Annual Financial Report

Skyepharma PLC

Peter Grant, Chief Executive Officer

Andrew Derodra, Chief Financial Officer

+44 (0)20 7881 0524

Jonathan Birt, Investor and Media Relations

+44 (0)7860 361746

N+1 Singer

Shaun Dobson/Jen Boorer

+44 (0)20 7496 3000

FTI Consulting

Julia Phillips/Rob Winder/Natalie Garland-Collins

+44 (0)20 3727 1000

Risks that operations may be disrupted or unable to cope with demand

The Group's business is complex and is dependent on it and its suppliers and partners maintaining and developing the appropriate capabilities to meet contractual and regulatory requirements and exploit business opportunities.

Any significant disruption to, or inability to meet demand in, the Group's research and development and supply operations, or those of key third party suppliers and partners, could result in lost revenues and business opportunities, stock shortages, liabilities and significant damage to profitability and prospects of the Group.

The Group maintains a system of quality assurance.

Where possible, alternative sources of supply are sought and contracts are negotiated to include appropriate provisions for replacement of defective goods.

The Group has appropriate insurance, but it is not possible to insure against all risks and not all insurable risks can be fully insured on an economically feasible basis.

Risks that competition, technological change or lack of innovation may damage prospects for the business

The Group has a number of pipeline developments and revenue-generating products which are at various stages of their developmental and commercial lives. The successful development, commercial success and life of regulated pharmaceutical products depends upon a range of factors such as, having adequate product innovation and development strategies, how successfully products are marketed, the overall competitive environment including generics, the effectiveness of patent protection, continued innovation, technological progress and constraints on healthcare spending.

The Group files for and prosecutes patents and other forms of intellectual property and, in conjunction with its partners, takes steps to enforce these rights. Third party rights that may be of interest to and/or have adverse effects on the Group's activities are also monitored so that action can be initiated where appropriate.

The Group is developing a number of products and technologies which are aimed at spreading the dependency on current approved products and provide new revenue streams.

Risk that pharmaceutical and technology development will fail or there are issues with safety or efficacy

Pharmaceutical and technology development is inherently risky and there can be no certainty of achieving a positive outcome or return from developments. The development cycle for new products is long and uncertain and the regulatory environment is complex and subject to change. Clinical testing may not accurately predict safety or effectiveness in broader human use. For a new potential product or technology, it can be difficult to establish from available data a meaningful and reliable assessment of its eventual efficacy and/or safety in the market. If developments fail, or products or technologies are withdrawn, this can have a significant impact on profitability and prospects of the Group.

The Group seeks a mix of development work to balance higher risk development projects against lower risk, but potentially less remunerative opportunities.

The Group seeks to follow the guidelines of the relevant regulatory bodies and conducts trials in accordance with prevailing practice and statutory/regulatory requirements.

Risks arising from inability to control or influence commercialisation of products and the income streams related to them

The Group is dependent on partners for obtaining regulatory approval and marketing of products. Once partners have obtained approval and launched the products, the Group may be entitled to revenue based on a proportion of net sales or share of revenue of these products. In many cases, the Group has limited or no influence over the approval process, manufacture and marketing of the product from which it receives revenue. This can lead to the unpredictable cessation of part of the Group's income streams.

The Group tries to mitigate this risk by maintaining regular dialogue with partners and monitoring compliance with contractual obligations.

Risk that the Group fails to retain key personnel or attract new personnel

The Group relies upon a number of key qualified management, scientific, technical, marketing and support personnel. Competition for such personnel is intense, and there can be no assurance that the Group will be able to continue to attract and retain such personnel. The loss of key executives or employees could adversely affect the Group's business.

The Group has identified deputies for all key roles within the business.

The Remuneration Committee reviews annually the remuneration packages of key personnel to ensure they remain appropriately competitive. A range of benefits, including share plans, are utilised to encourage retention of key personnel.

Risk of dependency on key customers or products

The Group currently generates a significant proportion of its revenue from flutiform® and a limited number of other products.

Development cycles cover many years, and it is likely to take time for such dependencies to be significantly reduced. Should revenues from a key product cease or substantially reduce, this could have a material adverse effect on the Group's profitability and prospects.

The Board regularly reviews its strategic plan which includes assessing the risk of dependency on any one partner or product and setting targets to develop new business to broaden the Group's product and/or partner portfolio.

Risk that there is disruption or on-going losses from the Lyon Facility when the lease terminates

The lease to Aenova of the Lyon Facility and related business expires at the end of June 2016 and the transfer of control back to Skyepharma will involve operational, regulatory and financial risk. There can be no assurance that the operations at the Facility will be profitable when they return to Skyepharma and they remain dependent on relatively few products. Unanticipated costs or losses could affect the performance of the Group as a whole.

A reintegration team has been established to co-ordinate a smooth transition of the Lyon Facility back to Skyepharma's control.

The Group is also looking into ways to increase both third party and internal Group activity that could be undertaken at the Facility to increase utilisation and prospects of viability.

Risk that flutiform® may not achieve continued commercial success

There can be no assurance that flutiform® will continue to be commercially successful as this depends on a range of factors. The risks relating to the product are detailed above but since the success of flutiform® is critical to the Group, the specific overall risk relating to flutiform® is detailed in addition to the individual risks above.

Regular meetings are held with all parties involved in the flutiform® supply chain to maintain and increase the continuing supply of the product. Skyepharma's regulatory and technical experience are closely involved in monitoring product performance and maintaining compliance to cope with the needs of licensees, regulators and markets.