20 Sep 2007 07:03
Skyepharma PLC20 September 2007 Interim Results Announcement for the Six Months Ended 30 June 2007 SkyePharma PLC (LSE: SKP) LONDON, ENGLAND, 20 September 2007 Summary of Unaudited Results for the six months ended 30 June 2007 H1: 2007 *H1: 2006 £'m £'mContinuing operations Revenue from continuing operations 19.7 21.4 Operating loss from continuing operations before exceptionals 8.8 11.2Loss before tax from continuing operations after exceptionals 14.1 15.8 The loss is arrived at after charging R&D expenditure 13.8 14.2 Discontinued operationsOperating loss from discontinued operations (before exceptionals) 4.4 11.0Loss before tax from discontinued operations after exceptionals 5.4 11.0 Net debtTotal debt less cash (including convertible bonds at period end) 105.7 111.7 *Restated - see Financial Review section Highlights • Sale of Injectable Business completed in March 2007 • Completion of major financial restructuring: liquidity at 30 June 2007: £48.4 million (31 December 2006: £46.2 million) • Further progress with FlutiformTM: o existing Phase III trials for US nearly fully recruited o additional clinical work for US being planned o plan to file in Europe and US in H2, 2008 • Good progress with near term pipeline products - 2 key regulatory filings and 2 key approvals Dr Jerry Karabelas, Non-Executive Chairman, said: "Substantial progress has beenmade in the first half to reshape the Group, focus the activity on oral andinhalation products, ensure that the Company has adequate financial resources tomeet its objectives, and ensure the timely completion of the FlutiformTM PhaseIII program. Although there is an unexpected delay to the planned date forfiling FlutiformTM in the US to the second half of 2008, the Board continues tohave confidence in the potential for significant growth being created forshareholders in the coming years. This growth will arise from thecommercialisation of FlutiformTM by our partners, the continued contributionfrom the royalties of our eleven approved products, and the further developmentof our pipeline." The results presentation has been published on the Company's website and awebcast of the analysts' conference will be available shortly after thatconference 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 Company has eleven 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 With the disposal of the Injectable Business in March, the Group is now clearlyfocused on oral and inhalation products and drug delivery technologies.Substantial progress continues to be made with the FlutiformTM development,notwithstanding the unexpected delay to the US FDA filing date. The Board hasconfidence in the potential for substantial growth being created forshareholders over the coming years due to the prospects for FlutiformTM, theother products in development and the eleven approved products. Consolidated results The Continuing Operations (being the Group excluding the Injectable Business)achieved revenues of £19.7 million in the first half of the year, 8% below the£21.4 million reported for the same period in 2006. This reduction was primarilydue to exchange rate fluctuations. Revenues included royalty income fromapproved products of £8.2 million (H1 2006: £9.3 million). Half of the £1.1million decrease of royalty income was due to exchange translation effects andthe balance largely arose from reduced sales and royalty rates following theentry of generic competition to Xatral(R) OD in Europe. The Continuing Operations incurred an operating loss of £8.8 million (H1 2006:loss of £11.2 million), a reduction of 19%. The loss was after charging £13.8million (H1 2006: £14.2 million) for internally funded research and development,mainly on FlutiformTM. After net finance costs, the Continuing Operationsincurred a loss before tax of £14.1 million (H1 2006: £15.8 million). The disposal of the Injectable Business (now called Pacira Pharmaceuticals Inc.)was completed on 23 March 2007. The loss after tax of the Injectable Businesswas £4.4 million in the period from 1 January 2007 to 23 March 2007 (in thefirst half of 2006 its loss after tax was £11.0 million) which is reported inthe result from Discontinued Operations. Following the impairment of goodwillof £37.0 million in 2006, the residual loss on sale of the Injectable Businesswas £1.0 million, included as an exceptional loss from Discontinued Operations. The net result for the Continuing Operations after finance charges and tax was aloss of £14.2 million (H1 2006: £16.0 million). Pipeline Products The Phase III trial program for FlutiformTM continues to make substantialprogress. The long-term safety study is now complete, the data is collated andwe expect to be able to use this data to support our regulatory filings. Thethree clinical efficacy trials which commenced in 2006 are nearly fullyrecruited and we expect that we will be able to complete recruitment and havethe results of these in the first quarter of 2008. As announced on 6 August2007 the Company held a pre-NDA (New Drug Application) meeting in July with theFDA to discuss the planned regulatory filing. The meeting covered the clinical,non-clinical and Chemistry, Manufacture and Control ("CMC") development aspectsof the project. Unexpectedly, the FDA queried one particular aspect of thedesign of the clinical trial programme. Working with our US partner, Abbott,and our outside consultants, we have held further discussions with the FDA and,as announced on 11 September 2007, we have agreed on an approach for theadditional clinical work required, which will include a further study to providemore efficacy data. Discussions with the FDA are ongoing in relation to thedesign of this study and will be finalised after submission of supporting CMCdata. Our discussions with the FDA have given us increased confidence on allother aspects of the planned filing, which includes the CMC section of the NDA.The anticipated date for filing of the FlutiformTM NDA is the second half of2008. The European clinical trials supporting regulatory approval of FlutiformTM inEurope remain on track. The European trials include extending the indication topaediatric patients and to a higher dose strength. Good progress also continues to be made with a number of SkyePharma's otherdevelopment products. The clinical trial programme for our new formulation ofSular(R), nisoldipine CR, a calcium channel blocking agent for the treatment ofhigh blood pressure being developed with Sciele Pharma, was successfullycompleted in May. Sciele filed a supplemental NDA with the FDA at the end ofJune which has a Prescription Drug User Fee Act (PDUFA) date of 2 November 2007.Launch is expected in 2008. SkyePharma is manufacturing the product forSciele. Zyflo CR TM, which is licensed to Critical Therapeutics, was approved in May bythe FDA for marketing in the USA. It is expected that this novel treatment forasthma will be launched by Critical Therapeutics, together with its co-promotionpartner Dey L.P., in the autumn of 2007. SkyePharma is manufacturing theproduct for Critical Therapeutics. During the first half the Group has embarked upon a number of new feasibilityprojects, with various partners, using our wide range of oral and inhalationdrug delivery technologies. We are aiming for these and other projects to leadto further development and licensing agreements. Commercial developments In June 2007 we entered into an exclusive agreement with Somnus Therapeutics forthe worldwide development and commercialisation of the sleep therapeuticSKP-1041. Under the terms of the agreement, SkyePharma could receive up toUS$35 million in milestone payments and will also receive a royalty on futuresales escalating upwards from high-mid single digit. NASDAQ listing In May, the Company delisted from NASDAQ. This will reduce future costs byapproximately £0.5 million per annum by removing the need for continuedcompliance with Section 404 of the Sarbanes-Oxley Act of 2002, other reportingrequirements required with a US listing and associated legal and audit services.The Company continues to comply fully with the corporate governancerequirements associated with being listed on the London Stock Exchange.SkyePharma has maintained its American Depositary Receipt (ADR) facilityrelating to the American Depositary Shares ("ADS") with The Bank of New York.The ADS's are traded over-the-counter in the United States. Financing As at 30 June 2007 SkyePharma had cash of £41.4 million and total liquidity(cash plus undrawn facilities) of £48.4 million compared with £11.9 million netcash and £47.5 million total liquidity at 31 December 2006. The increase in cashis primarily due to the partial drawdown on the CRC loan facility and receipt ofthe £14.8 million net proceeds from the placing which took place in March 2007. As previously announced and described in more detail in the Operating andFinance Review below, in March, the Group renegotiated its agreements with PaulCapital from the sharing of royalties from a number of specified products into afixed amortisable note ("Note"). As well as facilitating the sale of theInjectable Business this has helped to simplify and give better transparency tothe financing of the business. Due to the nature of the Note it has alsosignificantly reduced the future financing costs in respect of the obligationsto Paul Capital. We are working on detailed plans for refinancing the convertible bonds so thatthe earliest redemption dates are extended to more closely follow the liquidityprofile of the Group. We will continue to keep under review various workingcapital and non-equity finance initiatives should these be necessary in theperiod prior to the anticipated approval of FlutiformTM in the second half of2009. Board In July, 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, most recently asPresident and Chief Operating Officer of Yamanouchi Europe, the largest Japanesepharmaceutical company in Europe. The Company is committed to bringing furtherdepth and experience to its Board and continues to seek to appoint an additionalnon-executive director. Long term incentive plans The Extraordinary General Meeting on 4 May approved a new long term incentiveplan for executive directors and senior management under the Skyepharma PLC 2007Long Term Incentive Plan. The plan was put in place following consultation withmajor long-term shareholders. As a result of this consultation, the initialaward requires substantial growth in share price over a three year period beforeany awards fall due. We believe that the implementation of this plan providesthe appropriate incentives to executive management in alignment with theinterests of the shareholders. Outlook We are not expecting revenues in the second half of 2007 to be significantlydifferent from the first half whereas costs are expected to ramp-up due toincreased rate of development expenditure on FlutiformTM. Over the next 12months we are expecting further country by country launches of Pulmicort(R)HFA-MDI and launches of Requip(R) Once-a-day, ZYFLO CRTM, LodotraTM andnisoldipine CR, which should lead to growth in revenues during 2008. Ourobjective remains to move into operating profit (before finance costs) duringthe course of 2008 and we reiterate our target to move into profit (after tax)in 2009. Dr Jerry Karabelas Non-Executive Chairman OPERATING AND FINANCIAL REVIEW REVIEW OF PRODUCTS Inhalation Products FlutiformTM HFA-MDI FlutiformTM HFA-MDI is a fixed-dose combination of formoterol and the inhaledsteroid fluticasone in a metered dose inhaler ('MDI'). The product uniquelyincorporates the fastest onset long-acting beta-agonist (formoterol) with themost commonly prescribed steroid (fluticasone) in combination with anenvironmentally friendly aerosol propellant ('HFA') and is being developed forasthma. FlutiformTM is aimed at the market for combination steroid andlong-acting beta-agonist inhalers which is forecast to be approximately US$10billion worldwide (including US$8 billion in the US) by 2010, which is when weexpect FlutiformTM to be in the market in both the US and Europe. Progress on the FlutiformTM clinical development has been addressed in theChairman's Statement and a summary of the developments costs is covered underResearch and Development Expenses, in the Financial Review section below. Abbott has exclusive rights to market FlutiformTM, once approved, in the US anda right of first negotiation for Canada. The contract provides for the Group toreceive up to US$165 million (£82.2 million) in milestone payments, of whichUS$25 million (£12.5 million) was received upfront, up to US$80 million (£39.9million) are receivable up to and including approval and up to US$60 million(£29.9 million) are sales-related. In addition the Group will earn royaltiesstarting in the mid teens on net sales by Abbott. We are managing and fundingthe trials needed for approval of FlutiformTM in adult asthma while, if itchooses to do so, Abbott is responsible for managing and funding the trialsneeded for all other indications, including chronic obstructive pulmonarydisease (COPD) and paediatrics as well as marketing studies. Mundipharma has exclusive rights in Europe and other territories outside theAmericas and Japan. The contract provides for the Group to receive up to €82million (£55.2 million) in milestone payments, of which €15 million (£10.1million) was received upfront, up to €12 million (£8.1 million) payments areearmarked to cover specific development costs, up to €15 million (£10.1 million)on launch and up to €40 million (£26.9 million) are sales related. In addition,the Group will earn royalties as a percentage escalating from 10% on net sales.Mundipharma is also conducting, at its own expense, additional clinical trialsneeded for regulatory approval in Europe and to extend the indication topaediatric patients and to a higher dose strength. The European clinical trialssupporting regulatory approval of FlutiformTM in Europe remain on track. Thecosts of these studies will be recouped from future royalty and milestonepayments to SkyePharma. Pulmicort(R) HFA-MDI This new HFA-MDI containing AstraZeneca's inhaled corticosteroid Pulmicort(R)(budesonide), which was developed for territories outside of the US, was filedfor marketing authorization in June to September 2005 on a country-by-countrybasis in Europe for the treatment of asthma. The HFA-MDI will replace thecurrently available CFC MDI formulation of Pulmicort(R). The product has beenapproved in 12 countries of which 4 have been approved since the start of 2007,and has now been launched in 6 countries - in 2006 in Latvia and in 2007 inFinland, Denmark, Hungary, Portugal and Spain. SkyePharma earns a mid teensroyalty on AstraZeneca's net sales of Pulmicort(R) HFA-MDI. Foradil(R) CertihalerTM The Foradil(R) CertihalerTM is the multi-dose dry powder inhaler version ofNovartis's long-acting beta-2-agonist Foradil(R) (formoterol fumarate). Themodified inhaler was approved by the FDA in December 2006. We are indiscussions with Novartis regarding the commercialisation of Foradil(R)CertihalerTM, potentially involving third parties. We are also exploring otheravenues for potential applications for the SkyeHaler device. Oral and Topical Products Paxil CRTM Paxil CRTM is an improved formulation of the anti-depressant Paxil(R) developedby SkyePharma with GlaxoSmithKline ("GSK") using SkyePharma's GeomatrixTMtechnology. Sales of Paxil CRTM in the first half of 2007 were US$154 million,down by 2% compared with the first half of 2006. The majority of these saleswere in the US on which we earned a royalty of 4%. A new US patent covering adelayed and controlled release formulation of paroxetine hydrochloride (PaxilCR) was issued to GSK in June 2007 and filed in the FDA Orange Book. On 25thJune GSK filed an action in the US District Court for the District of New Jerseyagainst Mylan Pharmaceuticals Inc. ("Mylan") for infringement of that newlyissued patent, including a motion for a temporary restraining order (TRO)preventing Mylan from launching its generic form of Paxil CR. A hearing washeld on GSK's motion for the TRO on 26 June 2007 but as of the date of thisreport there has been no final ruling on that motion. Mylan received final FDAapproval for its generic version on 29 June 2007. Mylan has agreed not tolaunch its version until a hearing on a preliminary injunction has been held oruntil the motion for the TRO has been resolved. Xatral(R) OD Xatral(R) OD (Uroxatral(R) in the US) is our once-daily version ofSanofi-Aventis' Xatral(R) (alfuzosin), a treatment for the urinary symptoms ofbenign prostatic hypertrophy. In the first half of 2007, reported sales of allforms of Xatral(R) were €167 million, down 7.7% (on a comparable basis) on thefirst half of 2006. European sales have been affected by generic competitionafter the expiry of a key European patent in May 2006, with sales for H1 2007reported as €86 million, down by 28.3%. This decline was partially offset bystrong growth in the US, where sales of Uroxatral(R) were €53 million, up 35.9%. Sales in other countries were also up 27.3% to €28 million. SkyePharma earnslow single digit royalties on net sales of Xatral(R) OD (Uroxatral(R)). Solaraze(R) Solaraze(R) (diclofenac), our topical gel treatment of actinic keratosis, ismarketed in the US by Doak Dermatologics, a subsidiary of BradleyPharmaceuticals Inc. US sales by Bradley in the first half of 2007 wereapproximately US$12.4 million (£6.2 million), up by approximately 24% on thefirst half of 2006. Sales in Europe and certain other territories by Shire plcwere US$6.8m, down 1% down on the first half of 2006. Both partners areactively involved in public campaigns to raise awareness of the risks posed byactinic keratosis, which is considered by experts to be an early form of skincancer. The product has recently been approved in Australia and we expectlaunch later this year. SkyePharma receives a low teens royalty on relevant netsales. Triglide(R) Triglide(R) (fenofibrate), an oral treatment for elevated blood lipid disorders,is marketed in the US by Sciele Pharma, Inc. and was launched in July 2005.Triglide(R) new prescriptions increased 48% and total prescriptions increased59% in the second quarter of 2007 compared with the second quarter of 2006.Triglide(R) had a 2.4% market share of new prescriptions and a 1.9% share oftotal prescriptions in the second quarter of 2007. SkyePharma receives 25% ofSciele's net sales, out of which we pay for manufacturing. In May 2007, Scielelicensed a fenofibrate product in 120mg and 40mg dosage strength from LifeCyclePharma A/S, which was approved by the FDA in August 2007 and is expected to bethe lowest dose of fenofibrate currently available for patients, although thecurrent approval requires it to be taken with meals. SkyePharma has enteredinto an agreement with Sciele to allow the launch of the LifeCycle product priorto 31 July 2008, which would otherwise have been precluded under the currentTriglide(R) license agreement between SkyePharma and Sciele. Under theseagreements, SkyePharma will make no further marketing contributions in respectof Triglide(R) to Sciele, which has agreed to purchase and distribute minimumnumbers of samples of Triglide(R) and to share revenues from the LifeCycleproduct. The share of revenues starts at 8% and reduces to 4% from 31 July 2008to 31 December 2009, or 1% if SkyePharma manufactures the LifeCycle product.Sciele intends to promote both Triglide(R) and the LifeCycle product. Requip(R) Once-a-day Requip(R) (ropinirole) as a once daily formulation for Parkinson's disease wasdeveloped in partnership with GlaxoSmithKline. Requip(R) Once-a-day was filedfor approval at the end of 2005 in Europe, and the French Ministry of Health wasthe first major European market to grant regulatory approval in March 2007(branded RequipTM LP) with further approvals expected in the coming months. TheUS new drug application for Requip(R) XL 24-hourTM was accepted for filing bythe FDA in April 2007. SkyePharma will earn low-mid single digit royalties onnet sales of Requip(R) Once-a-day. GlaxoSmithKline's sales of Requip(R), theimmediate release form for both Parkinson's disease and restless leg syndrome,in the first six months of 2007 were £164 million, up by 45% (at constantexchange rates) on the prior year. Parkinson's disease makes up about 40% ofcurrent Requip(R) sales in the United States. ZYFLO CRTM (zileuton) Extended-Release Tablets We have developed a controlled release formulation of the oral asthma drugzileuton for Critical Therapeutics. The controlled release formulation ofzileuton, ZYFLO CRTM (zileuton) extended-release tablets, taken twice daily,utilises our GeomatrixTM technology, and was approved by the FDA in May 2007.Critical Therapeutics expects to begin marketing ZYFLO CRTM in the U.S. togetherwith its co-promotion partner, Dey, L.P. in the autumn of 2007. SkyePharmawill receive a high-mid single digit royalty on net sales and manufacture theproduct at its plant in Lyon, France. LodotraTM LodotraTM, developed together with Nitec Pharma AG, is a novel modified-releaseformulation of prednisone, a widely-used anti-inflammatory drug for thetreatment of rheumatoid arthritis. With our GeoclockTM delivery system the drugcan be taken at bedtime, but the active substance only gets released in theearly hours of the morning, the optimum time point to treat morning symptomssuch as stiffness and pain due to the inhibition of inflammatory cytokines.Nitec filed the product in Europe in 2006 and approval is now expected in early2008. Merck KGaA will market the product in Germany and Austria. Nitec iscurrently in negotiations with potential licensees for other markets.SkyePharma will receive a mid single digit royalty on net sales and manufacturethe product at its plant in Lyon. Nisoldipine CR In May 2006 we entered into an agreement with Sciele Pharma (our US licensee forTriglide(R)) to develop an improved version of Sciele's leading product Sular(R), a calcium channel blocker antihypertensive. The clinical trial programmewas successfully completed in May 2007, was filed for approval as planned at theend of June and has a Prescription Drug User Fee Act (PDUFA) date of 2 November2007. The study results showed that the new Sular(R) formulation isbioequivalent to Sciele's currently marketed Sular(R). SkyePharma will receivea low mid single digit royalty on net sales of nisoldipine CR. SkyePharma willalso receive a total of up to US$5 million (£2.5 million) in milestone payments. US$3 million (£1.5 million) has been paid to date and up to US$2 million (£1million) will be paid upon approval in the US, which is expected in 2008.SkyePharma will also be manufacturing nisoldipine CR on a new line which isbeing installed by Sciele in our Lyon manufacturing facility. SKP-1041 On 26 June 2007, SkyePharma announced that it has entered into an exclusiveagreement with Somnus Therapeutics ('Somnus') for the worldwide development andcommercialisation of its hypnotic SKP-1041. SKP-1041 is a new controlled releaseformulation of a non-benzodiazepine chemical utilising SkyePharma's GeoclockTMtechnology. As part of the agreement, SkyePharma will formulate andmanufacture SKP-1041. Under the terms of the agreement, SkyePharma couldreceive up to US$35 million in milestone payments, of which US$4 million wasreceived on signature, up to US$11 million is payable during the developmentphase, mainly on product approval and US$20 million is sales-related.SkyePharma will also receive a royalty on future sales escalating upwards fromhigh-mid single digit. In addition, Somnus will be responsible for the majorityof the development and clinical trial costs. In line with most oral drugdelivery programmes, the development is expected to take several years. FINANCIAL REVIEW Continuing Business and Discontinued Operations The Injectable Business, which was sold on 23 March 2007, is included asDiscontinued Operations in line with the 2006 accounts. Accordingly theconsolidated income statement shows the net results of the Injectable Businessseparately (described as Discontinued Operations) and all other lines (includingrevenues, gross profit and operating loss) are for the Continuing Operations.The comparative six month period to 30 June 2006 in the consolidated incomestatement has been re-stated accordingly and, except where otherwise stated, allcommentary in the Chairman's Statement and the Operating and Financial Reviewrelates to the Continuing Operations. Restatement - prior period error As set out in Note 1(i) the comparative figures for 2006 have been restated tocorrect a prior period error relating to exchange translation gains byreallocating them between the profit and loss account and translation reserve inequity. The adjustment has no effect on Total Shareholders' Equity in thecurrent year or prior periods. All figures in the Chairman's Statement andOperating and Financial Review reflect the restated figures. Revenue Revenues of £19.7 million for the first six months of 2007 were slightly belowthe £21.4 million for the first half of 2006, largely due to exchange ratetranslation effects. Revenues recognised from license signing and milestone payments amounted to £5.9million in 2007 compared with £7.7 million in 2006. For the six months of thecurrent financial year the Group has recognised, in respect of FlutiformTM, afurther £3.6 million of the upfront payment by Kos (now Abbott) (cumulatively£9.3 million from a total of £12.5 million (US$25.0 million)) and £1.6 millionfrom the upfront payment by Mundipharma (cumulatively £2.8 million from a totalof £10.1 million (• 15 million)). Contract research and development revenues totalled £0.6 million (H1 2006: £1.1million) primarily relating to amounts received from Mundipharma to develop ahigher strength version of FlutiformTM for Europe. Royalty income was £8.2 million (H1 2006: £9.3 million), a reduction of £1.1million (12%). Half of the decrease was due to exchange translation effects andthe balance largely arose from reduced sales and royalty rates following theentry of generic competition to Xatral(R) OD in Europe. Manufacturing and distribution revenue increased by £1.7 million to £5 million,compared with £3.3 million in the first half of 2006. The revenue for the firsthalf of 2007 included a £2.5 million (H1 2006: £nil, H2 2006: £3.4 million)contribution from Novartis towards maintaining capacity for Foradil(R)CertihalerTM, of which a substantial part was passed onto a sub-contractor formaintaining its capacity. Deferred income During the first half of 2007, there was a net decrease in deferred income of£3.3 million as income has been recognised from upfront payments over the periodof development of products in excess of payment received - mainly in respect ofFlutiformTM. The movement in deferred income was as follows: 31 December 2006 Received Taken to 30 June 2007 income £m £m £m £m Deferred income 18.2 1.7 (5.0) 14.9 _____ _____ _____ _____ Cost of sales Cost of sales comprises expenditure on research and development conducted forthird parties including the costs of directly funded clinical trials incurred onbehalf of our collaborative partners, the direct costs of contractmanufacturing, direct costs of licensing arrangements and royalties payable.Cost of sales decreased by £1.2 million to £7.4 million in 2007, of which £1.6million related to payments to a subcontractor for capacity maintenance inrespect of Foradil(R) CertihalerTM. Gross profit decreased 4% to £12.3 millioncompared with £12.8 million in 2006. Selling and administration expenses Selling, marketing and distribution expenses mainly comprise Triglide(R)marketing contribution costs, and decreased from £1.6 million in 2006 to £0.4million in 2007. Under an agreement reached with Sciele in May 2007, no furthermarketing contributions are payable in respect of Triglide(R). Administration expenses for the Continuing Operations were £6.9 million in 2007compared with £8.6 million for the first half of 2006. The reduction is due toexchange translation effects coupled with cost reduction measures taken during2006. 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 half year decreased by £0.4 million to£13.8 million, and included £11.5 million on developing FlutiformTM. Asindicated in the AGM statement on 29 June, the pace of recruitment for the PhaseIII trials for FlutiformTM in the US reduced during Spring 2007, due tocompetition for patients during the allergic rhinitis season, and this resultedin the rate of spend in the first half of the year being lower than planned.The actions which have been taken to expedite the clinical trials and associatedactivities to assure the timely filing of FlutiformTM have increased theexternal costs of the total programme by approximately £5 million. In addition,as announced on 6 August 2007, it is estimated that the extra clinical work nowrequired by the FDA will cost in the order of £3 million to £5 million, net ofthe cash contribution from Abbott, which will recoup its contribution out of themilestone due on US approval. Further development work is being carried out for Europe on a higher strengthversion of FlutiformTM 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 for paediatricsand to compare FlutiformTM with an existing marketed product. These are beingpaid for by Mundipharma but part funded by SkyePharma from a milestone of €12million (£8.1 million), the balance of which is payable to SkyePharma at the endof the trials. Sale of Injectable Business In March 2007, SkyePharma sold the Injectable Business to Blue Acquisition Corp(now called Pacira Inc.) for an initial cash consideration of US$20 million(less costs of US$2 million paid into escrow, a working capital adjustment andcertain liabilities) and deferred consideration of up to US$62 million ofcontingent milestone payments as well as a percentage of sales for certainfuture products for a defined period of time. Subsequent to the sale theworking capital adjustment has been agreed and resulted in a reduction of thepurchase price of US$0.3 million which has been settled from the escrow account. As noted above, the Injectable Business also retained responsibility forcertain royalty based payments which, when made, will reduce SkyePharma's debtto Paul Capital. Following the impairment of goodwill of £37.0 million in 2006,the residual loss on sale was £1.0 million as detailed in note 5 to the interimfinancial statements. The loss on sale, which is shown as an exceptional lossfrom Discontinued Operations, has been calculated without taking account of anydeferred consideration in respect of DepoBupivacaineTM and Biologics products,since this depends on the successful outcome of the long-term developmentprogramme for DepoBupivacaineTM and identification, initiation and completion ofprogrammes for Biologics. The Injectable Business lost £4.4 million from 1January 2007 until the date of sale of 23 March 2007. Results The operating loss before exceptional items from Continuing Operations was £8.8million (H1 2006: £11.2 million). The improvement was principally due to thereduction in selling, marketing, distribution and other administration expensesdescribed above. The finance costs of £5.9 million (H1 2006: £7.0 million) includes £1.2 millioninterest payable on the CRC finance, £1.4 million (H1 2006: £3.5 million)interest attributable to the Paul Capital finance and £3.1 million (H1 2006:£3.2 million) interest payable on the convertible bonds. The finance charge inrespect of the renegotiated agreements with Paul Capital is substantially lessthan with the previous agreements due to the applicable discount rate being11.2% (based on the comparable CRC finance) compared with the 24.5% to 29.8%applicable to the original Paul Capital royalty sharing arrangements. The Group's income tax charge was £0.1 million, relating to provisions forirrecoverable witholding taxes. The Group has substantial tax losses, some ofwhich are subject to expiry dates, available for offset against applicablefuture profits. The loss for the half year after exceptionals from continuing operationsdecreased by £1.8 million to £14.2 million, due primarily to the decrease inadministration costs, offset by higher finance charges. The loss for the half year after exceptionals from Continuing and DiscontinuedOperations decreased by £7.4 million to £19.6 million, primarily due to the saleof the Injectable Business in March 2007, contributing three months of lossescompared with the full six months in H1 2006. The exceptional loss of £1.0million in H1 2007 was the result on the sale of the Injectable Business, fulldetails of which are disclosed in Note 5. Earnings per share The loss per share from continuing operations was 1.8 pence (H1 2006: loss pershare of 2.1 pence). As at 30 June 2007 there were 814,988,636 ordinary 10pence shares in issue. Cash flows In the first half of 2007 there was a net cash outflow from operating activitiesof £11.8 million, compared with £2.3 million in the first half of 2006. Duringthe year the Group received net proceeds on the disposal of the InjectableBusiness of £4.6 million, and receipts (net of costs) from the share issue andloan from CRC of £14.8 million and £28.5 million respectively. The Group paid £4.9 million of interest in H1 2007, mainly relating to theconvertible bonds. Interest received on cash deposits amounted to £1.2 million. Balance sheet The Group balance sheet as at 30 June 2007 shows total shareholders' equity of£55.1 million deficit (31 December 2006: £48.4 million deficit). The reductionin net equity has arisen mainly due to the £19.6 million loss from Continuingand Discontinued Operations. As set out in Note 1(i) the comparative figures for 2006 have been restated tocorrect a prior period error by reallocating exchange translation gains betweenthe profit and loss account and equity. Borrowings and liquidity As at 30 June 2007 SkyePharma had cash and cash equivalents of £41.4 million,compared with £11.9 million as at 31 December 2006. The increase in cash isprimarily due to the draw down on the CRC loan and receipt of the £14.8 millionnet proceeds from the placing which took place in March 2007. In addition tothe net cash, SkyePharma had £7.0 million of undrawn facilities as at 30 June2007, giving total liquid funds available of £48.4 million. Paul Capital Finance In March 2007, in conjunction with the disposal of the Injectable Business, theGroup renegotiated its agreements with Paul Capital from a share of royalties ofcertain products into a fixed amortisable note ("the Note") of US$92.5 million(£46.1 million) with up to an additional US$12.5 million (£6.2 million) payableif worldwide sales of DepoDurTM (a product of the Injectable Business) reachcertain thresholds. The Note is repayable in accordance with an amortisationschedule through to 2015. The Injectable Business has been sold on the basis that it retainsresponsibility to Paul Capital for its existing obligations to make paymentsbased on sales of DepoCyt(R) and DepoDurTM and, to the extent that payments aremade in respect of these, the continuing Group's liability under the Note willbe reduced accordingly. The amount of the Continuing Group's liabilitytherefore depends on estimates of the sales of DepoCyt(R) and DepoDurTM by theInjectable Business, now called Pacira Pharmaceuticals Inc ("PaciraPharmaceuticals"). In August 2007 it was announced that EKR Therapeutics, Inc.had acquired the marketing and distribution rights for DepoDurTM for North,South and Central America from Pacira Pharmaceuticals. Sales of DepoCyt(R)continued to be steady in the first half of 2007. At 30 June 2007 the net present value of the liability (net of anticipatedpayments by Pacira Pharmaceuticals to Paul Capital), discounted at an annualrate of 11.2%, is US$43.9 million (£22.0 million) compared with the value ofUS$47.6 million (£24.3 million) for the previous agreements included in the 31December 2006 balance sheet. As noted above, the finance charge in respect ofthe renegotiated agreements with Paul Capital is substantially less than theprevious agreements. 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 to give an outstandingloan balance as of 30 June 2007 of £28.5 million. The remainder of the facilitywill be drawn down by December 2007. Other borrowings Bank and other borrowings amounted to £7.0 million at 30 June 2007 (31 December2006: £9.7 million), consisting principally of a property mortgage secured onthe assets of certain Swiss subsidiaries. Convertible bonds The Group holds convertible bonds comprising £69.6 million 6% convertible bondsdue May 2024 and £20.0 million 8% convertible bonds due June 2025 outstanding asat 30 June 2007. Of the total convertible bonds, a value of £64.4 million isincluded in liabilities and £28.5 million in equity in the consolidated balancesheet as at 30 June 2007. The Board is seeking to refinance these bonds wellbefore the first repayment date of May 2009 in order to ensure that the earliestrepayment dates are extended to match more closely the Group's expected cashinflows. Going concern basis The Directors have reviewed the working capital requirements for the next twelvemonths, together with various available working capital and non-equity financeinitiatives should these be necessary in the period prior to the anticipatedapproval of Flutiform in the second half of 2009. Following this review theDirectors have a reasonable expectation that the Group has adequate resources tocontinue in operational existence for the foreseeable future. Auditors' review conclusion The results for the period to 30 June 2007 have been formally reviewed andreported on by Ernst & Young LLP the Company's auditors. As in respect of theauditors' independent review conclusion on the unaudited statements for thefirst half of 2006 and the auditors report on the financial statements for 2006,the auditors' independent review report contains an emphasis of matter paragraphdrawing attention to the existence of material uncertainties which relate to2009, which could affect the Group's ability to continue as a going concern, andare outlined in Note 1 to the financial information included in the interimreport. The auditors' review opinion is not qualified in this regard. The auditors' conclusion is that, on the basis of their review, they are notaware of any material modifications that should be made to the financialinformation as presented for the six months ended 30 June 2007. Forward looking statements The foregoing discussions contain certain forward looking statements. AlthoughSkyePharma believes that the expectations reflected in these forward lookingstatements are reasonable, it can give no assurance that these expectations willmaterialise. Because the expectations are subject to risks and uncertainties,actual results may vary significantly from those expressed or implied by theforward looking statements based upon a number of factors. Such forward lookingstatements include but are not limited to, the timescales for regulatory timingsfor FlutiformTM, the statements under "Outlook" including the timescales for theroll out of new products and the objective for moving into operating profit andthe target for becoming profitable, the forecast sales of FlutiformTM, thedevelopment of new products, risks related to obtaining and maintainingregulatory approval for existing, new or expanded indications of existing andnew products, risks related to SkyePharma's ability to manufacture products on alarge scale or at all, risks related to SkyePharma's and its marketing partners'ability to market products on a large scale to maintain or expand market sharein the face of changes in customer requirements, competition and technologicalchange, risks related to regulatory compliance, the risk of product liabilityclaims, risks related to the ownership and use of intellectual property, andrisks related to SkyePharma's ability to manage growth. SkyePharma undertakesno obligation to revise or update any such forward looking statement to reflectevents or circumstances after the date of these Interim Financial Statements. CONSOLIDATED INCOME STATEMENT for the six months ended 30 June 2007 Unaudited 6 months to 30 June 2007 Unaudited 6 months to 30 June 2006 (restated) Notes Pre-exceptional Exceptional Total £million £million £million £millionRevenue 2 19.7 - 19.7 21.4Cost of sales (7.4) - (7.4) (8.6) _____ _____ _____ _____Gross profit 12.3 - 12.3 12.8Selling, marketing and distribution (0.4) - (0.4) (1.6)expensesAdministration expenses Amortisation of other intangibles (0.3) - (0.3) (0.7) Other administration expenses (6.6) - (6.6) (7.9) (6.9) - (6.9) (8.6)Research and development expenses (13.8) - (13.8) (14.2)Other income - - - 0.4 _____ _____ _____ _____Operating loss (8.8) - (8.8) (11.2)Finance costs 3 (5.9) - (5.9) (7.0)Finance income 3 0.6 - 0.6 2.6Share of loss in associate 0.0 - 0.0 (0.2) _____ _____ _____ _____Loss before income tax (14.1) - (14.1) (15.8)Taxation (0.1) - (0.1) (0.2) _____ _____ _____ _____Loss for the period from continuing (14.2) - (14.2) (16.0)operations _____ _____ _____ _____Loss for the period from discontinued 5 (4.4) (1.0) (5.4) (11.0)operations _____ _____ _____ _____Loss for the period from continuing and (18.6) (1.0) (19.6) (27.0)discontinued operations _____ _____ _____ _____ Basic and diluted earnings per share 4Continuing operations (1.8)p - (1.8)p (2.1)pContinuing and discontinued operations (2.4)p (0.1)p (2.5)p (3.6)p _____ _____ _____ _____ Audited 12 months to 31 December 2006 (restated) Notes Pre-exceptional Exceptional Total £million £million £million Revenue 2 43.0 - 43.0Cost of sales (18.0) - (18.0) _____ _____ _____Gross profit 25.0 - 25.0Selling, marketing and distribution (3.0) - (3.0)expensesAdministration expenses Amortisation 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 0.8 0.7 1.5 _____ _____ _____Operating loss (15.3) (13.0) (28.3)Finance costs 3 (14.1) - (14.1)Finance income 3 3.0 20.1 23.1Share of loss in associate - - - _____ _____ _____Loss before income tax (26.4) 7.1 (19.3)Taxation (0.8) - (0.8) _____ _____ _____Loss for the period from continuing (27.2) 7.1 (20.1)operations _____ _____ _____Loss for the period from discontinued 5 (22.0) (37.0) (59.0)operations _____ _____ _____Loss for the period from continuing and (49.2) (29.9) (79.1)discontinued operations _____ _____ _____ Basic and diluted earnings per share 4Continuing 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 Interim Financial Statements. CONSOLIDATED BALANCE SHEET as at 30 June 2007 Notes Unaudited Unaudited Audited 31 30 June 2007 30 June 2006 December 2006 (restated) (restated) £million £million £millionASSETSNon-current assetsGoodwill 29.2 68.7 29.2Other intangible assets 6.0 26.3 8.7Property, plant and equipment 23.7 34.9 25.1Available-for-sale financial assets 0.1 0.4 0.1 _____ _____ _____ 59.0 130.3 63.1Current assetsInventories 0.5 2.3 0.5Trade and other receivables 10.4 14.8 14.5Financial assets at fair value through profit or - 0.3 0.6lossCash and cash equivalents 41.4 22.8 11.9 _____ _____ _____ 52.3 40.2 27.5Non-current assets classified as held for sale - - 17.1 _____ _____ _____Total Assets 111.3 170.5 107.7 _____ _____ _____ LIABILITIESCurrent liabilitiesTrade and other payables (20.8) (26.9) (23.4)Other borrowings 6 (6.5) (4.3) (8.6)Deferred income (6.4) (12.0) (10.8) _____ _____ _____ (33.7) (43.2) (42.8)Non-current liabilitiesConvertible bonds 6 (64.4) (63.9) (64.1)Other borrowings 6 (51.0) (48.0) (25.4)Deferred income (8.5) (2.4) (7.4)Other non-current liabilities - (3.3) (0.2)Provisions (1.8) (1.6) (1.9)Deferred Tax (7.0) (7.6) (7.6) _____ _____ _____ (132.7) (126.8) (106.6)Liabilities directly associated with non-current - - (6.7)assets classified as held for sale _____ _____ _____ Total Liabilities (166.4) (170.0) (156.1) _____ _____ _____ Net (liabilities)/ assets (55.1) 0.5 (48.4) _____ _____ _____ SHAREHOLDERS' EQUITYShare capital 7 82.7 76.6 76.6Share premium 354.3 345.6 345.6Translation reserve 0.1 1.0 3.4Fair value reserve (0.2) (0.2) (0.2)Retained losses (521.9) (451.8) (503.1)Other reserves 29.9 29.3 29.3 _____ _____ _____Total Shareholders' Equity (55.1) 0.5 (48.4) _____ _____ _____ See Notes to the Interim Financial Statements. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE for the year ended 30 June 2007 Unaudited Unaudited Audited 6 months to 6 months to 30 12 months to 31 30 June 2007 June 2006 December 2006 (restated) (restated) £million £million £million Net currency translation effect (2.4) 2.2 4.3Available for sale financial assets Fair value movements taken to equity - (0.4) (0.2) Transfer to the income statement on disposal - (0.2)Actuarial gains on defined benefit plans 0.1 0.2 (0.1) _____ _____ _____Net (losses)/profits recognised directly in equity (2.3) 2.0 3.8Loss for the period from continuing operations (14.2) (16.0) (20.1)Loss for the period from discontinued operations (5.4) (11.0) (59.0) _____ _____ _____Total recognised income and expense for the period (21.9) (25.0) (75.3) _____ _____ _____ See Notes to the Interim Financial Statements. CONSOLIDATED CASH FLOW STATEMENT for the six months ended 30 June 2007 Note Unaudited 6 Unaudited 6 Audited 12 months to 30 months to 30 months to June 2007 June 2006 31 December 2006 (restated) (restated) £million £million £million Operating activitiesCash used in operating activities (a) (11.7) (2.1) (8.7)Income tax paid (0.1) (0.2) (0.3) _____ _____ _____Net cash used in by operating activities (11.8) (2.3) (9.0) Investing activitiesPurchases of property, plant and equipment (1.0) (1.4) (2.0)Purchases of intangible assets - (1.1) (1.4)Proceeds from disposal of financial assets 1.2 1.3 1.3Net proceeds from disposal of subsidiary 4.6 - - _____ _____ _____Net cash generated by/(used in) investing activities 4.8 (1.2) (2.1) Financing activitiesProceeds from share issue 14.8 - -Proceeds from loan drawdown 28.5 - -Repayments of borrowings (2.2) (6.5) (6.9)Interest paid (4.9) (3.1) (6.3)Interest received 1.2 0.7 1.0 _____ _____ _____Net cash generated from/(used in) financing activities 37.4 (8.9) (12.2) Effect of exchange rate changes (0.5) (0.1) (0.1) _____ _____ _____ Net increase/ (decrease) in cash and cash equivalents 29.9 (12.5) (23.4) _____ _____ _____ Cash and cash equivalents including bank overdraft at 10.6 34.3 34.3beginning of the period _____ _____ _____Net (decrease)/ increase in cash and cash equivalents 29.9 (12.5) (23.4)including bank overdraft _____ _____ _____Less cash and cash equivalents included in - - (0.3)discontinued operations _____ _____ _____Cash and cash equivalents including bank overdraft at 40.5 21.8 10.6end of the period _____ _____ _____ See Notes to the Interim Financial Statements. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT 1. (a) Cash flow from operating activities Unaudited Unaudited Audited 6 months to 6 months to 30 12 months to 31 30 June 2007 June 2006 December 2006 (restated) (restated) £million £million £million Loss for the period from continuing operations (14.2) (16.0) (20.1)Loss for the period from discontinued operations (5.4) (11.0) (59.0)Loss for the period from continuing and discontinued operations (19.6) (27.0) (79.1) Adjustments for: Tax 0.1 0.2 0.8 Depreciation 2.2 2.8 5.5 Amortisation 0.5 1.1 2.2 Impairments - - 46.6 Fair value loss/ (gain) on derivative financial instruments - 0.2 0.2 Finance costs 6.7 9.3 18.2 Finance income (0.6) (2.6) (23.1) Share of loss in associate - 0.2 - Loss on disposal of subsidiary 1.0 - - Profit on disposal of financial assets - (0.5) (0.6) Share based payments charge 0.6 - 2.5 Other non-cash changes - 1.5 1.6 _____ _____ _____Operating cash flows before movements in working capital (9.1) (14.8) (25.2) Changes in working capital Decrease/ (increase) in inventories - 1.3 2.1 Decrease/ (increase) in trade and other receivables 3.5 (0.8) (2.4) (Decrease)/ increase in trade and other payables (2.6) 8.2 6.5 (Decrease)/ increase in deferred income (3.3) 4.1 10.3 (Decrease)/ increase in provisions and other liabilities (0.2) (0.1) - _____ _____ _____Cash (used in) operations (11.7) (2.1) (8.7) _____ _____ _____ Notes to the Interim Financial Statements 1 Accounting policies General information (a) Basis of preparation The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") adopted by the European Union. All IFRS'sissued by the International Accounting Standards Board ("IASB") that wereeffective at the time of preparing the financial statements and adopted theEuropean Commission for use inside the EU were applied by SkyePharma. These condensed consolidated financial statements have been prepared inaccordance with IFRS and, the interpretations issued by the InternationalFinancial Reporting Interpretations Committee ("IFRIC") and with those parts ofthe Companies Act 1985 applicable to companies reporting under IFRS. Thefinancial statements have been prepared under the historical cost convention, asmodified by the revaluation of financial assets and financial liabilities. Thefinancial statements have been prepared using accounting policies consistentwith those adopted by the Group in its financial statements for the year ended31 December 2006 and in accordance with IAS 34 - Interim financial reporting. The following IFRIC's have been adopted for the period to 30 June 2007 but haveno impact on the group's existing accounting policies: IFRIC 8 Scope of IFRS 2 Annual periods beginning on or after 1 May 2006IFRIC 9 Reassessment of Embedded Derivatives Annual periods beginning on or after 1 June 2006IFRIC 10 Interim Financial Reporting and Annual periods beginning on or after 1 Impairment November 2006 The interim condensed consolidated financial statements do not include all theinformation and disclosures required in the annual financial statements and,therefore, should be read in conjunction with the Group's published financialstatements for the year ended 31 December 2006. These interim financial statements are unaudited and do not constitute statutoryfinancial statements within the meaning of section 240 of the Companies Act1985. The results for the period to 30 June 2007 have been formally reviewed andreported on by the auditors. The figures for the year ended 31 December 2006 arean extract from the audited financial statements for that period which have beendelivered to the Registrar of Companies and on which the auditors have issued anunqualified report which contained no statement under section 237 (2) or section237 (3) of the Companies Act 1985. Going concern As set out in Note 6, the Group has in issue £69.6 million bonds which may beconverted into Ordinary Shares at 95 pence per share, and may be called forrepayment by the bond holders at par as early as May 2009 and £20.0 millionbonds which may be converted into Ordinary Shares at 58 pence per share, and maybe called for repayment by the bond holders at par as early as June 2010. TheDirectors intend to seek to refinance these bonds well before May 2009 in orderto ensure that the earliest repayment dates are extended to match more closelythe Group's expected cash inflows. The ability to refinance the convertiblebonds in a timely and cost-effective manner will depend upon market conditionsas well as continued progress with the Group's business, especially thedevelopment of FlutiformTM. Although the application of drug deliverytechnologies to known molecules is lower risk than drug development, there canbe no absolute certainty that FlutiformTM will successfully complete developmentand be launched within the timescales and costs envisaged. This characteristic,which is common to the drug delivery business, was illustrated by the FDArequirement for additional clinical work to provide more efficacy data forFlutiformTM as announced on 6 August. Having carefully considered the variousrisks, the Directors continue to have reasonable expectations that theconvertible bonds can be successfully refinanced and that the development ofFlutiformTM can be completed in a timely manner and within the currentlyenvisaged costs. The Directors have reviewed the working capital requirements for the next twelvemonths, together with various available working capital and non-equity financeinitiatives should these be necessary in the period prior to the anticipatedapproval of Flutiform in the second half of 2009. Following this review, theDirectors have a reasonable expectation that the Group has adequate resources tocontinue in operational existence for the foreseeable future and have,therefore, prepared the financial information contained herein on a goingconcern basis. The financial statements do not reflect any adjustments thatwould be required to be made if they were to be prepared on a basis other than agoing concern basis. Use of estimates The preparation of the financial statements, in conformity with generallyaccepted accounting principles, requires the use of estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Although these estimates are based on management's bestknowledge of the amount, event or actions, actual results may ultimately differfrom those estimates. (b) Consolidation The underlying financial statements comprise a consolidation of the accounts ofthe Company and all its subsidiaries and include the Group's share of theresults and net assets of its associates. Inter-company transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. Unrealised losses are also eliminatedunless the transaction provides evidence of an impairment of the assettransferred. Subsidiaries' accounting policies have been changed where necessaryto ensure consistency with the policies adopted by the Group. (c) Segment reporting The Group's primary segment for IFRS segment reporting is the business segment.A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. Geographical regions are the secondary reporting segments. A geographic segmentis engaged in providing products or services within a particular economicenvironment that are subject to risks and return that are different from thoseof components operating in other economic environments. Segment reporting reflects the internal management reporting structure and theway the business is managed. (d) Revenue recognition Revenue comprises the fair value for the sale of goods and services, net ofsales taxes, rebates and discounts and after eliminating sales within the Group.Revenue is recognised as follows: License signing and milestone fees License signing and milestone fees represent amounts earned from licensingagreements, including up-front payments, milestone payments and technologyaccess fees. Revenues are recognised where they are non-refundable, the Group'sobligations related to the revenues have been discharged and their collection isreasonably assured. Refundable contract revenue is treated as deferred untilsuch time that it is no longer refundable. In general up-front payments aredeferred and recognised on a systematic basis over the period of development tofiling. Milestone payments related to scientific or technical achievements arerecognised as income when the milestone is accomplished. Contract research and development costs recharged Contract research and development recharged represents amounts earned forservices rendered under development contracts. Revenues are recognised in theperiod when they are earned. Royalty income Royalty income is recognised on an accruals basis and represents income earnedas a percentage of product sales in accordance with the substance of therelevant agreement. Manufacturing and distribution Manufacturing and distribution revenues principally comprise contractmanufacturing fees invoiced to third parties, income from product sales andother income derived from manufacturing and supply agreements. Revenues arerecognised upon transfer to the customer of significant risks and rewards,usually upon despatch of goods shipped where the sales price is agreed andcollectability is reasonably assured. (e) Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of acquisition. Goodwill is tested regularly for impairment andcarried at cost less accumulated impairment losses. Goodwill is allocated tocash generating units for the purpose of impairment testing. Each of those cashgenerating units represents the Group's investment in each country of operation. Intellectual property Intellectual property comprises acquired patents, trade marks, know-how andother similarly identified rights. These are recorded at their fair value atacquisition date and are amortised on a straight line basis over their estimateduseful economic lives from the time they are available for use. The period overwhich the Group expects to derive economic benefits does not exceed 20 years. Research and development Research expenditure is charged to the income statement in the period in whichit is incurred. Development expenditure is capitalised when the criteria forrecognition as an asset is met - when it is probable that the project will be asuccess, considering its commercial and technological feasibility and costs canbe measured reliably. Regulatory and other uncertainties generally mean thatsuch criteria are not met. Where development costs are capitalised they areamortised over their useful economic lives from product launch. Prior to productlaunch the asset is tested annually for impairment. Computer software Costs that are directly associated with the purchase and implementation ofidentifiable and unique software products by the Group are recognised asintangible assets. Expenditures that enhance and extend the benefits of computersoftware programmes beyond their original specifications and lives arerecognised as a capital improvement and added to the original cost of thesoftware. Direct costs include the software development employee costs and anappropriate portion of relevant overheads. Software costs are amortised overtheir useful economic lives, generally a period of 3 to 5 years. (f) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment. Assets that are subject to amortisation ordepreciation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognised for the amount by which the asset's carryingamount exceeds its recoverable amount. The recoverable amount is the higher ofan asset's fair value less costs to sell and value in use. Any impairment lossis charged to the income statement in the year concerned. For the purposes ofassessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash inflows (cash-generating units). The expected cash flows generated by the assets are discounted using assetspecific discount rates which reflect the risks associated with the groups ofassets. These risks vary with the nature and the location of the cash generatingunits. (g) Assets held for sale and discontinued operations Assets classified as held for sale are measured at the lower of carrying valueand fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if theircarrying amount will be recovered through a sale transaction rather than throughcontinuing use. This condition is regarded as met only when the sale is highlyprobable and expected to be completed within one year from classification andthe asset is available for immediate sale in its present condition. Disposal groups are classified as discontinued operations where they represent amajor line of business or geographical area of operations. The income statementfor the comparative period has been restated to show the discontinued operationsseparate from the continuing operations. (h) Deferred Tax Current tax is the expected tax payable on the taxable income for the year usingthe tax rates and laws that have been enacted or substantially enacted at thebalance sheet date, and any adjustment to tax payable in respect of previousyears. Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. Deferredtax assets are recognised to the extent that it is probable that future taxableprofits will be available against which the temporary differences can beutilised. Deferred income tax is determined using tax rates that have beenenacted or substantially enacted by the balance sheet date. Deferred tax assetsand liabilities are not discounted. The deferred tax liability appropriatelyreflects the change to the full rate of UK corporation tax from 30% to 28% whichwill become effective 1 April 2008. (i) Restatement - Prior Period Adjustment Following an internal review of accounting processes it has been identified thatthe previous practices have led to an incorrect allocation of exchangetranslation gains between profit and loss account and equity. The comparativefigures for 2006 have been restated to correct this as follows: -Other administrative expenses, operating loss and loss for the period haveincreased £1.4 million and £0.4 million for the year ended 31 December 2006 and6 months ended 30 June 2006 respectively. -Retained losses and cumulative translation reserves are increased by £1.6million as at 31 December 2006, £0.6 million as at 30 June 2006 and £0.2m as at31 December 2005. These adjustments have no effect on Total Shareholders' Equity. (j) Exceptional items Exceptional items are those significant items which are separately disclosed byvirtue of their size or incidence to enable a full understanding of the group'sfinancial performance. Transactions which may give rise to exceptional items areprincipally gains or losses on disposal of subsidiaries and impairment ofassets. (k) Interest-bearing loans and borrowings Obligations for loans and borrowings are recognised when the Group becomes partyto the related contracts and are measured initially at fair value less directlyattributable transaction costs. After initial recognition, interest-bearingloans and borrowings are subsequently measured at amortised cost using theeffective interest method. Gains and losses arising on the repurchase,settlement or otherwise cancellation of liabilities are recognised respectivelyin finance revenue and finance cost. Information about the group's principal borrowing facilities is given in note 6. 2 Segment information Primary reporting format - business segments The continuing operations business segment consists of the Oral and Inhalationbusiness. The discontinued operations business segment consists of theInjectable Business. Business segment data includes an allocation of corporatecosts to this segment on an appropriate basis. There are no materialinter-segment transfers. There is no significant seasonality to the results ofoperations which would affect interim results. Revenue by business segment: 6 months to 6 months to 12 months to 30 June 2007 30 June 2006 31 December 2006 (restated) £million £million £million Continuing operations 19.7 21.4 43.0Discontinued operations 0.8 4.2 6.3 _____ _____ _____Total revenue from continuing and discontinued 20.5 25.6 49.3operations _____ _____ _____ Revenue earned can be analysed as:License signing and milestone fees 5.9 7.7 12.7Contract research and development 0.6 1.1 1.6Royalties 8.2 9.3 18.1Manufacturing and distribution 5.0 3.3 10.6 _____ _____ _____Continuing operations 19.7 21.4 43.0Discontinued operations 0.8 4.2 6.3 _____ _____ _____Total revenue from continuing and discontinued 20.5 25.6 49.3operations _____ _____ _____ Operating loss by business segment: 6 months to 30 June 6 months to 30 June 12 months to December 2007 2006 (restated) 2006 (restated) £million £million £million Continuing operationsOperating loss pre exceptional items (8.8) (11.2) (15.3)Exceptional items - - (13.0) ____ ____ ____Operating loss (8.8) (11.2) (28.3)Share of loss in associate - (0.2) -Net interest (5.3) (4.4) 9.0Tax (0.1) (0.2) (0.8) ____ ____ ____Loss after tax from continuing operations (14.2) (16.0) (20.1)Loss after tax from discontinued operations (5.4) (11.0) (59.0) ____ ____ ____Loss after tax from continuing and (19.6) (27.0) (79.1)discontinued operations ____ ____ ____ 3 Finance costs and income 6 months to 6 months to 12 months to 30 June 2007 30 June 2006 31 December 2006 (restated)Continuing operations £million £million £millionInterest and similar expense:Interest: Bank borrowings (0.1) (0.3) (0.5) Paul Capital finance (1.4) (3.5) (6.9) CRC finance (1.2) - - Convertible bonds (3.1) (3.2) (6.3) _____ _____ _____Total interest expense (5.8) (7.0) (13.7)Translation differences (0.1) - (0.4) _____ _____ _____Total interest and similar expense (5.9) (7.0) (14.1) _____ _____ _____ Interest and similar income:Interest income 0.6 0.8 1.1Translation differences on finance facilities - 1.8 1.9Exceptional credit arising from change in the - - 20.1estimated future payments to Paul Capital _____ _____ _____Total interest and similar income 0.6 2.6 23.1 _____ _____ _____ 4 Earnings per share 6 months to 6 months to 12 months to 30 June 2007 30 June 2006 31 December 2006 (restated) (restated)Continuing operations £million £million £millionAttributable loss before exceptional items (14.2) (16.0) (27.2)Exceptional items - - 7.1 _____ _____ _____Basic and diluted attributable loss (14.2) (16.0) (20.1) _____ _____ _____ Continuing and discontinued operationsAttributable loss before exceptional items (18.6) (27.0) (49.2)Exceptional items (1.0) - (29.9) _____ _____ _____Basic and diluted attributable loss (19.6) (27.0) (79.1) _____ _____ _____ Number Number Number million million millionBasic and diluted weighted average number of 779.4 748.8 748.8shares in issue _____ _____ _____ Continuing operationsLoss per Ordinary Share before exceptional (1.8)p (2.1)p (3.6)pitemsExceptional items (0.0)p (0.0)p 0.9p _____ _____ _____Basic and diluted loss per Ordinary Share (1.8)p (2.1)p (2.7)p _____ _____ _____ Continuing and discontinued operationsLoss per Ordinary Share before exceptional (2.4)p (3.6)p (6.6)pitemsExceptional items (0.1)p (0.0)p (4.0)p _____ _____ _____Basic and diluted loss per Ordinary Share (2.5)p (3.6)p (10.6)p _____ _____ _____ There is no difference between basic and diluted loss per share since in aloss-making year all potential shares from convertible bonds, stock options,warrants and 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. 5 Disposal of Injectable Business The Injectable Business was that part of the Group's business focused on theformulation, development and manufacturing of controlled release injectableproducts, utilising two proprietary drug delivery platforms: DepoFoam andBiosphere, together with the related assets and liabilities. (a) Proceeds and result on disposal 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: i. of US$18 million (£9.2 million) at completion; ii. of US$2 million (£1.0 million) into an escrow account; and iii. an adjustment to the payments above based upon the net asset valueof the business at completion in relation to a specified target amount of thenet asset value. Subsequently this has been agreed resulting in a reduction inpurchase price of US$0.5 million (£0.3 million), which has been paid from theescrow amount. 2. Milestone payments, by Pacira to SkyePharma: i. US$10 million (£5.1 million) upon the first commercial sale in theUS of DepoBupivacaineTM; ii. US$4 million (£2.0 million) upon the first commercial sale ofDepoBupivacaineTM in a major country of the EU; iii. US$8 million (£4.1 million) if worldwide annual net sales ofDepoBupivacaineTM reach US$100 million (£51 million); iv. a further US$8 million (£4.1 million) if worldwide annual net salesof DepoBupivacaineTM reach US$250 million (£128 million); v. a further US$32 million (£16.3 million) if worldwide annual netsales of DepoBupivacaineTM reach US$500 million (£255 million). 3. Ongoing payments for the period of protection by existing patents,subject to certain conditions, to SkyePharma, of: i. 3% of worldwide net sales of DepoBupivacaineTM; and ii. 3% of worldwide net sales of Biologics (not to exceed 20% of theroyalty income of Pacira). In addition, Pacira Pharmaceuticals retains responsibility for making paymentsto Paul Capital related to sales of DepoCyt(R) and DepoDurTM. This obligationwas included as debt in the balance sheet of the Injectable Business. The loss on disposal of the Injectable Business was £1.0 million as analysedbelow: £ millionConsideration:Cash 10.2Purchase price adjustment (0.3) _____Total cash consideration 9.9Less: Disposal costs and provisions (5.3) _____Net proceeds 4.6Net assets of the Injectable Business at disposal (see note below) (8.2)Attributable goodwill (1.6)Realisation of translation reserve 4.2 _____Loss on disposal (1.0) _____ 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. (b) Results of discontinued operations 6 months to 30 June 2007 Pre - Exceptional Total Exceptional £million £million £million Revenue 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) (1.0) (1.7) (0.8) (1.0) (1.8)Research and development expenses (1.6) - (1.6) _____ _____ _____Operating loss (3.6) (1.0) (4.6)Finance costs (0.8) - (0.8) _____ _____ _____Loss for the year from discontinued operations (4.4) (1.0) (5.4) _____ _____ _____ Year to 31 December 2006 Pre - Exceptional Exceptional Total £million £million £million Revenue 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) _____ _____ _____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 in the 6 months to 30 June 2007 relates to the period 1 January 2007 to23 March 2007, being the date of disposal. 6 Borrowings As at As at As at 30 June 2007 30 June 2006 31 December 2006 £million £million £millionCurrentBank overdraft & borrowings 0.9 3.3 3.3Property mortgage 0.3 0.3 0.2Paul Capital finance 5.3 0.7 5.0Finance lease liabilities - - 0.1 _____ _____ _____Total current borrowings 6.5 4.3 8.6 Non-currentConvertible bonds due May 2024 51.4 51.0 51.2Convertible bonds due June 2025 13.0 12.9 12.9 _____ _____ _____Convertible bonds 64.4 63.9 64.1 Bank borrowings - 0.2 -Property mortgage 5.7 6.5 6.0Paul Capital finance 16.7 41.3 19.3CRC finance 28.5 - -Finance lease liabilities 0.1 - 0.1 _____ _____ _____Other non-current borrowings 51.0 48.0 25.4 _____ _____ _____ Total non-current borrowings 115.4 111.9 89.5 _____ _____ _____ Total borrowings 121.9 116.2 98.1 _____ _____ _____ Bank borrowings At 30 June 2007 bank borrowings include an amount due to theBasellandschaftliche Kantonalbank of £0.8 million (CHF 2 million). This loan canbe terminated with six weeks notice by either party and bears interest at 6.5%.The loan is secured on the assets of Skyepharma AG. 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 £69.6 million May 2024 bonds may be called forrepayment by the bond holders at par in May 2009, May 2011, May 2014 or May 2019and the £20.0 million June 2025 bonds may be called for repayment by the bondholders at par in June 2010, June 2012, June 2015 or June 2020. The convertible bonds are included in the balance sheet partly in non-currentliabilities (2007: £64.4 million, 31 December 2006: £64.1 million) and partly inother reserves in shareholders' equity (2007: £28.5 and 31 December 2006: £28.5million). The total face value of the convertible bonds is £89.6 million. Property mortgage At 30 June 2007, the Group has a property mortgage facility with theBasellandschaftliche Kantonalbank of £6.0 million (CHF 14.6 million) (2006: £6.2million (CHF 14.9 million)). The mortgage is in two tranches, both secured bythe assets of Skyepharma AG. The first tranche of £2.4 million (CHF 5.8 million)bears interest at 3.875% and is repayable by instalments over 15 yearssemi-annually to be fully repaid in 2021. The second tranche of £3.5 million(CHF 9.1 million) bears interest at 3.875% and is repayable by instalments over46 years semi-annually to be fully repaid in 2052. Paul Capital finance In March 2007 the Group completed a restructuring of the Paul Capital debt froma royalty sharing arrangement for a number of specified products, into a fixedamortisable note with fixed future minimum payments of US$92.5 million(£46.1million). The future payments under the note will be increased by up to anadditional US$12.5 million (£6.2million) if worldwide sales of DepoDurTM reachcertain thresholds. The Injectable Business was sold on the basis that itretained responsibility to Paul Capital for its obligations to make paymentsbased on the sales of DepoCyt(R) and DepoDurTM, and, to the extent that paymentsare made in this respect, the Group's liability to Paul Capital under the Notewill be reduced accordingly. The note is repayable in accordance with anamortisation schedule through to 2015. The restructuring of the Paul Capitaldebt is on substantially different terms from those applying to the royaltysharing arrangement and therefore has been treated as a new financial liabilityarising in 2007 on extinguishment of an original financial liability. Thecarrying value of the new fixed amortizable note is calculated as the netpresent value of expected future minimum payments discounted at a rate of 11.2%per annum (being management's estimate at inception of a fair market cost ofthis facility). At 30 June 2007, the carrying value of the note was £22.0million. CRC Loan 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 future repayments' schedule. Interest isgenerally charged on a quarterly basis at the respective US and euro three monthLIBOR rates plus a 5.85% margin. In March 2007, the terms of the CRC financingwere amended in the following respects: (i) from 22 March 2007 interest ischarged on the first €7.5 million of the facility at the rate of Euro threemonth LIBOR plus 10.85%; (ii) the loan will be prepaid up to US$10.0 million outof 50% of any FlutiformTM milestone payments received after 1 January 2009 (oron FDA approval if earlier); (iii) additional security has been provided of anassignment or charge over receipts in respect of two additional products(nisoldipine CR and zileuton CR); and (iv) a number of additional covenants andconsents are incorporated in line with the Paul Capital refinancing. Thesecurity does not include FlutiformTM. The Company has guaranteed to the lenderthe obligations of the Group in respect of this facility. There are provisions for the facility to be increased by a further US$15.0million subject to due diligence and progress with a specific productdevelopment. Half of the committed principal on each loan was drawn down inJanuary 2007 and a further US$11.5 million and €9.0 million was drawn down inMarch 2007 to give an outstanding balance as of 30 June 2007 of £28.5 million(net of costs). The balance of the facility will be drawn down by 31 December2007. 7 Share Capital 30 June 2007 31 December 2006 30 June 2007 31 December 2006 Number of shares Number of shares £million £million AuthorisedOrdinary Shares of 10p each 1,188,000,000 1,102,000,000 118.8 110.2 Issued Ordinary Shares Nominal value Deferred 'B' Shares Nominal value Total nominal of 10p each of 10p each value Number £million Number £million £million At 1 January 2007 753,764,146 75.4 12,000,000 1.2 76.6Share Placing 61,224,490 6.1 - - 6.1 _____ _____ _____ _____ _____At 30 June 2007 814,988,636 81.5 12,000,000 1.2 82.7 _____ _____ _____ _____ _____ In March 2007 SkyePharma issued 61.2 million new Ordinary Shares at a price of24.5 pence per share raising £14.8 million net of issue costs. In June 2007 the authorised share capital was increased by £8.6 million by thecreation of 8 million Ordinary Shares of 10p. 8 Related Parties In August 2003 the Company entered into an eight-year tenancy agreement of 10East 63rd Street, New York, with an annual rental of US$720,000 per annum untilAugust 2008, and US$942,500 per annum from August 2008 to August 2011. Thebuilding was owned by Ian Gowrie-Smith, a former director, through afamily-owned trust. In June 2007 after negotiations, the lease was terminatedand SkyePharma agreed to pay US$600,000 in full and final settlement. In June 2007 the Company entered into an exclusive agreement with SomnusTherapeutics formed by Care Capital LLC for the worldwide development andcommercialization of its sleep therapeutic SKP-1041. SkyePharma's Non-ExecutiveChairman, Dr Jerry Karabelas, is a partner in Care Capital LLC. In view of hisposition, Dr Karabelas has not participated in any SkyePharma PLC Boarddiscussions concerning this agreement. This information is provided by RNS The company news service from the London Stock Exchange
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