____ _____ _____At 31 December 2007 20.4 0.5 0.3 21.2 _____ _____ _____ _____Net book valueAt 31 December 2006 8.6 0.1 - 8.7 _____ _____ _____ _____At 31 December 2007 8.6 0.1 - 8.7 _____ _____ _____ _____ There are no intangible assets with indefinite useful lives. All amortisationcharges in the year have been charged through administrative expenses. In 2006, as a result of external and internal events within the Group, theintellectual property was tested for impairment consistent with the value in usemethod set out in Note 7: Goodwill. At 31 December 2006, the Group incurred atotal intangible impairment loss of £7.9 million. This related to the nanotechnology acquired from Medac and intellectual property related to certaintopical products acquired from Bioglan. Included within intellectual property is £3.3 million (2006: £3.0 million) ofassets which are not yet in use. These assets have not been amortised but havebeen tested for impairment using the method set out for goodwill in Note 7:Goodwill. No impairment was identified. 9 Cash and cash equivalents Group Group As at As at 31 December 2007 31 December 2006 £m £mCash at bank and in hand 31.9 11.9 _____ _____ 31.9 11.9 Cash at bank earns interest at floating rates based on daily bank deposit rates. Short term deposits are made for varying periods of between one day and threemonths depending on the cash requirements of the Group and earn interest at therespective short term deposit rate. The carrying amount of these assetsapproximates their fair value as at the Balance Sheet date. 10 Borrowings Group Group As at As at 31 December 2007 31 December 2006 £m £mCurrentBank overdraft & borrowings 1.0 3.3Property mortgage 0.3 0.2Paul Capital finance 5.4 5.0CRC finance 0.1 -Finance lease liabilities - 0.1 _____ _____Total current borrowings 6.8 8.6 _____ _____ Non-currentConvertible bonds due May 2024 51.7 51.2Convertible bonds due June 2025 13.0 12.9 _____ _____Convertible bonds 64.7 64.1 Property mortgage 6.1 6.0Paul Capital finance 15.6 19.3CRC finance 36.1 -Finance lease liabilities 0.1 0.1 _____ _____Other non-current borrowings 57.9 25.4 _____ _____Total non-current borrowings 122.6 89.5 _____ _____Total borrowings 129.4 98.1 _____ _____ Bank overdraft and borrowings At 31 December 2007 bank borrowings include an overdraft of £0.2 million (SwFr0.4million) (2006: £1.3 million) and loan due of £0.8 million (SwFr 2 million)with the Basellandschaftliche Kantonalbank. This loan can be terminated on sixweeks' notice by either party and bears interest at 6.5%. Both amounts aresecured on the assets of SkyePharma AG. The Group had a loan as at 31 December 2006 with GE Capital Corp of £0.6 million(US$1.1 million), secured by certain assets of SkyePharma Inc, SkyePharma US Incand SkyePharma PLC. The loan bore interest at 8.0% per annum and was repayableby instalments until September 2007. In February 2007, in order to simplify thedisposal of the Injectable Business, SkyePharma settled the loan in full. Convertible bonds The Group has £69.6 million 6% convertible bonds due May 2024 at a conversionprice of 95 pence and £20 million 8% convertible bonds due June 2025 at aconversion price of 58 pence. The conversion price of the £20 millionconvertible bonds due June 2025 was reset from 77 pence to 58 pence in June2006. The £69.6 million May 2024 bonds may be called for repayment by the bondholders at par in May 2009, May 2011, May 2014 or May 2019 and the £20.0 millionJune 2025 bonds may be called for repayment by the bond holders at par in June2010, June 2012, June 2015 or June 2020. The bonds are included partly in non-current liabilities (2007: £64.7 million,2006: 64.1 million) and partly in Share Premium (2007 and 2006: £28.5 million).The total face value of the convertible bonds is £89.6 million. Property mortgage At 31 December 2007, the Group had a property mortgage facility with theBasellandschaftliche Kantonalbank of £6.4 million (SwFr 14.3 million) (2006:£6.2 million (SwFr 14.9 million)). The mortgage is in two tranches, bothsecured by the assets of SkyePharma AG. The first tranche of £2.4 million (SwFr5.4 million) bears interest at 3.875% and is fully in 2011. The second trancheof £4.0 million (SwFr 8.9 million) bears interest at 3.875% and is fullyrepayable in 2011. Paul Capital finance The Group entered into two transactions with Paul Capital Royalty Fund, L.P. ("Paul Capital"), formerly known as Paul Capital Royalty Acquisition Fund, L.P.,in 2000 and 2002. Under these transactions Paul Capital provided a total ofUS$60 million in return for the sale of a portion of the potential futureroyalty and revenue streams on Solaraze(R), Xatral(R) OD, Triglide(R),Pulmicort(R) HFA, Foradil(R) Certihaler(TM) and Paxil CR(TM) and certain otherminor or early stage products ("Products"). The proceeds received from PaulCapital met the definition of financial liabilities under IAS 39: FinancialInstruments: Recognition and Measurement, and on IFRS conversion in theFinancial Statements for 2005, were treated as financial liabilitiesaccordingly. Royalties paid to Paul Capital were treated as a repayment of theliabilities and notional interest was charged on the liabilities using theeffective interest rate at inception of each agreement. The estimated paymentsto Paul Capital were discounted using each contract's original effectiveinterest rates at inception, which were 24.5% and 29.8% respectively. Anychange in the estimated future payments to Paul Capital was recognised as incomeor expense in the income statement. The Paul Capital debt was restructured inMarch 2007 as described below. On 23 March 2007, SkyePharma PLC and its subsidiary, Jagotec AG entered into aPrivate Note Purchase and Exchange of Interests Agreement (the "Note PurchaseAgreement") with Royalty Securitization Group I, a Delaware statutory trust andsubsidiary of Paul Capital ("RST"), and, with respect to certain sectionstherein, Paul Capital, pursuant to which each of Paul Capital and RST assignedits interests in the royalty and revenue streams described in the precedingparagraph in respect of the Products in exchange for a fixed amortisable seniornote (the "Note") in the amount $105.0 million (£52.5million) issued by Jagotecto RST. Under the terms of Note Purchase Agreement, minimum amortizationpayments are $92.5 million (£46.3 million) and these payments are increased by$12.5 million (£6.3 million) beginning on 31 March 2011 if worldwide sales ofDepoDur(TM) reach certain thresholds. The Note is repayable on a quarterlybasis in accordance with an amortisation schedule beginning on 31 March 2007through to 31 December 2015. The outstanding amount under the Note as at 31December 2007 is $94.3 million (£47.2 million). The Note must be prepaid in certain circumstances, including 50% of anymilestone payments for any Flutiform(TM) license agreements or 50% of anysigning fees with respect to Flutiform(TM) license agreements entered into withregard to any unlicensed territory, in each case received after 1 January 2009(or on FDA approval if earlier), in an amount up to $10.0 million. Jagotec AGmust also prepay the Note in an amount equal to 50% of the proceeds receivedupon the disposal of any of the intellectual property related to the Products. The Injectable Business was sold on the basis that it retains its obligations toRST to share royalties received in respect of DepoCyt(R) and DepoDur(TM) and tothe extent that payments are made in satisfaction of such obligations, theliability of SkyePharma PLC and Jagotec AG under the Note is reducedaccordingly. SkyePharma PLC and Jagotec AG have the option to prepay the Note byproviding 10 days' prior written notice. Such prepayment amount will becalculated at a discount to the remaining scheduled amortisation payments duemore than 12 months after the date of prepayment at a rate of LIBOR plus 75basis points The Note Purchase Agreement contains representations and warranties andcovenants customary for agreements of this type. There is also a covenant(negative pledge) not to grant security over Flutiform(TM) intellectualproperty, and the requirement for prior consent from RST for certaintransactions that could affect RST's security and risk. The Note is secured bymilestone payments and royalty receipts receivable by Jagotec AG under licenseagreements related to the Products. SkyePharma PLC has guaranteed all of theobligations of Jagotec AG under the Note Purchase Agreement pursuant to aguarantee, dated 23 March 2007, by SkyePharma PLC to the noteholders of the Note(as defined in the Note Purchase Agreement). In connection with the Note Purchase Agreement, Jagotec AG granted RST aroyalty-free, fully-paid up and worldwide, license or sublicense, as applicable,subject to third party rights, limited to the right to grant sublicenses(through multiple tiers) under the intellectual property in the Products, whichbecomes operable following an event of default and certain other circumstances,pursuant to a License Agreement dated as of 23 March 2007. The restructuring of the Paul Capital debt is on substantially different termsfrom those applying to the royalty sharing arrangement and therefore has beentreated as a new financial liability arising in 2007 on extinguishment of anoriginal financial liability. The new liability was initially recorded at fairvalue, calculated by discounting the expected cash flows based on management'sestimation of a fair market rate. Subsequently the carrying value of the Noteis at amortised cost, calculated as the net present value of the expected futureminimum payments (net of amounts expected to be paid by the Injectable Business)discounted at 11.2% per annum (the effective comparable interest rate atinception). At 31 December 2007, the carrying value of the Note was £21.0million. CRC Loan On 22 December 2006 SkyePharma PLC, SkyePharma AG, Jagotec AG, SkyePharmaHolding AG, SkyePharma Production SAS, Jago Holding AG and SkyePharma ManagementAG entered into a facility agreement and associated documentation with aspecialist lending entity, domiciled in Ireland ("CRC"), advised byChristofferson, Robb & Company LLC, for a 10 year secured amortising loanfacility. The transaction included the following elements: (i) initial commitments of $35.0 million and €26.5 million are repayable over 10years based on a minimum amortisation schedule. Such schedule was based onexpected receipts from milestones and royalties in respect of Coruno(R),Lodotra(TM) and Requip(R) Once-a-day; In the event that the cumulativemilestones and royalties from these products exceed the minimum principal andinterest payments, the excess will be applied to repay principal early withoutpenalty; (ii) interest was charged on a quarterly basis at the respective three month USLIBOR and EURIBOR rates plus a 5.85% margin; (iii) the loan facility was secured by a comprehensive security package,including: pledges of shares of certain key subsidiaries, charges over certainbank accounts, charges over certain intra-group debts, a floating charge overthe assets of SkyePharma PLC and an assignment (once certain consents areobtained) of receivables in respect of Coruno(R), Lodotra(TM) and Requip(R)Once-a-day. Flutiform(TM) is not directly included in the security package; (iv) there is a comprehensive covenant package, including a negative pledge, sofurther security over the Group's assets may not be granted, nor may certainother transactions that could affect CRC's security and risk be entered into,without prior consent from CRC; and (v) provision for the facility to be increased by a further $15.0 millionsubject to due diligence and progress with a specific product development. The facility agreement was amended on 23 March 2007 to include the followingadditional elements: (i) the interest rate on the first €7.5 million of the Euro facility wasincreased to three month EURIBOR plus 10.85%; (ii) charges over receivables in respect of Coruno(R), Lodotra(TM) and Requip(R)Once-a-day until assignments over these receivable were implemented; (iii) an assignment or charge over receivables in respect of Sular(R) and ZYFLOCR(TM); (iii) charges over bank accounts into which receivables of Coruno(R),Lodotra(TM), Requip(R) Once-a-day, Sular(R) and ZYFLO CR(TM) are paid; (v) the loan must be prepaid in certain circumstances, including 50% of anymilestone payments for any Flutiform(TM) license agreements or 50% of anysigning fees with respect to Flutiform(TM) license agreements entered into withregard to any unlicensed territory, in each case received after 1 January 2009(or on FDA approval if earlier), in an amount up to $10.0 million. Any suchrepayment would be part principal and part a make-whole amount based on a pre-agreed calculation designed to compensate for loss of future margin; (vi) a number of additional covenants and consents that are in line with thePaul Capital refinancing; (vi) a royalty-free, fully-paid up and worldwide license or sublicense, asapplicable, subject to third party rights, in favour of CRC limited to the rightto grant sublicenses (through multiple tiers) under the intellectual property inCoruno(R), Lodotra(TM) and Requip(R), which becomes operable following an eventof default and certain other circumstances. The Directors believe that these changes did not substantially modify theliability. Half of the committed principal on each loan was drawn down in January 2007 anda further $11.5 million and €9.0 million was drawn down in March 2007. Thebalance of approximately £6.5 million was drawn down in December 2007 to give anoutstanding balance as of 31 December 2007 of approximately £36.2 million (netof £0.9 million of costs). Finance lease liabilities Obligations under hire purchase and finance leases are secured upon the assetsto which they relate and as at 31 December 2007 £0.1 million (2006: £Nil) isguaranteed by SkyePharma PLC. 11 Provisions As at As at 31 December 2007 31 December 2006Group £m £mBeginning of the year 1.9 1.9Exchange 0.2 (0.1)Actuarial losses - 0.1Charge for the year 0.1 - _____ _____End of the year 2.2 1.9 _____ _____ The provision relates to the Group's retirement commitments under its definedbenefit scheme in respect of its employees in Switzerland and the Group'sleaving indemnity commitments in respect of its employees in France under Frenchlaw. This information is provided by RNS The company news service from the London Stock Exchange
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