26th Apr 2007 07:02
Skyepharma PLC26 April 2007 SkyePharma PLC Preliminary statement of annual results for the year ended 31 December 2006 SkyePharma PLC (LSE:SKP; NASDAQ: SKYE), LONDON, ENGLAND, 26 April 2007 Summary of Results 2006 2005 £'m £'mContinuing operationsRevenue from continuing operations 43.0 50.8 Research & development expenditure 22.9 14.3 Operating loss from continuing operations before exceptionals 13.9 1.0Loss before tax from continuing operations after exceptionals 17.9 20.3 Discontinued operationsOperating loss from discontinued operations (before exceptionals) 16.1 15.9Loss before tax from discontinued operations after exceptionals 59.0 30.3 Net debtTotal debt less cash including convertible bonds at 31 December 2006 111.7 109.8 Highlights • Company restructuring successfully completed by new management team • Sale of Injectable Business completed in March 2007: o Eliminates related operating losses and need to invest o Potential upside from development of DepoBupivacaine(TM) at no cost/risk to the Group • Major financial restructuring: o Raised £35m new finance facility from Christofferson Robb & Co. ("CRC") in December 2006 o Paul Capital Refinancing agreed in March 2007. Exceptional credit £20.1m in 2006 o Equity placing raised £14.8m (net) in March 2007 o Total debt less cash at year end £111.7m (2005: £109.8m) including convertible bonds • Good progress with Flutiform(TM): o Licensed for US to Kos (now Abbott), for Europe to Mundipharma o Phase III clinical trials progressing to plan with Food and Drug Administration ("FDA") filing expected around end of 2007 • Revenue: o Revenue from continuing operations down 15% to £43.0m (2005: £50.8m) o Cash received from license signing and milestone fees up 24% at £30.0m (2005: £24.1m) o Royalty revenue totalled £18.1m (2005: £19.6m), reflecting continuing sales of existing products Dr Jerry Karabelas, Non-Executive Chairman, said: "The past year was one ofsignificant transition that has established a new direction for SkyePharma. Thenew management team has successful completed a fundamental restructuring of theCompany's operations and finances and SkyePharma is now well placed to moveforward. Our key priorities in the coming year will be to complete the USclinical trial programme for our lead asthma product, Flutiform(TM), and toleverage the Company's skills and technologies in oral and inhalation drugdelivery." 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 Group has ten approved products in the areas of oral, inhalationand topical delivery. The Group's products are marketed throughout the world byleading pharmaceutical companies. For more information, visitwww.skyepharma.com. CHAIRMAN'S STATEMENT 2006 was a year of significant transition that established a new direction forSkyePharma. The new management team with Frank Condella as CEO, Ken Cunninghamas COO and Peter Grant as Finance Director delivered on all of the objectivesset early in the year, and transformed the financial position of the Group. Consolidated results The continuing business (being the Group excluding the Injectable Business whichwas sold in March 2007) achieved revenues of £43.0 million in the year, 15%below the £50.8 million reported in 2005. This was primarily due to the deferralof recognition of up-front milestone payments received in 2006 for the US andEuropean marketing and distribution rights for Flutiform(TM). Cash receivedfrom milestones totalled £30.0 million (2005: £24.1 million). The continuing business incurred an operating loss, before exceptional items, of£13.9 million (2005: loss of £1.0 million) after investing £19.0 million (2005:£8.7 million) in the continued development of Flutiform(TM). After net financecosts and share of losses in associated companies, the continuing businessincurred a loss before exceptional items and tax of £25.0 million (2005: £15.2million). Exceptional items totalled £29.9 million (net). Exceptional charges arose fromthe impairment of assets (including £37.0 million from the write down of thecarrying value of the Injectable Business, which was sold on 23 March 2007) andother one-off charges as detailed in Note 3 to the preliminary announcement. Anexceptional credit of £20.1 million arose from the reduction in estimated futurepayments to Paul Capital as detailed in Note 11. The Injectable Business lost£22.0 million in the year (2005: £14.0 million) which is reported as a resultfrom Discontinued Operations. The net result after exceptional charges, financecharges and tax was a loss of £77.7 million (2005: £50.9 million). Achievements Under the leadership of the new management, we have achieved all of theobjectives set early in 2006 as well as completing a major financialrestructuring which has significantly strengthened the Group's working capitalposition. We achieved our objective of licensing Flutiform(TM), our key combination asthmaproduct, for the United States and Europe. We announced Kos Pharmaceuticals,Inc. as our US partner in May and Mundipharma International Corporation Limitedas our partner for Europe in September. Kos was subsequently acquired by AbbottLaboratories, which is now our partner for the important US territory. We havenot yet concluded agreements for Canada and Japan but are aiming to do so in2007. Phase III trials for Flutiform(TM) started in February 2006, as planned, and allstudies are progressing well. Flutiform(TM) development represents our largestexpense and use of cash. This will continue until the New Drug Application ("NDA") is filed in the US, which is expected to be around the end of 2007.Flutiform(TM) European development is also continuing with filing expected in2008. Foradil(R) Certihaler(TM), which is licensed to Novartis worldwide, was approvedin December in the United States by the FDA. This was a major achievement forour development team and the device. We continue to work with Novartisregarding the potential commercialisation of this product and we also see thedevice as having potential in other products. Our oral pipeline was expanded with one new partnered project, a controlledrelease version of nisoldipine (Sular(R)), with Sciele Pharma, our US partnerfor Triglide(TM). We are currently working to partner two other early stageproducts: a sleep disorder product and a product to treat acute pain andinflammation. Given the size of these indications, and the potential costsassociated with conducting clinical trials for these programmes, we have decidedthe best course of action would be to find partners for these programmes toshare in the potential costs of development. This will enable us to focus ourfinancial resources on completing the Flutiform(TM) development whilst creatingfuture value from our innovative ideas, skills and technology. In early January 2007, we reached agreement with Blue Acquisition Corp. todivest our Injectable Business. This is a stand-alone operation in San Diegowith its own management team and manufacturing facilities for marketed products(DepoCyt(R) and DepoDur(TM)). Its major pipeline product isDepoBupivacaine(TM), which represents a significant commercial opportunity. Consideration for the sale included an upfront payment and other potentialpayments dependant on the successful commercialisation of DepoBupivacaine. Thedisposal of the Injectable Business both releases cash and relieves the Group ofa significant cash burn due to operating losses and the potential costs offuture product development and related capital expenditure. We reduced corporate overhead costs by closing our New York office andsignificantly reducing the size of our London Office. We intend to continue tokeep costs firmly under control and anticipate a substantial reduction inexpenditure on research and development once the Flutiform(TM) trials arecompleted. Financing Ahead of the sale of the Injectable Business, we arranged a royalty and assetbased financing facility from Christofferson Robb & Co. (CRC) for approximately£35 million. Upon completion of the sale in March 2007, we also completed arefinancing of the Paul Capital facility and an equity placing for £14.8 million(net of costs). This financial restructuring together with the considerationreceived for the Injectable Business has greatly improved our cash position andwill result in a substantial reduction of the cost of the Paul Capital financecharges in 2007 compared with 2006. In 2007 we will commence work onrefinancing the £89.6 million convertible bonds so that the earliest redemptiondates are extended in order to more closely match the liquidity profile of theGroup. Board The stronger financial position of the Group provides the opportunity to work onattracting new talent and reshaping the composition of the non-executivemembership of the Board. During 2006, we established a process whereby weconsult with major investors on the selection of new Directors as well asoverall business strategy. Following a review of the fee structure, from 1April 2007 the Chairman and Non-Executive Directors have agreed to lowercompensation amounting in aggregate to a reduction in total fees of nearly onethird. The Remuneration Committee in consultation with the Executive Directors,and with their full support, has not awarded them any bonuses in respect of 2006or base salary increase in respect of 2007. Although overall non-financialobjectives and the major financial restructuring were achieved during 2006 orshortly thereafter it was agreed by the Executive Directors that the Company'sshare price performance during 2006 did not warrant any such bonuses orincrease. Long term incentive plans As announced on 18 April 2007, having taken advice and consulted with principalshareholders, the Board has called an extraordinary general meeting on 4 May2007 to seek approval for a long term incentive plan to provide incentives toExecutive Directors and senior managers. The previous plans expired in June2006 and the Remuneration Committee concluded that it would be appropriate toimplement a replacement plan as soon as possible to provide the Executive teamwith the appropriate incentives in alignment with the interests of the Company'sshareholders. Strategy and objectives SkyePharma's strategy is to become a leading speciality pharmaceutical companyby using its proprietary technologies and competitive capabilities, particularlyin the areas of inhaled and controlled-oral drug delivery, to produce newformulations of known molecules that meet market needs. Our near-term objectives are as follows: • Work with partners to maximize royalty streams of existing andnear-term launch products o Marketed products include Paxil CR(TM), Xatral(R) OD (Uroxatral (R)), Solaraze(R) and Triglide(TM) o Near-term launch products include Requip(R) XL 24-hour(TM), Lodotra(TM), zileuton CR, Foradil(R) Certihaler(TM) and nisoldipine CR • Successfully complete development of Flutiform(TM) and gain approvals forasthma in the US and European markets. Work with partners to gain additionalindications of COPD and paediatrics • Finalize marketing partners for Flutiform(TM) for Canada and Japan • Enter into new partner-financed development programs that increase thenumber of products in our pipeline • Reduce unfunded third party expenditure on clinical trialssignificantly after the successful filings of Flutiform(TM) in US and Europe • Use Flutiform(TM) earnings to further strengthen the balance sheet andprovide new opportunities for future growth Outlook In 2007, since new products are planned to be launched towards the end of theyear, revenues are unlikely to show a significant increase compared with 2006.We expect that there will be some reduction in sales, general and administrationcosts compared with 2006, but these savings are likely to be more than offset bythe planned costs of completing the Phase III clinical trials for Flutiform(TM)during 2007. In 2008, as the research and development costs scale back to a more normal leveland pipeline products come to market, our objective is to move into operatingprofit (before finance costs). We have set a target to become profitable (aftertax) in 2009. Our goal remains to deliver long-term value for shareholders. We thank all of our shareholders, employees and many business partners for theirsupport during the past year. Dr Jerry Karabelas Non-Executive Chairman OPERATING AND FINANCIAL REVIEW Review of Products Inhalation Products Flutiform(TM) HFA-MDI Flutiform(TM) 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 and chronic obstructive pulmonary disease ('COPD'). Flutiform(TM)commenced Phase III trials in February 2006, on target, and is on track for atarget US filing date around the end of 2007, with a target approval in thefirst half of 2009. The European filing is targeted for the end of 2008 withlaunch expected in 2010. In May 2006 we announced that we had entered into an agreement with KosPharmaceuticals, Inc. to market Flutiform(TM) in the US and in September weannounced an agreement with Mundipharma International Corporation Limited todevelop Flutiform(TM) for Europe and other territories outside the Americas andJapan. In December 2006 Abbott Laboratories acquired Kos, stating that Flutiform(TM)will provide an expanded presence for Abbott in the $10 billion asthma market.The Directors believe that prospects for Flutiform(TM) are enhanced by Abbott'sacquisition of Kos as Abbott brings additional size and marketing strength inthe primary care area which complements the specific expertise Kos has ininhalation therapies. Abbott has exclusive rights to market Flutiform(TM), once approved, in the USand a right of first negotiation for Canada. SkyePharma could receive up to $165million (£89 million) in milestone payments, of which $25 million (£13.5million) were paid upfront, up to $80 million (£43.2 million) are payable up toand including approval and up to $60 million (£32.4 million) are sales related.In addition the Group will earn royalties starting in the mid teens on net salesby Abbott. We are managing and funding the trials needed for approval ofFlutiform(TM) in adult asthma while, if it chooses to do so, Abbott isresponsible for managing and funding the trials needed for all otherindications, including COPD and paediatrics. Abbott is also responsible for allmarketing and post-approval studies. The US represents the largest marketopportunity for Flutiform(TM), where sales of combination products containing asteroid and a long-acting beta-agonist are forecast to exceed $6 billion by2009, which is when we expect Flutiform(TM) to be launched. Mundipharma has exclusive rights in Europe and other territories outside theAmericas and Japan. The agreement provides for up to €82 million (£58.6 million)in milestone payments, of which €15 million (£10.7 million) was paid upfront tothe Group, up to €27 million (£19.3 million) payments are earmarked to coverspecific development costs and up to €40 million (£28.6 million) are salesrelated. In addition the Group will earn royalties, escalating upwards from alow teens percentage of net sales. Mundipharma will have access to data from thetrials we are conducting for FDA approval, which will be used as the basis forobtaining European approval. Mundipharma will also conduct an additionalclinical study needed for regulatory approval in Europe and also the studiesneeded to extend the indication to paediatric patients and to a higher dosestrength. The costs of these studies will be recouped from future royalty andmilestone payments to SkyePharma. As stated above, the Flutiform(TM) project continues to operate substantially tothe original timescales. We are in the process of seeking licensees for Canadaand Japan. Under the agreement with Abbott and Mundipharma, SkyePharma will supplyFlutiform(TM), which will be sourced from a third party manufacturer. Both Abbott and Mundipharma share our belief in the high potential of Flutiform(TM) as a superior product concept, differentiated from competing combination asthma products. 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 authorisation in June 2005 on a country-by-country basis in Europefor the treatment of asthma in adults and children. The HFA-MDI will replace thecurrently available MDI formulation of Pulmicort(R) which uses theenvironmentally unfriendly chlorofluorocarbons (CFCs) as the propellant.SkyePharma developed this new formulation, which employs its proprietaryformulation technology, and also conducted the clinical development programmefor AstraZeneca. The product has been approved in 11 countries, includingGermany, Spain and Switzerland. AstraZeneca is now managing the launch processand has already launched Pulmicort(R) HFA-MDI in Finland, Latvia and Denmark.SkyePharma earns a mid teens royalty on AstraZeneca's net sales of Pulmicort(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). Globalsales of Foradil(R) (in other devices) were $331m in 2006. For Foradil(R)Certihaler(TM) we developed not only the multi-dose dry-powder inhaler devicebut also the formulation technologies designed to ensure dose consistencyregardless of storage conditions. After launch in two European markets in late2005, the product was voluntarily withdrawn by Novartis early in 2006 because asmall number of patients received an incorrect dose after mishandling thedevice. During 2006 SkyePharma and Novartis successfully made modifications tothe inhaler to prevent the identified problem from recurring and submitted theseto the FDA. In December 2006 the FDA approved the modified Foradil(R)Certihaler(TM) for the treatment of asthma. Foradil(R) Certihaler(TM) isapproved in 30 countries outside of the United States. We continue to work with Novartis regarding the potential commercialisation ofthis product, following which we would earn a mid single digit royalty on netsales as well as manufacturing and supplying the product. We see the SkyeHaler(TM) multi-dose dry powder inhaler device (used forForadil(R) Certihaler(TM)) as having potential in other products, includingcombination products. Oral and Topical Products Paxil CR(TM) Paxil CR(TM) is an improved formulation of the anti-depressant Paxil(R)developed by SkyePharma with GlaxoSmithKline using SkyePharma's Geomatrix(TM)technology. Sales of Paxil CR(TM) in 2006 were up by 38% on the prior year to$318 million. The majority of these sales were in the US on which we earned aroyalty of 4%. However this growth was largely a result of short term supplydisruption of Paxil CR(TM) during 2005. Royalty income was, however, downcompared with 2005 as during the supply disruption we were paid royalties basedon higher budgeted sales of Paxil CR(TM) as required by contract. The first USgeneric competitor for Paxil CR(TM) could enter the market in the second half of2007 and this could impact sales of Paxil CR(TM). Xatral(R) OD Xatral(R) OD (Uroxatral(R) in the United States) is our once-daily version ofSanofi-Aventis' Xatral(R) (alfuzosin), a treatment for the urinary symptoms ofbenign prostatic hypertrophy. Xatral(R) OD has been on the market outside the USsince April 2000 and older multidose versions of Xatral(R) have now largely beenwithdrawn. European sales have started to be affected by generic competitionafter the expiry of a key European patent in May 2006, and the impact increasedin the second half of 2006. However this impact was offset by strong growth inthe US. In 2006, reported sales of all forms of Xatral(R) were €353 million, upby 7.3% (on a comparable basis) on the prior year. Included in this were USsales of Uroxatral(R). SkyePharma earns low single digit royalties on net salesof Xatral(R) OD (Uroxatral(R)). Solaraze(R) Solaraze(R) (diclofenac) our topical gel treatment for actinic keratosis, anearly form of skin cancer, is marketed in the US by Bradley Pharmaceuticals.Sales in 2006 were up by 50% on the prior year to $22 million. Sales in Europeand certain other territories by Shire plc were $13.2 million, up by 6% from$12.5 million in 2005. Both partners are actively involved in campaigns to raiseawareness of the risks posed by this common condition. Solaraze(R) has beenapproved and marketed in the United States and Europe for several years andreceived approval for registration by the Australian Government Department ofHealth and Ageing Therapeutic Goods Administration (TGA) on 28 November 2006.SkyePharma's marketing partner in Australia, Shire plc, aims to launch Solaraze(R) after selection of a distributor and final approval of product informationand reimbursement. SkyePharma receives a low teens royalty on relevant netsales. Triglide(TM) Triglide(TM) (fenofibrate), an oral treatment for elevated blood lipiddisorders, is marketed in the US by Sciele Pharma, Inc. and was launched in July2005. In December 2006, Triglide(TM) captured 2.5% of new prescriptions forfenofibrate and 1.8% of total prescriptions. Triglide growth was due primarilyto greater focus by Sciele's sales force on key targeted physicians andincreased managed care access and was one of the key drivers in Sciele's strongrevenue growth. SkyePharma receives 25% of Sciele's net sales, out of which wepay for manufacturing. Requip(R) XL 24-hour(TM) Requip(R) XL 24-hour(TM) (ropinirole) for Parkinson's disease was developed inpartnership with GlaxoSmithKline. A recent study showed that adding Requip(R)XL 24-hour(TM) ropinirole prolonged release tablets to Parkinson's diseasepatients' existing levodopa therapy significantly reduced the "off" time by anaverage of more than two hours per day when compared with baseline prior totreatment, thus allowing patients to continue their daily activities for alonger period of time. In addition, the 24 hour dosing regime shouldsignificantly aid compliance. It was filed for approval at the end of 2005 inEurope, and regulatory approval was received in France in April 2007. It alsohas approval in Canada, Slovakia, Slovenia, Latvia and Estonia andGlaxoSmithKline plans to gain further marketing authorisations in other memberstates of the European Union. The US NDA was submitted in February 2007, and theUS FDA accepted the submission for filing in April 2007. SkyePharma will earnlow-mid single digit royalties on net sales of the Requip(R) XL 24-hour(TM)formulation only. GlaxoSmithKline's sales of Requip(R), the immediate releaseform for Parkinson's disease and restless legs syndrome in 2006 were at GBP 268million, up by 74% (at constant exchange rates) on the prior year. Parkinson'sdisease makes up about 40% of current Requip(R) sales in the United States. Zileuton CR We have developed a controlled release formulation of the oral asthma drugzileuton for Critical Therapeutics. Zileuton is a highly potentanti-inflammatory drug. The current immediate-release formulation of zileuton(marketed as ZYFLO(R)) is approved for asthma in the US and has a four timesdaily dosing regimen. The controlled-release formulation of zileuton (zileutonCR), taken twice daily, utilises our Geomatrix(TM) technology, and is currentlyawaiting FDA approval in the US. Pending regulatory approval, CriticalTherapeutics expects to launch the product in the second half of 2007. We willmanufacture the product at our plant in Lyon, France and receive a high-midsingle digit royalty on net sales of zileuton CR. In March 2007, CriticalTherapeutics announced the signing of a definitive co-promotion agreement withDey, L.P., part of the Merck KGaA group of companies, that strengthens theresource available for marketing zileuton CR in the US respiratory care market. Lodotra(TM) Lodotra(TM), developed for Nitec, is a novel modified-release formulation ofprednisone, a widely-used anti-inflammatory drug for treating the pain andstiffness caused by rheumatoid arthritis. With our Geoclock(TM) delivery systemthe drug can be taken at bedtime but released in the early hours of the morning,the optimum time. Nitec filed the product in Europe in September 2006 and launchis expected in 2007. In Phase III studies Lodotra(TM) patients showedsignificantly reduced morning stiffness compared with the group using standardimmediate release prednisone. Merck KGaA will market the product in Germany andAustria. Nitec is currently in negotiations with potential licensees for othermarkets. SkyePharma will manufacture the product at its plant in Lyon andreceive a mid single digit royalty on net sales. Nisoldipine CR In May 2006 we entered into an agreement with Sciele Pharma (our US licensee forTriglide(TM)) to develop an improved version of Sciele's leading productSular(R) (nisoldipine CR), a calcium channel blocker antihypertensive. Newprescriptions of Sular(R) increased 24.6% and total prescriptions increased20.0% in the fourth quarter of 2006 compared with the fourth quarter of 2005.One of the key factors driving Sular prescription growth was the successfulleveraging of Sciele's improved managed care position by their primary caresales force. Nisoldipine CR is expected to be filed in the first half of 2007with launch in 2008. SkyePharma will manufacture the product at its plant inLyon, France, and receive a low mid single digit royalty on net sales ofnisoldipine CR and SkyePharma will also receive a total of up to $5 million(£1.5 million) in milestone payments. $1 million (£0.5 million) has been paid atsigning and up to $4 million (£2 million) will be paid up to approval in the US,which is expected in 2008. Research & development In addition to the above late stage oral pipeline products we are also workingon various other earlier stage projects addressing such areas as sleep disordersand pain/inflammation. We continue to seek additional applications of our technologies and skillsthrough a combination of in-house innovation and external collaboration. Ourresearch and development activities are focused on developing new formulationsof known molecules and applying our proprietary technology to provide a clinicaladvantage and life-cycle extension. By using our multiple technologies, provenskills, regulatory and manufacturing expertise, we have a proven track record ofbuilding a product pipeline for commercialisation through out-licensing toco-development and marketing partners. We do not intend to finance furthermajor clinical trial programs before Flutiform(TM) is launched. Financial Review Continuing business and discontinued operations The Injectable Business, which was sold on 23 March 2007, is included as adiscontinued business for the reasons set out in Note 7. 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 business. Thecomparatives in the consolidated income statement have been re-statedaccordingly and, except where otherwise stated, all commentary in the Chairman'sstatement and the business and financial review relates to the continuingbusiness. Revenue Revenues for 2006, at £43.0 million, were 15% below the £50.8 million reportedin 2005. This was primarily due to the deferral of recognition of up-frontmilestone payments received in 2006 for the US and European marketing anddistribution rights for Flutiform(TM). Cash received from milestones totalled£30.0 million (2005: £24.1 million) whilst deferred revenues from milestonesincreased from £10.6 million at 31 December 2005 to £18.2 million at 31 December2006 (see deferred income section below). Revenues recognised from license signing and milestone fees amounted to £12.7million in 2006 compared with £16.4 million in 2005, primarily due to deferralof proportionally more revenue from payments received in 2006. Up-front paymentsare generally deferred and recognised over the period of development up to thecompletion of the development phase, such as filing or approval. To the extentthat they relate to reduced royalty rates they may be spread over the period ofthat reduction in rates. Consequently, whilst the Group received £13.5 million(US$25.0 million) in May 2006 from Kos for the US marketing rights to Flutiform(TM), only £5.7 million was recognised as revenue in 2006 and thebalance is expected to be recognised over the period up to filing. In addition,SkyePharma received £10.2 million (€15.0 million) from Mundipharma for theEuropean marketing rights to Flutiform(TM), but only £1.2 million was recognisedas revenue in 2006, and a large part of the balance was deferred to be releasedpost-launch to offset a temporary royalty reduction, being SkyePharma'scontribution to Mundipharma's costs for developing the higher dose strengthversion. Contract research and development costs recharged decreased £2.0million to £1.6 million, compared with £3.6 million in 2005, mainly due to afall in the revenue from Novartis in respect of the QAB 149 project and thefocus of available resources on the Flutiform(TM) development. Royalty income was £18.1 million (2005: £19.6 million), a reduction of 8%.During the early part of 2005 the Group received royalties based onGlaxoSmithKline's ("GSK's") budgeted sales of Paxil CR(TM) whilst the productwas temporarily off the market as a result of GSK's suspension of production atits Cidra plant in Puerto Rico. The decrease in 2006 was due to a 24% fall inPaxil CR(TM) royalty income: although the product returned to the market in June2005, continuing supply constraints meant that sales did not fully recover tothe pre-withdrawal level. This was partly offset in 2006 by an increase inroyalty income from Triglide(TM) and Solaraze(R). Excluding Paxil CR(TM),royalties for the balance of SkyePharma's other products grew by 7% (at constantexchange rates) in 2006 compared with 2005. Manufacturing and distribution revenue decreased by £0.6 million to £10.6million, compared with £11.2 million in 2005, mainly due to the aforementionedfall in the revenue from Novartis in respect of QAB 149. Manufacturing anddistribution revenues included a substantial contribution towards maintainingmanufacturing capacities internally and externally for the Foradil(R) Certihaler(TM). Deferred income During 2006, there was a net increase in deferred income of £7.6 million asmilestone payments in respect of Flutiform(TM) licenses were deferred as described above. The movement in deferred income was as follows: 31 December Received * Recognised/ 31 December 2005 Transferred 2006 £m £m £m £mContract development and licensing revenue 10.6 30.0 (22.4) 18.2 * Includes exchange adjustments Cost of sales Cost of sales comprises: the direct costs of contract manufacturing; directcosts of licensing arrangements; expenditure on research and developmentconducted for third parties including the costs of directly funded clinicaltrials incurred on behalf of our collaborative partners and royalties payable.Cost of sales decreased by £2.6 million to £18.0 million in 2006; and grossprofit decreased 17% to £25.0 million compared with £30.2 million in 2005, beingin line with the fall in revenue. Selling and administration expenses Selling, marketing and distribution expenses mainly comprise Triglide marketingcontribution costs, and decreased slightly to £3.0 million in 2006, comparedwith £3.1 million in 2005. Other administration expenses before exceptionals for the continuing businesswere £12.3 million in 2006 compared with £12.0 million in 2005. Research and development expenses SkyePharma's own research and development expenses in the year increased by £8.6million to £22.9 million, mainly due to the development expenditure incurred onthe start of the Flutiform(TM) Phase III clinical trials. Expenditure onFlutiform(TM) in 2006 was £19.0 million (2005: £8.7 million). As announced on27 December 2006, further costs forecast to be incurred from that date inrespect of the development required for US approval (excluding saleable launchstock) total US$60 million (£30.5 million), comprising US$47 million (£23.9million) of revenue expenditure plus US$13 million (£6.6 million) of capitalexpenditure. In addition, a total of US$10 million (£5.1 million) of expenditureincurred on Flutiform(TM) up to 31 December 2006 remained unpaid at that date,so that the total forecast cash requirement for Flutiform(TM) at the end of 2006totalled US$70 million (£35.6 million). 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 will be conducted in Europe for paediatricsand to compare Flutiform(TM) with an existing marketed product. These will bepaid for by Mundipharma but up to €12 million (£8.6 million) will be deductedfrom a milestone of that amount due to the Group at the end of the trials. Other income The other income before exceptionals of £0.8 million is mainly due to the profiton disposal of the Group's holding in Vectura Group plc and certain Vital LivingInc securities. The exceptional income of £0.7 million is the profit on disposalof SkyePharma Canada Inc. Following the reorganisation of research anddevelopment operations and other business functions completed in 2004,SkyePharma Canada Inc was sold in July 2006 for £1.0 million (CDN$2.0 million).The sale did not include any product or technology rights. Finance costs and income The finance costs of £14.1 million (2005: £16.2 million) mainly comprisenotional interest on the Paul Capital funding liabilities as well as theinterest of £6.3 million payable on the convertible bonds. The finance income of £23.1 million in 2006 includes £1.9 million of foreignexchange gains (2005: loss of £3.3 million included in finance costs) relatingto the Paul Capital funding liabilities which are denominated in US dollars and£20.1 million in respect of a decrease in the estimated future payments to PaulCapital (2005: £1.8 million). Income tax expense The Group's income tax expense was £0.8 million, relating to provisions forirrecoverable withholding taxes. The Group has substantial tax losses, subjectto expiry dates, available for offset against future profits. Exceptional items The exceptional charge of £13.7 million in adminstration expenses comprises:£8.8 million relating to the impairment of intangible assets following a reviewof their value to the continuing business; £0.6 million in respect of impairmentof investments in non-group companies; £0.2 million in respect of write down offixed assets; corporate restructuring costs of £2.1 million; £1.5 million inrespect of provisions for legal claims; and £0.5 million related to the EGM heldin March 2006. Further details are provided in Note 3 to the preliminaryannouncement. The exceptional credit of £0.7 million in Other income relates to a profit onthe disposal of SkyePharma Canada Inc., and the exceptional credit of £20.1million in Finance income arose from the reduction in estimated future paymentsto Paul Capital as described in Note 11. Results The operating loss before exceptional items was £13.9 million, compared with£1.0 million in 2005. This was principally due to the reduction in revenue andthe increased R&D costs for Flutiform(TM) Phase III clinical trials (up £10.3million on 2005). The operating loss after exceptionals increased by £20.8million to £26.9 million, mainly due to the fall in revenue, increased R&D costsand higher exceptional charges. The loss for the year after exceptionals from continuing operations decreased by£1.9 million to £18.7 million, notwithstanding the fall in revenue and thehigher costs as a result of the Flutiform(TM) clinical trials, due primarily tothe decrease in the estimated future payments to Paul Capital as described inNote 11. The loss for the year after exceptionals from continuing and discontinuedoperations increased by £26.8 million to £77.7 million, primarily due to the£46.6 million total impairment charges partly off set by the decrease in theestimated future payments to Paul Capital. A £46.6 million impairment chargecomprises the £9.6 million relating to the continuing operations described aboveand £37.0 million relating to discontinued operations regarding the impairmentof the Injectable Business goodwill. Earnings per share The loss per share from continuing operations amounted to 2.5 pence (2005: 3.3pence). The pre-exceptional loss per share from continuing operations amountedto 0.8 pence (2005: 2.5 pence). As at 31 December 2006 there were 753,764,146ordinary 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.Following the equity placing in March 2007 the number of ordinary 10 penceshares was increased by a further 61,224,490 to 814,988,636. In addition there were outstanding as at 31 December 2006 a number of warrants,options, conversion rights and employee share schemes as follows: Description Number of ordinary Exercise price Expiry conditions 10p sharesWarrants (D&E) 5,000,000 73.75p December 2008Warrants (F) 300,000 120.0p September 2007Deferred consideration (Krypton) 37,500,000 229.0p increasing at 10% None per annumPaul Capital 38,320,049 - Extinguished on March 2007 refinancingEmployee share option schemes 22,411,165 43.0p to 89.3p Various dates 2007 to 2013Employee share schemes* 10,908,727 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 2006 222,185,858Total at 31 December 2005 233,372,997 * Employee share schemes include the deferred share bonus plan, long termincentive plans, international share purchase plan. As set out in the Chairman's statement, approval is being sought at anextraordinary general meeting on 4 May 2007 for a long term incentive plan toprovide incentives to Executive Directors and senior managers to replace theprevious scheme which expired in 2006. The maximum dilution of the proposedinitial grant is estimated at 2.63%, based on achievement of all conditions over3 years. The total limits on dilution for employee share plans (10% over 10years, including 5% for discretionary executive schemes) will continue to apply. More details of the convertible bonds are set out in Note 11 to the preliminaryannouncement. As at 25 April 2007, the Company's closing mid-market share pricewas 22.5 pence and the number of ordinary shares in issue at that date was814,988,636. Cash flows In 2006 there was a net cash outflow from operating activities of £8.7 million,compared with £7.6 million in 2005. During the year the Group spent £2.0 millionon property, plant and equipment. In addition, expenditure on intangible assetswas £1.4 million and mainly related to the purchase of licenses to intellectualproperty in the area of pulmonary delivery. The proceeds on disposal of theholding in Vectura Group plc and certain Vital Living Inc securities were £1.3million. Borrowings of £6.9 million were repaid in the year, primarily comprising PaulCapital's share of the Group's royalty income. In addition, the Group paid £6.3million of interest during 2006, mainly relating to the convertible bonds.Interest received on cash deposits amounted to £1.0 million. Subsequent to 31 December 2006, in March 2007, the Company disposed of itsinterest in GeneMedix for £1.2 million cash proceeds and disposed of theInjectable Business for upfront consideration of $20.0 million (£10.2million)realising approximately £2.1 million after allowing for $2 million (£1.0million) paid into escrow and attributable costs. Key performance indicators We consider the following Key Performance Indicators (KPIs) to be the mostrelevant to our continuing business: Key performance indicators for continuing business 2002 2003 2004 2005 2006Number of approved and marketable products at year 8 8 9 10 *9end Revenue excluding milestones £'m 12.1 26.7 33.8 34.4 30.3 Signing and milestone payments received £'m 58.6 26.6 26.6 24.1 30.0 Research and development expenditure £'m 11.9 17.9 15.4 14.3 22.9 Manufacturing output Units (millions) 53.1 65.1 120.1 103.2 98.2 * As at 25 April 2007, Requip(R) XL 24-hour(TM) has approval in a number ofcountries in Europe and in Canada, bringing the current number of approved andmarketable products to 10. The above figures exclude the Injectable Business which is included indiscontinued operations. Balance sheet As noted above, the Injectable Business has been treated as held for sale and aDiscontinued Operation, and therefore the total assets and liabilities of theInjectable Business have been shown separately and excluded from the individualline items of the balance sheet. The prior period has not been restated and theassets and liabilities are included in the individual line items. The Group balance sheet as at 31 December 2006 shows total shareholders' equityof £48.4 million deficit (2005: £24.3 million positive). The reduction in netequity has arisen mainly due to the £77.7 million loss from continuing anddiscontinued operations (of which £29.9 million relates to exceptional items). As set out in Note 1(b) the comparative figures for 2005 have been restated tocorrect a prior period error by including a provision for deferred tax, asrequired by IAS 12 ("Income Taxes"), of £7.6 million at 31 December 2005 on thetemporary difference between the face value of the convertible bonds and thevalue at which they are included in liabilities in the balance sheet. Thisadjustment should have been made on the transition to IFRS and should have beenincluded in the 2005 financial statements. The restatement has no materialeffect on the consolidated income statement or consolidated cash flow statementfor the year ended 31 December 2005. This liability will unwind as the temporarydifference reverses to maturity of the convertible bonds and there is no taxpayable on redemption of the bonds at par. Borrowings and liquidity The Group's total net debt and convertible debt comprises: 2006 2005 £m £m Convertible bonds at face value (see note below) 89.6 89.6Paul Capital funding liabilities (included at net present value) 24.3 44.6Property mortgage 6.2 6.9Bank borrowings 2.0 2.9Finance lease liabilities 0.2 0.1Bank overdraft 1.3 -Total debt (including convertible debt included in equity) 123.6 144.1Less cash and cash equivalents (11.9) (34.3)Net debt (including convertible debt included in equity) 111.7 109.8 Note: The above table includes the convertible bonds at face value of £89.6million. The convertible bonds are included in the balance sheet partly innon-current liabilities (2006: £64.1 million, 2005: £63.6 million) and partly inother reserves in shareholders' equity (2006 and 2005: £28.5 million). Thefinancial liability accrues over time to the face value, whereas the equitycomponent remains fixed at the value at inception until the bonds are realised. In addition to the above, the Group had committed but unutilised facilitiestotalling approximately £35.0 million in respect of the CRC Financing (notedbelow) and, in March 2007, completed an equity placing which raised £14.8million (net of costs) and the disposal of the Injectable Business realising anet £2.1 million as described under "Cash flows" above. 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 2006. Of the total convertible bonds, £64.1 million is included inliabilities and £28.5 million in equity in the consolidated balance sheet. The£69.6 million May 2024 bonds may be converted into ordinary shares at 95 penceper share, and may be called for repayment by the bond holders at par in May2009, May 2011, May 2014 or May 2019. The £20.0 million June 2025 bonds may beconverted into ordinary shares at 58 pence per share, and may be called forrepayment by the bond holders at par in June 2010, June 2012, June 2015 or June2020. The Board intends to seek to refinance these bonds well before May 2009in order to ensure that the earliest redemption dates are extended to match moreclosely the Group's expected cash inflows. Paul Capital Finance As at 31 December 2006, the Paul Capital royalty-sharing finance was included inthe balance sheet at the net present value of anticipated payments under theagreements in force as at that date using the underlying contracts' effectiveinterest rates at inception of 24.5% and 29.8% respectively. Applying theserates to the latest forecasts of relevant royalties, the net present value ofthe liability as at 31 December 2006 amounted to $47.6 million (£24.3 million)(2005: $76.6 million (£44.6 million)). The reduction in liability due to thedecrease in the estimated future payments to Paul Capital during the course ofthe year amounted to $37.2 million (£20.1 million) and is credited to the profitand loss account under finance income as an exceptional item. The amountincluded in finance charges in 2006 in respect of the notional interest relatingto the Paul Capital finance amounted to $12.8 million (£6.9 million) (2005:$12.0 million (£6.6 million)). In March 2007, in conjunction with the disposal of the Injectable Business, theGroup completed a fundamental restructuring of its arrangements with PaulCapital from the sharing of royalties from a number of specified products into afixed amortisable note ("Note") of US$92.5 million (£47.3 million) with up to anadditional US$12.5 million (£6.4 million) payable if worldwide sales of DepoDur(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 has been sold on the basis that it retainsresponsibility to Paul Capital for its existing obligations to share royaltiesreceived in respect of DepoCyt(R) and DepoDur(TM) and, to the extent thatpayments are made in respect of these, the continuing Group's liability will bereduced accordingly. Security under the Paul Capital refinancing is provided byreceivables for the products which were part of the previous two royalty sharingarrangements with Paul Capital, the main products of which are; Solaraze(R),Xatral(R) OD, Foradil(R) Certihaler(TM), Pulmicort(R) HFA, Paxil CR(TM) andTriglide(TM). There is also a covenant (negative pledge), not to grant furthersecurities over Flutiform(TM) intellectual property, and the requirement forprior consent from Paul Capital for certain transactions that could affect PaulCapital's security and risk. The loan will be repaid early up to $10.0 millionout of 50% of any Flutiform(TM) milestones received after 1 January 2009 (or onFDA approval if earlier) and 50% of the proceeds of any disposal of Solaraze(R),Xatral(R) OD, Foradil(R) Certihaler(TM), Pulmicort(R) HFA, Paxil CR(TM) andTriglide(TM). The amortisation schedule determines the minimum amounts payable under the Notewhich will be accounted for as payments of principal and interest as follows: Notional interest Repayment of principal Total $m $m $m2007 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 additional payments due if sales of DepoDur(TM)reach certain thresholds and (ii) any reductions for future sales-relatedpayments by the Injectable Business for DepoDur(TM) and DepoCyt(R). The restructured Paul Capital financing will be accounted for as a new facilityin 2007 and included in the balance sheet from March 2007 onwards at the netpresent value (discounted at an annual discount rate of 11.2%, beingmanagement's estimate of a fair market cost) of the anticipated amortisationpayments less management's forecast of the future sales related payments of theInjectable Business in respect of DepoDur(TM) and DepoCyt(R). As at 25 April2007, the net present value of this liability, after paying a first instalmentof $2.7 million (£1.4 million) amounted to $44.3 million (£22.1 million)compared with the value of $47.6 million (£24.3 million) included under theoriginal arrangements in the 31 December 2006 balance sheet. 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. This schedule is basedon expected receipts from milestone and royalties in respect of Coruno(R),Lodotra(TM) and Requip(R) XL 24-hour(TM). Interest is generally charged on aquarterly basis at the respective US and Euro three month LIBOR rates plus a5.85% margin. Half of the committed principal on each loan was drawn down in January 2007 andthe balance must be drawn down by December 2007. In the event that thecumulative milestone and royalties received from these products are in excess ofthe minimum amortisation schedule and interest due, the balance will be appliedto the prepayment of principal without penalty. The three products are licensedfor marketing to the Therabel Group, Nitec and GlaxoSmithKline respectively. Theloan facility is secured by the assignment or charge over certain assetsincluding the receipts in respect of Coruno(R), Lodotra(TM), and Requip(R) XL24-hour(TM). There is also a covenant (negative pledge) not to grant furthersecurities over the Group's assets, including Flutiform(TM) intellectualproperty, and the requirement for prior consent from Christofferson Robb forcertain transactions that could affect Christofferson Robb's security and risk.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. In March 2007, once the detailed terms of the Paul Capital Refinancing weresettled, further discussions took place with CRC and the terms of the CRCFinancing were amended in a number of respects: (i) from 22 March 2007, theinterest charged on the first €7.5 million of the facility will be at the rateof Euro three month LIBOR plus 10.85%; (ii) the loan will be prepaid up to $10.0million out of 50% of any Flutiform(TM) milestones received after 1 January 2009(or on FDA approval if earlier); (iii) additional security will be provided ofan assignment 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 Flutiform(TM). The amortization schedule determines the minimum amounts payable under the CRCFinancing as follows (using exchange rates ruling as at 31 December 2006): Interest Repayment of principal Total $m $m $m2007 6.2 - 6.22008 7.8 0.5 8.32009 7.5 4.9 12.42010 6.7 8.1 14.82011 5.7 10.5 16.22012 4.6 10.7 15.32013 3.5 9.4 12.92014 2.6 8.9 11.52015 1.6 8.7 10.32016 0.4 8.3 8.7Total 46.6 70.0 116.6 The above table shows the minimum amortisation schedule assuming the cumulativemilestones and royalties from Coruno(R), Lodotra(TM), and Requip(R) XL 24-hour(TM) are not in excess of these (otherwise the principal would be paid offearlier without penalty). The interest estimate for 2007 is based on ananticipated draw down schedule. Approximately half of the facility is denominated in US dollar and half in Euro.The amounts above are translated into US dollar using the Euro exchange ratesapplicable at 31 December 2006. Other borrowing and cash Bank and other borrowings amounted to £8.4 million at 31 December 2006 (2005:£9.9 million), consisting principally of a £6.2 million property mortgagesecured on the assets of Jago (2005: £6.9 million). At 31 December 2006 SkyePharma had net cash of £10.6 million, comprising cashand cash equivalents of £11.9 million net of a bank overdraft of £1.3 million,compared with £34.3 million net cash at 31 December 2005. Going concern basis Following the financial restructuring completed in March 2007, the Directorshave a reasonable expectation that the Group has adequate resources to continuein operational existence for the foreseeable future. The auditors' report onthe financial statements for the year ended 31 December 2005, and the auditors'independent review conclusion on the 30 June 2006 interim report each containedan emphasis of matter paragraph relating to assumptions justifying the use ofthe going concern basis. The auditors' report on the financial statements forthe year ended 31 December 2006 again will include an emphasis of matterparagraph, on this occasion, to draw attention to the disclosures made in Note 1to the financial statements (set out in Note 1(a) to this preliminaryannouncement) indicating the existence of material uncertainties which relate to2009. The auditors' opinion is not qualified in this respect, and the Directorshave reasonable expectations that the risks concerned can be managed to asuccessful outcome. Foreign exchange risks All of the Group's continuing operations are based overseas in ContinentalEurope and license royalty payments are typically denominated in variouscurrencies, with sales-related payments based on underlying sales in localcurrencies. This gives rise to direct and indirect exposures to changes inforeign exchange rates notably the Swiss Franc, Euro and US Dollar. To minimisethe impact of any fluctuations, the Group's policy has historically been tomaintain natural hedges by relating the structure of borrowings to theunderlying trading cash flows that generate them. Where subsidiaries are fundedcentrally, this is achieved by the use of long-term loans, the exchangedifferences on which are taken to reserves. Use has been made of currencyoptions and forward currency contracts to minimise the currency exposure onoperational transactions. Injectable Business In January 2007, SkyePharma announced that it had sold the Injectable Businesssubject to shareholders' approval and certain other conditions to BlueAcquisition Corp for an initial cash consideration of US$20 million (less costs,US$2 million paid into escrow, a working capital adjustment and certainliabilities) and up to US$62 million of contingent milestone payments and apercentage of sales for certain future products for a defined period of time.The Injectable Business is also retaining responsibility for certain royaltybased payments which, when made, will reduce SkyePharma's debt to Paul Capital. In February 2007, shareholders approved the proposed sale of the InjectableBusiness to Blue Acquisition Corp at an EGM. The disposal completed in March2007. The results before exceptional items of the Injectable Business are as follows: 2006 2005 Pre - Exceptional Pre - Exceptional £m £mRevenue 6.3 10.5Cost of sales (8.5) (8.6) _____ _____Gross (loss)/ profit (2.2) 1.9Selling, marketing and distribution expenses (0.1) (2.7)Administration expenses Amortisation of other intangibles (0.7) (0.7) Other administration expenses (4.4) (2.7) (5.1) (3.4)Research and development expenses (8.7) (11.7) _____ _____Operating loss (16.1) (15.9)Finance costs (5.9) (6.1)Finance income - 8.0 _____ _____Loss for the year from discontinued operations (22.0) (14.0) _____ _____ Note: The results of the Injectable Business for the year ended 31 December 2005are different from those of the Injectable Segment published in the January 2007Circular and prior years' segmental analyses which included an allocation ofcorporate costs. The operating losses of the Injectable Business in 2007 up to the date of saleare estimated at £3.6 million. The realisable value of the Injectable Businesshas been arrived at based on the upfront consideration. No account has beentaken of the potential deferred payments in respect of DepoBupivacaine and otherproduct sales as it will be some years before these would be realised. As noted above, the consolidated income statement shows the net results of theInjectable Business separately (described as Discontinued Operations). Forward looking statements The foregoing discussions contain certain forward looking statements and aremade in reliance on the safe harbour provisions of the US Private SecuritiesLitigation Act of 1995. Although SkyePharma believes that the expectationsreflected in these forward looking statements are reasonable, it can give noassurance that these expectations will materialise. Because the expectations aresubject to risks and uncertainties, actual results may vary significantly fromthose expressed or implied by the forward looking statements based upon a numberof factors, which are described in SkyePharma's 20-F and other documents on filewith the SEC. Factors that could cause differences between actual results andthose implied by the forward looking statements contained in this Annual Reportinclude, without limitation, risks related to 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 this Annual Report. CONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2006 Year to 31 December 2006 Pre - Exceptional Notes Exceptional (Notes 3 and 7) Total Continuing 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 of intangibles (1.5) (8.8) (10.3) Other administration expenses (12.3) (4.9) (17.2) (13.8) (13.7) (27.5)Research and development expenses (22.9) - (22.9)Other income/ (expense) 0.8 0.7 1.5 _____ _____ _____Operating loss (13.9) (13.0) (26.9)Finance costs 5 (14.1) - (14.1)Finance income 5 3.0 20.1 23.1Share of loss in associate - - - _____ _____ _____Loss before income tax (25.0) 7.1 (17.9)Income tax expense (0.8) - (0.8) _____ _____ _____Loss for the year from continuing operations (25.8) 7.1 (18.7) _____ _____ _____ Loss for the year from discontinued operations 7 (22.0) (37.0) (59.0) _____ _____ _____Loss for the year from continuing and discontinuedoperations (47.8) (29.9) (77.7) _____ _____ _____ Basic and diluted earnings per share 6Continuing operations (0.8)p (1.7)p (2.5)pContinuing and discontinued operations (3.7)p (6.7)p (10.4)p Year to 31 December 2005 (restated) Pre - Exceptional Notes Exceptional (Notes 3 and 7) Total Continuing operations £m £m £mRevenue 2 50.8 - 50.8Cost of sales (20.6) - (20.6) _____ _____ _____Gross profit 30.2 - 30.2Selling, marketing and distribution expenses (3.1) - (3.1)Administration expenses Amortisation of intangibles (1.4) - (1.4) Other administration expenses (12.0) (5.1) (17.1) (13.4) (5.1) (18.5)Research and development expenses (14.3) - (14.3)Other income/ (expense) (0.4) - (0.4) _____ _____ _____Operating loss (1.0) (5.1) (6.1)Finance costs 5 (16.2) - (16.2)Finance income 5 2.8 - 2.8Share of loss in associate (0.8) - (0.8) _____ _____ _____Loss before income tax (15.2) (5.1) (20.3)Income tax expense (0.3) - (0.3) _____ _____ _____Loss for the year from continuing operations (15.5) (5.1) (20.6) _____ _____ _____ Loss for the year from discontinued operations 7 (14.0) (16.3) (30.3) _____ _____ _____Loss for the year from continuing and discontinuedoperations (29.5) (21.4) (50.9) _____ _____ _____ Basic and diluted earnings per share 6Continuing operations (2.5)p (0.8)p (3.3)pContinuing and discontinued operations (4.7)p (3.4)p (8.1)p See Notes to the Preliminary Announcement. CONSOLIDATED BALANCE SHEETas at 31 December 2006 31 December 2006 31 December 2005 Notes Restated (see Note 1 (b)) £m £mASSETSNon-current assetsGoodwill 8 29.2 68.7Other intangible assets 9 8.7 26.8Property, plant and equipment 25.1 37.1Investments in associates - 0.2Available-for-sale financial assets 0.1 1.6 _____ _____ 63.1 134.4Current assetsInventories 0.5 3.6Trade and other receivables 14.5 14.2Financial assets at fair value through profit or loss 0.6 0.4Cash and cash equivalents 10 11.9 34.3 _____ _____ 27.5 52.5Non-current assets classified as held for sale 7 17.1 - _____ _____Total Assets 107.7 186.9 LIABILITIESCurrent liabilitiesTrade and other payables (23.4) (21.0)Other borrowings 11 (8.6) (3.4)Deferred income (10.8) (7.7) _____ _____ (42.8) (32.1)Non-current liabilitiesConvertible bonds 11 (64.1) (63.6)Other borrowings 11 (25.4) (51.1)Deferred income (7.4) (2.9)Other non current liabilities (0.2) (3.4)Provisions 12 (9.5) (9.5) _____ _____ (106.6) (130.5)Liabilities directly associated with non-current assets 7 (6.7) -classified as held for sale _____ _____Total Liabilities (156.1) (162.6) _____ _____ Net (Liabilities)/ Assets (48.4) 24.3 _____ _____ SHAREHOLDERS' EQUITYShare capital 76.6 76.6Share premium 345.6 345.6Translation reserve 1.8 (1.2)Fair value reserve (0.2) 0.2Retained losses (501.5) (426.2)Other reserves 29.3 29.3 _____ _____Total Shareholders' Equity (48.4) 24.3 _____ _____ See Notes to the Preliminary Announcement. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the year ended 31 December 2006 Year to 31 Year to 31 December December 2006 2005 (restated) £m £mNet currency translation effect 2.9 (0.3)Available for sale financial assets Fair value movement taken to equity (0.2) 0.2 Transfer to the income statement on disposal (0.2) -Actuarial losses on defined benefit plans (0.1) - _____ _____Net profits/ (losses) recognised directly in equity 2.4 (0.1)Loss for the year from continuing operations (18.7) (16.4)Loss for the year from discontinued operations (59.0) (34.5) _____ _____Total recognised income and expense for the year (75.3) (51.0) _____ _____ Effect of restatement for prior period error (Note 1(b))Reduction in shareholders' equity - (7.6) _____ _____ See Notes to the Preliminary Announcement. CONSOLIDATED CASH FLOW STATEMENTfor the year ended 31 December 2006 Note Year to Year to 31 December 31 December 2006 2005 £m £m Cash flow from operating activitiesCash used in operations (a) (8.7) (7.6)Income tax paid (0.3) (0.3) _____ _____Net cash used in operating activities (9.0) (7.9) Cash flows from investing activitiesPurchases of property, plant and equipment (2.0) (2.6)Purchases of intangible assets (1.4) (2.3)Proceeds from disposal of available for sale investments 1.3 1.6Purchase of shares in associates - (0.2)Purchase of own shares - (0.4) _____ _____Net cash used in investing activities (2.1) (3.9) Cash flows from financing activitiesRepayments of borrowings (6.9) (7.4)Interest paid (6.3) (6.7)Interest received 1.0 0.8Gross proceeds from rights issue - 37.7Expenses of rights issue - (2.9)Proceeds from issue of ordinary share capital - 0.1Proceeds from issue of convertible bonds due June 2025 - 20.0Expenses of issue of convertible bonds due June 2025 - (1.2)Repayment of convertible bonds due June 2005 - (9.8) _____ _____Net cash (used in)/ generated from financing activities (12.2) 30.6 Effect of exchange rate changes (0.1) 0.2 _____ _____Net (decrease)/ increase in cash and cash equivalents less bank (23.4) 19.0overdraft Net cash and cash equivalents less bank overdraft at beginning 34.3 15.3of the yearNet (decrease)/ increase in cash and cash equivalents less bank (23.4) 19.0overdraftLess cash and cash equivalents included in discontinued (0.3) -operations _____ _____Net cash and cash equivalents less bank overdraft at end of the 10.6 34.3year _____ _____ Analysis of net cash:Cash and cash equivalents 10 11.9 34.3Bank overdraft 11 1.3 - _____ _____Net cash and cash equivalents 10.6 34.3 _____ _____ 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 2006 31 December 2005 (restated) £m £mLoss for the year from continuing operations (18.7) (16.4)Loss for the year from discontinued operations (59.0) (34.5) _____ _____Loss for the year from continuing and discontinued operations (77.7) (50.9) Adjustments for: Tax 0.8 0.3 Depreciation 5.5 6.2 Amortisation 2.2 2.1 Impairments 46.6 19.4 Fair value loss/ (gain) on derivative financial instruments 0.2 (0.3) Finance costs 18.2 22.3 Finance income (23.1) (10.0) Share of loss in associate - 0.8 Profit on disposal of available for sale financial assets (0.6) (0.3) Share based payments charge 2.5 2.4 Other non-cash charges 0.2 0.8 _____ _____Operating cash flows before movements in working capital (25.2) (7.2) Changes in working capital Decrease/ (increase) in inventories 2.1 (2.1) (Increase)/ decrease in trade and other receivables (2.4) 4.2 Increase in trade and other payables 6.5 1.2 Increase/ (decrease) in deferred income 10.3 (3.4) Decrease in provisions - (0.3) _____ _____Cash used in operations (8.7) (7.6) _____ _____ Notes to the Preliminary Announcement 1 Basis of preparation The preliminary announcement was approved by the Board on 25 April 2007. The preliminary announcement has been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") adopted by the European Union and theinterpretations issued by the International Financial Reporting InterpretationsCommittee ("IFRIC") and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS. All IFRS issued by the International AccountingStandards Board ("IASB") that were effective at the time of preparing thepreliminary announcement and adopted the European Commission for use inside theEU were applied by SkyePharma. In preparing this preliminary announcement theGroup has applied the accounting policies as set out in the Group's consolidatedfinancial statements for the year ended 31 December 2005 to which no materialchanges 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 2005 and 2006. The financial information for theyears ended 31 December 2005 and 2006 has been extracted from the Group'saudited consolidated financial statements for the year ended 31 December 2005and 2006. The auditors' report on those accounts was unqualified and did notcontain a statement under Section 237 (2) or (3) of the Companies Act 1985.Certain comparative figures as at 31 December 2005 have been restated due to theclassification of the injectable business as a discontinued operation asdetailed in Note 7 and to correct a prior period error by including a provisionfor deferred tax as detailed in Note 1 (b). The audited financial statements for the year ended 31 December 2005 have beendelivered to the Registrar of Companies The preliminary announcement has been prepared under the historical costconvention, as modified by the revaluation of financial assets and financialliabilities. (a) Going concern As set out in Note 11, 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 during May 2009 and £20.0 million bondswhich may be converted into Ordinary Shares at 58 pence per share, and may becalled for repayment by the bond holders at par during the following year. 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 Flutiform(TM). Although the application of drug deliverytechnologies to known molecules is lower risk than drug development, there canbe no absolute certainty that Flutiform(TM) will successfully completedevelopment and be launched in the United States in 2009. Nevertheless, theDirectors have a reasonable expectation that these risks can be managed to asuccessful outcome. Accordingly, following the financial restructuring completed in March 2007, andhaving made an assessment of the working capital requirements for the nexttwelve months, the Directors have a reasonable expectation that the Group hasadequate resources to continue in operational existence for the foreseeablefuture and have, therefore, prepared the financial information contained hereinon a going concern basis. The preliminary announcement does 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) Deferred taxation - correction of prior period error The comparative figures for 2005 have been restated for a prior period error toinclude a provision for deferred tax, as required by IAS 12, of £7.6 million at31 December 2005 on the temporary difference between the face value of theconvertible bonds and the value at which they are included in liabilities in thebalance sheet. This adjustment should have been made on the transition to IFRSand should have been included in the consolidated 2005 financial statements. Theprior period comparative figures in the consolidated balance sheet have beenrestated as follows: • A provision for deferred taxation of £7.6 million has been included asat 31 December 2005; • Other Reserves brought forward at 1 January 2005 have beenreduced by £6.9 million; • Other Reserves carried forward at 31 December 2005 have been reduced by£8.5 million; and • Retained losses brought forward at 1 January 2005 and carriedforward at 31 December 2005 have been reduced by £0.9 million. The restatement has no material effect on the consolidated income statement orconsolidated cash flow statement for the year ended 31 December 2005. 2 Segment information Revenue by business segment: Year ended Year ended 31 December 2006 31 December 2005 (restated) £m £mContinuing operations 43.0 50.8Discontinued operations 6.3 10.5 _____ _____Total revenue from continuing and discontinued operations 49.3 61.3 _____ _____ Revenue earned can be analysed as:License signing and milestone fees 12.7 16.4Contract research and development costs recharged 1.6 3.6Royalties 18.1 19.6Manufacturing and distribution 10.6 11.2 _____ _____Continuing operations 43.0 50.8Discontinued operations 6.3 10.5 _____ _____Total revenue from continuing and discontinued operations 49.3 61.3 _____ _____ Manufacturing and distribution revenues included a substantial contributiontowards maintaining manufacturing capacities internally and externally for theForadil(R) Certihaler(TM). Operating loss by business segment: Year ended 31 Year ended 31 December 2006 December 2005 (restated) £m £mContinuing operationsOperating loss pre exceptional items (13.9) (1.0)Exceptional items (13.0) (5.1) _____ _____Operating loss (26.9) (6.1)Share of loss in associate - (0.8)Net interest 9.0 (13.4)Tax (0.8) (0.3) _____ _____Loss after tax from continuing operations (18.7) (20.6)Loss after tax from discontinued operations (59.0) (30.3) _____ _____Loss after tax from continuing and discontinued operations (77.7) (50.9) _____ _____ 3 Exceptional items Year ended Year ended 31 December 2006 31 December 2005 (restated)Continuing operations £m £mAmortisation of intangibles (8.8) - Impairments (0.8) (3.1)Corporate restructuring (2.1) -Legal claims (1.5) -EGM costs (0.5) -Aborted transaction costs - (2.0) _____ _____Other administration expenses (4.9) (5.1) Profit on disposal of subsidiary undertaking 0.7 - Exceptional Paul Capital change in estimated future payments 20.1 - _____ _____Total exceptional items 7.1 (5.1) _____ _____ Of the exceptional items for 2006, £8.8 relates to impairments of intangibles asfollows: £0.9 million in respect of goodwill in SkyePharma AB related to certainproducts which are no longer considered to be cash generating and £7.9 millionin respect of intellectual property comprising nano technology acquired fromMedac and certain topical products acquired from Bioglan. A further £4.9 million relates to Other administration expenses as follows:impairments of £0.8 million comprising £0.2 million related to Astralis in viewof the continuing losses and financial position of Astralis; £0.4 million is towrite down the investment in Vital Living to reflect the illiquidity of theshares in that company and £0.2 million relates to Land and Buildings. Changesin the composition of the Board and staff reductions during the year resulted intermination payments, recruitment costs and other charges of £2.1 millionreported above under corporate restructuring. Provisions of £1.5 million forlegal claims reflect potential costs of settlement and or legal defence ofhistoric claims. EGM costs relate to the EGM which was requisitioned by certainshareholders and held in March 2006. In addition £0.7 million, which is included in Other income relates to a profiton disposal of SkyePharma Canada Inc. Following the reorganisation of researchand development operations and other business functions completed in 2004,SkyePharma Canada Inc was sold in July 2006 for £1.0 million (CDN$2.0 million).The disposal did not give rise to a taxation charge and did not include anyproduct or technology rights. The £20.1 million exceptional credit arises from the change in estimated futurepayments to Paul Capital as explained in Note 11 (Borrowings). Of the exceptional items for 2005 of £5.1 million, £3.1 million relates to theimpairment of the investments in Vital Living and Micap and £2.0 million relatesto legal and professional fees for an aborted strategic transaction. 4 Operating expenses Year ended Year ended 31 December 2006 31 December 2005 (restated)Continuing operations £m £mCost of sales 18.0 20.6Selling, marketing and distribution expenses 3.0 3.1Depreciation 4.7 5.0Amortisation 1.5 1.4Research and development expenses 22.9 14.3Other operating expenses 7.6 7.4 _____ _____Operating expenses before exceptional items 57.7 51.8Impairments 9.6 3.1Corporate restructuring 2.1 -Legal claims 1.5 -EGM costs 0.5 -Aborted transaction costs - 2.0 _____ _____Total operating expenses after exceptional items 71.4 56.9 _____ _____ 5 Finance costs and income Year ended Year ended 31 December 2006 31 December 2005 (restated)Continuing operations £m £mInterest and similar expense:Interest: bank borrowings (0.5) (0.5) Paul Capital arrangements (6.9) (6.6) interest on convertible bonds (6.3) (5.8) _____ _____Total interest expense (13.7) (12.9)Foreign exchange on Paul Capital arrangements - (3.3)Foreign exchange on inter company balances (0.4) - _____ _____Total interest and similar expense (14.1) (16.2) _____ _____ Interest and similar income:Paul Capital change in estimated future payments - 1.8Foreign exchange on Paul Capital arrangements 1.9 -Other interest income 1.1 1.0 _____ _____Total interest and similar income pre exceptional 3.0 2.8Exceptional credit arising from change in estimated future payments 20.1 -to Paul Capital (see Note 11) _____ _____Total interest and similar income 23.1 2.8 _____ _____ 6 Earnings per share Year to Year to 31 December 2006 31 December 2005 (restated)Continuing operations £m £mAttributable loss before exceptional items (25.8) (15.5)Exceptional items 7.1 (5.1) _____ _____Basic and diluted attributable loss (18.7) (20.6) _____ _____ Continuing and discontinued operationsAttributable loss before exceptional items (47.8) (29.5)Exceptional items (29.9) (21.4) _____ _____Basic and diluted attributable loss (77.7) (50.9) _____ _____ Number Number m mBasic and diluted weighted average number of shares in issue 748.8 624.9 _____ _____ Continuing operationsLoss per Ordinary Share before exceptional items (3.4)p (2.5)pExceptional items 0.9p (0.8)p _____ _____Basic and diluted loss per Ordinary Share (2.5)p (3.3)p _____ _____ Continuing and discontinued operationsLoss per Ordinary Share before exceptional items (6.4)p (4.7)pExceptional items (4.0)p (3.4)p _____ _____Basic and diluted loss per Ordinary Share (10.4)p (8.1)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. 7 Assets held for sale and discontinued operations The injectable business is 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. In January 2007, SkyePharma announced that it had sold the injectable businesssubject to shareholder's approval and certain other conditions to BlueAcquisition Corp ("Blue"). In February 2007, shareholders approved the proposedsale of the injectable business to Blue Acquisition Corp at an EGM. The disposalwas completed on 23 March 2007. The consideration for the disposal is broken down as follows: 1. Cash payments by Blue 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 set forth above based upon the netasset value of the business at completion in relation to a specified targetamount of the net asset value. 2. Milestone payments, by Blue to SkyePharma, of: i. US$10 million (£5.1 million) upon the first commercial sale in theUS of DepoBupivacaine(TM); ii. US$4 million (£2.0 million) upon the first commercial sale ofDepoBupivacaine(TM) in a major country of the EU; iii. US$8 million (£4.1 million) if worldwide annual net sales ofDepoBupivacaine(TM) reach US$100 million (£51 million); iv. US$8 million (£4.1 million) if worldwide annual net sales ofDepoBupivacaine(TM) reach US$250 million (£128 million); v. US$32 million (£16.3 million) if worldwide annual net sales ofDepoBupivacaine(TM) reach US$500 million (£255 million). 3. Ongoing payments for the period of protection by existing patents, subject tocertain conditions, to SkyePharma, of: i. 3% of worldwide net sales of DepoBupivacaine(TM); and ii. 3% of worldwide net sales of Biologics (not to exceed 20% of theroyalty income of Blue). In addition, the injectable business is retaining responsibility for certainroyalty-related payments due to Paul Capital and currently recorded as debt inthe balance sheet of the injectable business. The injectable business has been classified as held for sale because the Groupwas committed to sell the injectable business since the outcome of the strategicreview in February 2006; an active plan to locate a buyer was initiatedfollowing the strategic review; the injectable business was actively marketed ata fair price and the sale was expected to be completed within one year fromclassification. In addition, the injectable business has been classified as a discontinuedoperation because it represents a major line of business and geographical areaof operations. The income statement for the comparative period has been restatedto show the discontinued operation separate from the continuing operations. The injectable segment is the injectable business together with an allocation ofcorporate and other Group costs, assets and liabilities. (a) Results of discontinued operations Year to 31 December 2006 Pre - Exceptional Total Exceptional (Note 7b) £m £m £mRevenue 6.3 - 6.3Cost of sales (8.5) - (8.5) _____ _____ _____Gross (loss)/ profit (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)Finance income - - - _____ _____ _____Loss for the year from discontinued operations (22.0) (37.0) (59.0) _____ _____ _____ Year to 31 December 2005 Pre - Exceptional Total Exceptional (Note 7b) £m £m £mRevenue 10.5 - 10.5Cost of sales (8.6) - (8.6) _____ _____ _____Gross (loss)/ profit 1.9 - 1.9Selling, marketing and distribution expenses (2.7) - (2.7)Administration expenses Amortisation of other intangibles (0.7) - (0.7) Other administration expenses (2.7) (16.3) (19.0) (3.4) (16.3) (19.7)Research and development expenses (11.7) - (11.7) _____ _____ _____Operating loss (15.9) (16.3) (32.2)Finance costs (6.1) - (6.1)Finance income 8.0 - 8.0 _____ _____ _____Loss for the year from discontinued operations (14.0) (16.3) (30.3) _____ _____ _____ (b) Exceptional items Year ended Year ended 31 December 2006 31 December 2005Discontinued operations £m £mImpairments (37.0) (16.3) _____ _____ 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 the net realisablevalue of £2.1 million, allowing for the subsequent sale proceeds andattributable costs as set out in Note 8 (Goodwill). The exceptional item for 2005 of £16.3 million relates to the impairment of theinvestment in Astralis. (c) 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 _____ IFRS requires that the total assets and liabilities of discontinued operationsare each shown separately and excluded from the individual line items of theBalance Sheet. However, no restatement of the prior period is required and theassets and liabilities are included in the individual line items. Hence onlyamounts in respect of 2006 are shown above. (d) Cash flow from discontinued operations included in the ConsolidatedCash Flow Statement Year to Year to 31 December 2006 31 December 2005 £m £mCash flow from operating activities (21.4) (11.5)Cash flows from investing activities (1.1) (2.0)Cash flows from financing activities (1.8) (1.3) _____ _____ (24.3) (14.8) _____ _____ 8 Goodwill Total £mCostAt 1 January 2005 and 1 January 2006 82.7Transfer to discontinued operations (49.0) _____At 31 December 2006 33.7 _____ Accumulated amortisationAt 1 January 2005 and 1 January 2006 14.0Impairment 0.9Transfer to discontinued operations (10.4) _____At 31 December 2006 4.5 _____ Net book valueAt 31 December 2005 68.7 _____At 31 December 2006 29.2 _____ Goodwill arose on the acquisition of SkyePharma Inc (£35.6 million), SkyePharmaCanada (£29.2 million) and SkyePharma AB (£3.9 million) and has been allocatedto the following business segments/ cash-generating units: As at As at 31 December 2006 31 December 2005 £m £mInjectableBeginning of the year 38.6 38.6Impairment (37.0) -Transfer to discontinued operations (1.6) - _____ _____End of the year - 38.6 Oral and inhalationBeginning of the year 30.1 30.1Impairment (0.9) - _____ _____End of the year 29.2 30.1 _____ _____ 29.2 68.7 _____ _____ 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 value 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 business plansapproved by management which, generally, cover a period of 10 years, and areadjusted where necessary to take account of longer patent lives. The discountrate applied varies from 10% to 15% depending on the risk profile of the assetbeing valued. The key assumptions for the value in use calculations are those regarding thelaunch dates of products, their growth rates, the discount rates used and theperiod over which the cash flows are projected. The assumptions made reflectpast experience, market research and expectations of future market trends. Goodwill was tested for impairment at both 31 December 2005 and 2006. At 31December 2006, the group incurred a total impairment loss of £37.9 million. Ofthe £37.9 million, £37.0 million relates to the impairment of the injectablebusiness goodwill. Following the completion of the disposal in March 2007 theimpairment of the discontinued operation is based on the net realisable value of£2.1 million, allowing for the subsequent sale proceeds and attributable costs.The remaining £0.9 million was the result of impairing the goodwill inSkyePharma AB related to certain products which are no longer considered to becash generating. No impairment was identified at 31 December 2005. 9 Other intangible assets Intellectual Software Development property costs Costs Total CostAt 1 January 2005 39.0 0.9 0.6 40.5Exchange 0.2 - 0.4 0.6Additions 1.8 0.1 - 1.9 _____ _____ _____ _____At 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 31 December 2006 26.3 0.6 0.9 27.8 _____ _____ _____ _____ Accumulated amortisationAt 1 January 2005 12.5 0.7 0.6 13.8Exchange (0.1) - 0.4 0.3Amortisation charge 2.0 0.1 - 2.1 _____ _____ _____ _____At 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 31 December 2006 17.7 0.5 0.9 19.1 _____ _____ _____ _____ Net book valueAt 31 December 2005 26.6 0.2 - 26.8 _____ _____ _____ _____At 31 December 2006 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. Intellectual property acquired during 2006 mainly relates to the purchase oflicenses to intellectual property in the area of pulmonary delivery. 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 8 (Goodwill). At 31 December 2006, the group incurred atotal impairment loss of £7.9 million. This related to the nano technologyacquired from Medac and intellectual property related to certain topicalproducts acquired from Bioglan. Included within intellectual property is £3.0 million of assets which are notyet in use. These assets have not been amortised but have been tested forimpairment consistent with the method set out for goodwill in Note 8 (Goodwill).No impairment was identified. 10 Cash and cash equivalents As at As at 31 December 2006 31 December 2005 £m £mCash at bank and in hand 11.9 26.8Short term deposits - 7.5 _____ _____ 11.9 34.3 _____ _____ 11 Borrowings As at As at 31 December 2006 31 December 2005 £m £mCurrentBank overdraft 1.3 -Bank borrowings 2.0 2.3Property mortgage 0.2 0.3Paul Capital funding liabilities 5.0 0.7Finance lease liabilities 0.1 0.1 _____ _____Total current borrowings 8.6 3.4 _____ _____ Non-currentConvertible bonds due May 2024 51.2 50.8Convertible bonds due June 2025 12.9 12.8 _____ _____Convertible bonds 64.1 63.6 Bank borrowings - 0.6Property mortgage 6.0 6.6Paul Capital funding liabilities 19.3 43.9Finance lease liabilities 0.1 - _____ _____Other non-current borrowings 25.4 51.1 _____ _____ Total non-current borrowings 89.5 114.7 _____ _____ Total borrowings 98.1 118.1 _____ _____ Bank overdraft At 31 December 2006 the Group had an overdraft of £1.3 million (CHF 3 million)(2005: £Nil) with the Basellandschaftliche Kantonalbank secured on the assets ofSkyePharma AG. Bank borrowings At 31 December 2006 bank borrowings include two amounts due to theBasellandschaftliche Kantonalbank of £0.8 million (CHF 2 million) and £0.6million (CHF 1.5 million) (2005: £0.9 million (CHF 2 million) and £0.7 million(CHF 1.5 million)). Both loans can be terminated with six weeks notice by eitherparty and bear interest at 6.5% and 6.0% respectively. Both loans are secured onthe assets of SkyePharma AG and the £0.6 million (CHF 1.5 million) loan isguaranteed by SkyePharma PLC supported by a bank guarantee. The Group had a loan as at 31 December 2006 with GE Capital Corp of £0.6 million(US$1.1 million) (2005: £1.4 million (US$2.4 million)). The loan was secured bycertain assets of SkyePharma Inc, SkyePharma US Inc and SkyePharma PLC. The loanbore interest at 8.0% and was repayable by instalments until September 2007. InFebruary 2007 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 June 2006in accordance with the reset mechanism. The £69.6 million May 2024 bonds may becalled for repayment by the bond holders at par in May 2009, May 2011, May 2014or May 2019 and the £20.0 million June 2025 bonds may be called for repayment bythe bond holders 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 (2006: £64.1 million, 2005: £63.6 million) and partly in otherreserves in shareholders' equity (2006 and 2005:£28.5 million). The total facevalue of the convertible bonds is £89.6 million. The financial liabilty accruesover time to the face value, whereas the equity component remains fixed at thevalue at inception until the bonds are realised. Property mortgage At 31 December 2006, the Group had a property mortgage facility with theBasellandschaftliche Kantonalbank of £6.2 million (CHF 14.9 million) (2005: £6.9million (CHF 15.5 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. The second tranche of £3.8 million (CHF 9.1 million) bearsinterest at 3.875% and is repayable by instalments over 46 years semi-annually. Paul Capital funding liabilities The Group entered into two transactions with Paul Capital in 2000 and 2002.Under these transactions Paul Capital provided a total of US$60 million inreturn for the sale of a portion of the potential future royalty and revenuestreams on a selection of the Group's products. Whilst the contractual arrangements with Paul Capital are royalty agreementsunder which royalties are payable on revenues earned and payments received, theproceeds received from Paul Capital meet the definition of financial liabilitiesunder IAS 39, and are treated as financial liabilities accordingly. Royaltiespaid to Paul Capital are treated as repayment of the liabilities and notionalinterest is charged on the liabilities using the effective interest rate atinception of each agreement. The estimated payments to Paul Capital arediscounted using each contract's original effective interest rates of 24.5% of29.8%. Any change in the estimated future payments to Paul Capital is recognisedas income or expense in the income statement. Refer to Note 5 (Finance costs andincome). Subsequent to the year end the Group has completed a restructuring of the PaulCapital debt from an arrangement sharing royalties from a number of specifiedproducts into a fixed amortisable note of £47.3million (US$92.5million). Thenote will be increased by up to an additional £6.4million (US$12.5million) ifworldwide sales of DepoDur(TM) (a product of the injectable business) reachcertain thresholds, and the Group's obligations in that regard will be reducedby its share of royalty receipts on certain products included in the injectablebusiness sold subsequent to the year end, as explained in Note 7. The note isrepayable in accordance with an amortisation schedule through to 2015. TheCompany has guaranteed to the lender the obligations of the Group in respect ofthis facility. As at 25 April 2007, the net present value of this liability,after paying a first instalment of $2.7 million (£1.4 million) amounted to $44.3million (£22.1 million) compared with the value of $47.6 million (£24.3 million)included under the original arrangements in the 31 December 2006 balance sheet. The restructuring of the Paul Capital debt is on substantially different termsfrom those applying to the royalty sharing arrangement and, therefore, will betreated in 2007 as a new financial liability arising on extinguishment of anoriginal financial liability. The calculation of the Paul Capital fundingliability at 31 December 2006 reflects relevant evidence from the restructuringonly insofar as it affects estimated future payments due under the royaltysharing arrangement, and the reduction in liability accounts for the £20.1million exceptional gain referred to in Note 5. Finance lease liabilities Obligations under hire purchase and finance leases are secured upon the assetsto which they relate and as at 31 December 2006 £Nil (2005: £Nil) is guaranteedby SkyePharma PLC. Maturity analysis of non-current borrowings As at 31 December 2006 1 to 2 2 to 3 3 to 4 4 to 5 Over 5 Total Years Years Years Years Years 2008 2009 2010 2011 From 2012 £m £m £m £m £m £mConvertible bonds - 51.2 12.9 - - 64.1Property mortgage 0.3 0.3 0.3 0.3 4.8 6.0Paul Capital funding liabilities 4.5 4.3 3.7 2.9 3.9 19.3Finance lease liabilities 0.1 - - - - 0.1 _____ _____ _____ _____ _____ _____Non-current borrowings 4.9 55.8 16.9 3.2 8.7 89.5 _____ _____ _____ _____ _____ _____ Christofferson Robb facility 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. This schedule is basedon expected receipts from milestone and royalties in respect of Coruno(R),Lodotra(TM) and Requip(R) XL 24-hour(TM). Interest is generally charged on aquarterly basis at the respective US and Euro three month LIBOR rates plus a5.85% margin. Half of the committed principal on each loan was drawn down inJanuary 2007 and the balance must be drawn down by December 2007. In the eventthat the cumulative milestone and royalties received from these products are inexcess of the minimum amortisation schedule and interest due, the balance willbe applied to the prepayment of principal without penalty. The loan facility issecured by the assignment or charge over certain assets including the receiptsin respect of Coruno(R), Lodotra(TM), and Requip(R) XL 24-hour(TM). The threeproducts are licensed for marketing to the Therabel Group, Nitec andGlaxoSmithKline respectively. There is also a covenant (negative pledge), not togrant further securities over the Group's assets, including Flutiform(TM)intellectual property, and the requirement for prior consent from ChristoffersonRobb for certain transactions that could affect Christofferson Robb's securityand risk. There are provisions for the facility to be increased by a furtherUS$15.0 million subject to due diligence and progress with a specific productdevelopment. In March 2007, the terms of the CRC Financing were amended in anumber of respects: (i) from 22 March 2007, the interest charged on the first€7.5 million of the facility will be at the rate of Euro three month LIBOR plus10.85%; (ii) the loan will be prepaid up to $10.0 million out of 50% of anyFlutiform(TM) milestones received after 1 January 2009 (or on FDA approval ifearlier); (iii) additional security will be provided of an assignment or chargeover receipts in respect of two additional products (nisoldipine CR andzileuton CR); and (iv) a number of additional covenants and consents areincorporated in line with the Paul Capital refinancing. The security does notinclude Flutiform(TM). The Company has guaranteed to the lender the obligationsof the Group in respect of this facility. 12 Provisions Deferred Tax As at As at 31 December 2006 31 December 2005 (restated) £m £mBeginning of the year 7.6 6.0Issue of convertible bonds - 1.8Repayment of convertible bonds - (0.2) _____ _____End of the year 7.6 7.6 _____ _____ As required by IAS 12 ("Income Taxes"), provision for deferred tax relates tothe temporary differences between the face value of the convertible bonds andthe value at which they are included in liabilities in the balance sheet. Pensions As at As at 31 December 2006 31 December 2005 £m £mBeginning of the year 1.9 1.7Exchange (0.1) -Actuarial losses 0.1 0.3Charge for the year - (0.1) _____ _____End of the year 1.9 1.9 _____ _____ The provision relates to the Group's retirement commitments under its definedbenefit schemes in respect of its employees in Switzerland and France. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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