Final Results

Preliminary statement of annual results

SkyePharma PLC (LSE: SKP), LONDON, ENGLAND, 22 March 2012

Summary of Results for the year ended 31 December 2011

* Net debt is as shown in the balance sheet, which is presented under IFRS 

Financial Highlights

·; Revenues in line with Board expectations at £55.2m, down 5% compared with 2010 (£58.1m) which benefited from substantial non-recurring revenues

·; Pre-exceptional operating profit also in line with expectations at £11.9m (2010: £15.3m), down 22%, reflecting non-recurring manufacturing revenues in the prior year

·; Net loss after tax of £1.6m (2010: £6.3m net profit)

·; Pre-exceptional EBITDA £14.6m (2010: £18.6m)

·; Cash and cash equivalents of £15.2m at 31 December 2011 (2010: £29.0m)

·; Continued investment in R&D during 2011 in preparation for the anticipated launch of Flutiform™ once approved in Europe

Operating Highlights

·; Arbitration process for Flutiform™ approval in Europe expected to conclude later this year

·; Development of Flutiform™ in Japan making good progress, filing expected during Kyorin's fiscal year ending 31 March 2013

·; Development and Marketing Agreement for Flutiform™ signed with Sanofi for Mexico, Central and South America

·; Two additional milestones of £1.5m received from GSK on the commencement of Phase III trials of two inhalation products incorporating the Group's technology

·; Completion of initial 'Proof of Concept' study for SKP-1052, a diabetes care product candidate

·; Lodotra® - U.S. FDA accepted NDA for review; PDUFA date 26 July 2012

·; Approval of NDA for Exparel™ by U.S. FDA; U.S.$10m (£6.5m) milestone receivable on launch, anticipated in Q2 2012

·; Alliance formed with Aenova during 2011 to improve utilisation of the Lyon Manufacturing Facility in France; alliance expanded in January 2012 with Aenova utilising part of the Group's laboratory space in Muttenz

·; Agreement with CRC to defer prepayment out of Flutiform™ milestones in return for higher interest rate, enhancing the Group's liquidity

Post Reporting Period Highlights

·; Reorganisation of Swiss operations in January to improve SkyePharma's competitiveness and reduced the cost base of the business by approximately £1.6m in 2012 and £1.8m per annum thereafter

·; Peter Grant was appointed Chief Executive Officer of SkyePharma in January 2012 following the resignation of Dr Axel Müller

Commenting on the results, Peter Grant, Chief Executive Officer, said:

"The Group made significant progress on the delivery of its strategy during 2011. As anticipated, revenues and operating profits were lower than 2010, due to substantial non-recurring revenues in 2010, but profitability remained in line with the Board's expectations."

"Flutiform™ remains an important potential driver for the business. Although the European regulatory delay is disappointing for SkyePharma and potential patients, we remain confident in the efficacy and safety profile of Flutiform™ and are continuing to work closely with our partner, Mundipharma, to seek its approval in Europe as soon as possible. Good progress has been made with two Phase III clinical trials of Flutiform™ in Japan and the Japanese New Drug Application is expected to be filed during Kyorin's fiscal year ending March 2013. In July, we were pleased to announce the licensing of Flutiform™ for Mexico, Central and South America to Sanofi, the leading pharmaceutical company in Latin America."

"EXPAREL™ is a highly promising new agent in the management of post-surgical pain and its approval during 2011 is a significant achievement by our former injectable business, Pacira Pharmaceuticals. The potential milestones and share of sales from a successful launch and roll out are a major asset for SkyePharma, with the launch milestone of US$10 million anticipated during the second quarter."

"The Group is also making good progress in several other important areas. The lease of our Lyon manufacturing business to Aenova, which is one of Europe's leading contract manufacturing organisations, provided an important opportunity to increase utilisation of the plant, generate rental income and enable SkyePharma to focus on its core business of developing drug delivery solutions for the global pharmaceutical industry. The further alliance with Aenova announced in January 2012, will enable us to reduce our fixed cost base whilst retaining the capability to offer innovative oral drug delivery solutions with the opportunity to use the same staff on a sub-contract basis for laboratory work."

"This year will be pivotal for SkyePharma - our key goals are to obtain the marketing authorisation and launch of Flutiform™ in Europe, potential filing of Flutiform™ in Japan and reach agreements to reorganise the Group's finances to align repayment obligations with the Group's cash generative potential."

The results presentation has been published on the Company's website and a webcast of the analysts' conference will be available later today.

For further information please contact:

About SkyePharma PLC

Using its proprietary drug delivery technologies, SkyePharma develops new formulations of known molecules to provide a clinical advantage. The Group has eleven approved products in the areas of oral and topical delivery as well as important license and revenue-generating arrangements in inhalation and injectable technologies. The Group's products are marketed throughout the world by leading pharmaceutical companies. For more information, visit www.skyepharma.com.

CHAIRMAN'S STATEMENT

Frank Condella

Overview

Revenue in 2011 was £55.2 million (2010: £58.1 million), slightly lower than in 2010, as anticipated, due to substantial non-recurring manufacturing volumes recorded in the prior year. Pre-exceptional operating profit in 2011 was £11.9 million (2010: £15.3 million), in line with the Board's expectations. Loss after tax was £1.6 million (2010: £6.3 million profit).

The Group finished the year with cash and cash equivalents of £15.2 million (2010: £29.0 million), after meeting scheduled financing commitments for interest and capital repayments totalling £23.8 million.

As announced on 18 October 2011, the UK, the Reference Member State ("RMS") and almost all the Concerned Member States ("CMSs") were in agreement that Flutiform™ was approvable, but a complete consensus was not achieved by Day 210 of the decentralised procedure ("DCP"). The procedure moved into a Co-ordination Group for Mutual Recognition and Decentralised Procedures, human ("CMDh") referral process during which the RMS and CMSs sought a consensus on the final regulatory position. The referral process concluded and although the RMS and almost all CMSs continued to be in agreement that Flutiform™ was approvable, the complete consensus required for a positive outcome of the referral process was not achieved. The DCP for the regulatory review of Flutiform™ has now been referred to the European Medicines Agency ("EMA") and its Committee for Medicinal Products for Human Use ("CHMP") for arbitration. As part of the arbitration process, all members of the CHMP are involved in the evaluation and will work together to make a decision by a majority vote on the regulatory position of Flutiform™. The process is expected to conclude later this year.

Good progress has been made with two Phase III clinical trials of Flutiform™ in Japan. The Group's licensee, Kyorin Pharmaceutical Company Ltd ("Kyorin"), is expected to file the Japanese New Drug Application ("NDA") during the fiscal year ending March 2013 and, subject to receiving approval, launch during the fiscal year ending March 2015.

During 2011 the Group made important announcements which demonstrate the progress of its strategy:

- Flutiform™ was licensed for Mexico, Central and South America to Sanofi, the leading pharmaceutical company in Latin America.

- An agreement was reached with the Aenova Group to lease the Group's entire pharmaceutical manufacturing business and premises in Lyon as part of a strategic move designed to increase utilisation of the factory and enhance the Group's liquidity from rental income, reduce working capital and lower capital expenditure requirements. The lease is for an initial term of two years extendable for a further three years. The financial implications of the agreements were effective from 1 July 2011.

- An amendment has been made to the CRC finance facility to enhance the prospective liquidity position of the Group.

- The initial 'Proof of Concept' study for SKP-1052, a diabetes care product candidate, has been completed.

- The NDA for Lodotra® to the United States Food and Drug Administration (FDA) has been submitted and accepted, with a Prescription Drug User Fee Act ("PDUFA") target report date of 26 July 2012.

- EXPAREL™ has been approved by the United States FDA and is expected to lead to the Group receiving a U.S.$10 million (£6.5 million) milestone during Q2, 2012.

Since the year end, the Group has reorganised its operations in Muttenz, Switzerland, resulting in a reduction of 21 staff. Separately, the Group entered into agreements with the Aenova Group to sub-let part of its laboratory space in Muttenz and sell some of its surplus laboratory equipment to Aenova. Aenova now employs 15 skilled staff in its new development centre, including 11 skilled technical staff recruited by agreement from SkyePharma's oral formulation and oral analytical development team. Aenova will use its Muttenz development centre to expand its own oral product development activities as well as carrying out oral product formulation and analytical services for SkyePharma on a sub-contract basis. SkyePharma will continue to offer a full range of innovative oral drug delivery solutions to its customers through its business development team, but on a more competitive basis due to lower fixed costs, providing greater flexibility for new oral business opportunities and its own R&D activities. As a result of these agreements, ongoing operating costs will reduce by CHF 2.6 million (£1.8 million) per annum.

These initiatives reflect the Board's continuing commitment to improve the prospects of the business and focus on exploiting SkyePharma's proven drug delivery capabilities and technologies.

To further constrain costs and conserve cash no inflationary pay increases have been implemented in the Group for 2012 and no bonuses are being paid in respect of 2011.

Financial highlights

Revenues in 2011 totalled £55.2 million, down 5 per cent. compared with 2010 (£58.1 million). This is primarily due to substantial manufacturing revenues in 2010 related to non-recurring volumes to support regulatory and commercial activities.

Pre-exceptional operating profit at £11.9 million is consequently lower than the £15.3 million in 2010 due to the non-recurring manufacturing revenues in 2010.

Loss before tax for 2011 was £1.0 million (2010: £6.5 million profit), loss after tax was £1.6 million (2010: £6.3 million profit) and basic earnings per share were a loss of 6.7 pence (2010: 26.3 pence gain).

At 31 December 2011 the Group had cash of £15.2 million, compared with £29.0 million at 31 December 2010, the reduction being mainly due to costs incurred on preparing for the launch of Flutiform™. 

Pre-exceptional earnings before interest, tax, depreciation and amortisation ("EBITDA") for the year totalled £14.6 million (2010: £18.6 million) or 26 per cent. of revenues (2010: 32 per cent. of revenues). 

Board

As announced on 31 January 2012, Dr Axel Müller resigned as Chief Executive Officer and a director of SkyePharma PLC with immediate effect to pursue other interests. The Board wishes Axel well in his future endeavours.

Peter Grant, Chief Financial Officer since November 2006, was appointed Chief Executive Officer in his place and has retained responsibility for the Group's financial matters.

Outlook

A positive outcome of the European arbitration decision on Flutiform™ anticipated later this year is key to the short term performance as well as the longer-term prospects of the Group. Revenues will benefit from milestones of €8 million (£6.7 million) if Flutiform™ is approved and launched in initial markets in Europe.

Contract R&D revenues are forecast to show some growth compared with 2011. Internal resources have been reduced through the restructuring of the oral development team, which will allow SkyePharma to continue to offer a full range of innovative oral delivery services with greater use of sub-contracting, and inhalation development resources are more focused on fee-earning business. As a result, the Group's net investment in R&D, which was £8.0 million in 2011, is expected to be substantially reduced in 2012. Royalties are expected to show a modest decline in 2012 compared with 2011 due to generic competition affecting certain products and the withdrawal by AstraZeneca of Pulmicort® pMDI in 2011. Manufacturing revenues are expected to be lower in 2012 as launch stocks for Flutiform™ were largely built in 2011 and sales of certain Lyon products are affected by generic competition. Manufacturing costs are not expected to be lower than in 2011 due to minimum commitments related to the Flutiform™ supply chain.

Overhead costs are expected to be lower in 2012 compared with 2011 due to the reorganisation of the Muttenz R&D operations announced in January 2012 and continuing cost conservation measures.

The Group's cash position started 2012 at £15.2 million and the Board expects that liquidity will benefit from a U.S.$10 million (£6.5 million) milestone payment due when Pacira achieves the first commercial sale of EXPAREL™ in the United States. This is anticipated in Q2, 2012. If Flutiform™ is approved and launched in initial markets in Europe, liquidity will also benefit from the receipt of €8 million (£6.7 million) of initial launch milestones, subject to 50% of these amounts being applied as prepayments of the Paul Capital Note.

The Group continues to work with Jefferies International Limited, which is advising on the Group's capital structure. SkyePharma (Jersey) Ltd will seek to commence a dialogue with bondholders during the coming months. The aim is to seek a consensual solution to rebalance the Group's financing obligations to be in line with forecast cash generation and this may involve substantial dilution to shareholders. Further information about the Group's potential cashflows is set out in Note 1 to the preliminary announcement.

The key strategic objectives for 2012 are to obtain a positive outcome to the arbitration process for Flutiform™ in Europe, to support a successful launch by Mundipharma, to file the NDA for Flutiform™ in Japan and to seek a consensual solution to rebalance the Group's financing obligations in line with forecast cash generation. In the meantime, the Group's management will continue to carefully manage costs and cash. The Directors believe that the achievement of these objectives would position the Group to have good growth prospects and further potential to exploit SkyePharma's proven drug delivery capabilities and technologies.

Frank Condella

Non-Executive Chairman

BUSINESS REVIEW

CHIEF EXECUTIVE OFFICER'S REVIEW

During 2011 the Group had 12 approved and marketed products which together generated £33.6 million of royalty and manufacturing revenues (2010: £47.9 million). In addition Flutiform™ generated £12.7 million of manufacturing and contract development revenue in 2011 (2010: £7.5 million) of which £6.4 million (2010: nil) came from manufacturing.

Flutiform™, the fixed dose combination of fluticasone, an inhaled corticosteroid ("ICS"), and formoterol, a long-acting beta agonist ("LABA") in a Metered Dose Inhaler ("MDI"), continues to be an important potential value driver for the Group. The DCP for the regulatory review of Flutiform™ has now been referred to the EMA and CHMP for arbitration. All members of the CHMP are involved in the evaluation and will work together to make a decision by a majority vote on the final regulatory position of Flutiform™. As anticipated, substantial investment was made during 2011 in preparing the Flutiform™ supply chain and supplying product for the launch period. The development of Flutiform™ in Japan is making good progress with the continuing expectation of filing the Japanese NDA by the end of Kyorin's fiscal year to March 2013. The appointment in July 2011 of Sanofi as the licensee for Flutiform™ for Mexico, Central and South America provides a very strong partner for that region.

According to IMS (1) the preventative asthma/COPD market sizes in 2010 were estimated at U.S.$8.6 billion (£5.6 billion) in Europe, U.S.$2.1 billion (£1.4 billion) in Japan and U.S.$0.5 billion (£0.3 billion) in Mexico, Central and South America, with four-year compound annual growth rates of 6.6%, 11% and 16% respectively. Once approved, Flutiform™ will compete in these markets which comprise anti-leukotrienes, ICS, ICS/LABAs, LAMAs and PDE-4 inhibitors.

Further progress was made in the year with the approval of EXPAREL™ in United States, filing of the NDA for Lodotra® in the United States and completion of Phase II study for SKP-1041.

The development programmes for other pipeline products are also moving forward, with the completion of the proof of concept study during 2011 for SKP-1052, which is being developed to reduce the risk of nocturnal hypoglycaemia in diabetes patients. A licensee is being sought for this product candidate. The Group has embarked on several development projects for which it is charging partners on a time and materials basis.

The alliance with Aenova for the Group's factory in Lyon ("Lyon Manufacturing Facility") announced on 1 August 2011 and described in detail below is an important strategic development which has simplified the Group's operations and enabled it to concentrate on its core drug delivery business. The Aenova alliance is expected to increase utilisation of the Lyon Manufacturing Facility, reduce its dependency on relatively few products and negate the risk of the Group incurring losses from manufacturing oral products. It will also enhance the Group's liquidity from rental income, reduced working capital and lower capital expenditure requirements.

Separately, as announced on 10 January 2012, the Group entered into agreements with Aenova to sub-let part of its laboratory space in Muttenz and sell some of its surplus laboratory equipment to Aenova. Aenova plans to use the space to expand its own non-competing oral product development activities. The changes will not affect relationships with existing or potential customers and the Group will continue to provide its full existing range of innovative oral and inhalation drug delivery solutions.

The Group continues to focus on enhancing its business development capabilities and appointed Dr. Pierre Delavaud as Executive Vice President Sales & Business Development in September 2011. 

During 2011 the Group rationalised operations in Muttenz, Switzerland, into two buildings, with the third building (net book value: £4.2 million) being marketed for sale.

Strategic positioning

The key strategic objectives for 2012 are to obtain a positive outcome to the arbitration process for Flutiform™ in Europe, to support a successful launch by Mundipharma, to file the NDA for Flutiform™ in Japan and to seek a consensual solution to rebalance the Group's financing obligations in line with forecast cash generation.

SkyePharma has developed both metered dose and dry powder inhalation products which have received approvals in more than 35 countries in the world including the United States and European Union. The Group aims to capitalise on its proven and long-established expertise in developing respiratory products by seeking further projects to apply its inhalation drug delivery technologies and skills. These projects are likely to be mainly funded by customers. 

Over the past 15 years the Group has developed 13 oral products, which have obtained approvals all over the world, and which, over the last 5 years, generated approximately $4.4 billion of sales for the Group's partners. The lease of the Lyon oral manufacturing business to Aenova and subsequent establishment by Aenova of an oral drug development team in rented space in SkyePharma's Muttenz premises employing most of SkyePharma's former oral formulation and oral analytical development team has improved the competitiveness and flexibility of the Group's oral offering. The Group is continuing to offer a full range of innovative oral drug delivery solutions to its customers through its business development team, but on a more competitive basis due to lower fixed costs, providing greater flexibility for new business and its own R&D activities.

BUSINESS REVIEW - KEY PRODUCTS

MARKETED PRODUCTS

Solaraze®

Solaraze® (diclofenac), a topical gel treatment for actinic keratosis, is marketed in the United States by Fougera Pharmaceuticals Inc. ("Fougera"), formerly Nycomed US. Almirall, S.A. ("Almirall"), the distribution and marketing partner in Europe and certain other territories, announced the launch of Solaraze® in Spain in December 2011 following success in several countries including Germany and the United Kingdom. The Group earns a low-teens royalty rate on net sales.

Net sales of Solaraze® in the United States in 2011 were U.S.$56.4 million (£36.2 million), 68 per cent. higher than reported in 2010. Sales in 2011 by Almirall increased to €26.6 million (£22.3 million) in 2011 from €24.7 million (£20.7 million) in 2010, an increase of 8%. Almirall is continuing to expand the market for the product by seeking approval and launching in additional European countries.

SkyePharma and its licensee, Fougera, received an ANDA Paragraph IV notice relating to a potential generic to Solaraze® in the United States in April 2010. Fougera and SkyePharma have filed suit against the ANDA filer. 

Requip® Once-a-day

Requip® Once-a-day, marketed under various brand names, is a once-daily formulation for Parkinson's disease and was developed in collaboration with GlaxoSmithKline ("GSK"). The extended release Requip® Once-a-day uses the Group's patented Geomatrix™ technology and is designed to provide smooth delivery of ropinirole over 24 hours. 

The United States FDA approved Requip® Once-a-day extended release tablets in June 2008 and the product was launched in the United States in July 2008. In 2009, a number of ANDAs were filed with the FDA for generic versions of ropinirole extended release tablets, and tentative approvals have been granted, with the first expected to launch in June 2012.

SkyePharma earns low-mid single digit percentage royalties on net sales of Requip® Once-a-day. In 2011 sales of Requip® Once-a-day totalled £139 million, a decrease of 6 per cent. (at constant exchange rates) from 2010. £94.0 million was generated in Europe, a 12 per cent. decrease from 2010 using constant exchange rates. £38 million arose in the United States, an increase of 6 per cent. at constant exchange rates. The remaining £7.0 million arose from emerging markets and Asia Pacific which are expected to be increasingly important.

Xatral® OD

Xatral® OD (Uroxatral® in the United States) is a once-daily version of Sanofi's Xatral® (alfuzosin hydrochloride), a treatment for the signs and symptoms of benign prostatic hypertrophy ("BPH"). In 2011, reported sales of all forms of Xatral® were €200 million (£167.6 million), down on 2010 sales of €296 million (£248.1 million). In the United States, sales of Uroxatral® were €75.1 million (£63.5 million), down 48 per cent. from 2010 due to the generic launches in Q3 2011. Western European sales have continued to fall as a result of generic competition, with sales for 2011 of €58.3 million (£48.9 million), a reduction of 12 per cent. from 2010. Sales in other countries were €66.6 million (£55.8 million). The Group earns low single digit royalties on net sales of Xatral® OD.

Following a successful action by Sanofi which resulted in a ruling which affirmed the validity of a particular United States patent, potential generic competition to Uroxatral® in the United States was stayed until the expiry of the paediatric exclusivity on July 18, 2011. Five Abbreviated New Drug Applications ("ANDAs") were approved on July 18, 2011 and generic products have been launched in the United States. 

Paxil CR™

Paxil CR™ is an advanced formulation of the anti-depressant Paxil® (paroxetine) and was developed by the Group with GSK using the Group's Geomatrix™ technology. In 2011 reported sales were $81.0 million (£52.4 million), compared with $85.0 million (£55.0 million) in 2010. Sales of Paxil CR™ continued to be affected by generic competition especially in the United States Growth in sales in Asia and emerging markets outpaced the decline in the United States and this trend is expected to continue.

ZYFLO CR® (zileuton) Extended-Release Tablets

The Group developed an extended release formulation of the oral asthma drug zileuton for Cornerstone Therapeutics Inc. ZYFLO CR® (zileuton) Extended-Release tablets, taken twice daily, utilise the Group's proprietary Geomatrix™ technology, and the product was approved by the FDA in May 2007 for the prophylaxis and chronic treatment of asthma in adults and children aged 12 years and older. ZYFLO CR® and ZYFLO® (zileuton tablets) are the only FDA-approved leukotriene synthesis inhibitors. ZYFLO CR® recorded sales of $29.3 million (£19.0 million) in 2011, an increase of 4 per cent. (at constant exchange rates) from 2010. The Group receives a high-mid single digit percentage royalty on net sales of ZYFLO CR®. The product is manufactured at the Lyon Manufacturing Facility leased by the Group to Aenova.

Lodotra®

Lodotra®, the novel programmed-release formulation of low dose prednisone, utilising SkyePharma's proprietary Geoclock™ technology and developed in collaboration with Horizon Pharma, Inc ("Horizon"), was approved in Europe in March 2009 for the treatment of moderate to severe active rheumatoid arthritis in adults particularly when accompanied by related morning stiffness, under the European decentralised procedure. The product is approved for marketing in 16 European countries as well as in Israel and was launched in Germany in April 2009 and in Italy in January 2011. 

Lodotra® was originally licensed to Merck Serono for Germany and Austria and Mundipharma for the rest of Europe. In April 2011, Mundipharma acquired the distribution rights for the product in Germany from Merck Serono and has relaunched in this important market with a significantly larger sales force. Subsequently Merck Serono also transferred the second agreement with respect to Austria to Mundipharma.

In November 2010, Horizon signed an exclusive distribution and supply agreement with Mundipharma for the commercialisation of Lodotra® in Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, Philippines, Singapore, South Africa, Taiwan, Thailand and Vietnam and this was extended, in March 2012, to include Mexico, Brazil, Argentina, Colombia, Venezuela, Peru, Chile, Ecuador, Dominican Republic, Guatemala, Costa Rica, Uruguay, Bolivia, Panama, Nicaragua, El Salvador and Honduras. 

Two pivotal Phase III studies were completed for Lodotra®. The first was a 12-week, randomised, double blind, controlled study against marketed immediate-release prednisone to support the Marketing Authorisation Application ("MAA") approval in Europe. To support the submission of the NDA for the United States a second 12-week, randomised, double blind, multicentre, placebo controlled study involving 350 patients was conducted with patients in both treatment arms receiving a disease modifying anti-rheumatic drug ("DMARD"). Both studies met their primary endpoints. Horizon submitted the NDA for Lodotra® in the United States in September 2011. The NDA was accepted for review with a PDUFA date of 26 July 2012, when the review is scheduled to be completed based on the standard 10 month review.

The Group received a small share of the milestone payable on launch in Italy, and is entitled to receive a small share of any future milestones received by Horizon for Lodotra®. The Group is entitled to a low-mid single digit percentage royalty on net sales of Lodotra® in North America and a mid single digit percentage royalty elsewhere. Lodotra® is manufactured at the Lyon Manufacturing Facility leased by the Group to Aenova.

Sular®

The Group developed lower-dose formulations of Sular® (nisoldipine), a calcium channel blocker antihypertensive agent, for Shionogi Inc. ("Shionogi") using the Group's proprietary Geomatrix™ drug delivery system. The products were launched in March 2008.

Sales of Sular® continue to be under pressure from a declining market and increasing competition. Competitive generic versions of the original formulations of Sular® were launched in 2008 and competitive generic versions of the lower-dose formulations of Sular® were approved and launched in January 2011 in the United States. 

In March 2011, a fire at a packaging sub-contractor destroyed several batches of Sular® and Triglide® supplied to Shionogi and packaging operations were disrupted. Shionogi has refilled the supply chain and has informed the Group that it intends to maintain both products on the market.

The lower-dose formulations of Sular® are manufactured at the Lyon Manufacturing Facility leased by the Group to Aenova. 

Should total net sales of the lower-dose formulations of Sular® be significantly reduced following entry of additional generics, the Group's royalty rate would be reduced from a low-mid single digit percentage to a low single digit percentage on net sales.

Triglide®

Triglide® (fenofibrate), an oral treatment for elevated blood lipid disorders, is marketed in the United States by Shionogi. Triglide® was launched in 2005. Triglide® total prescriptions have continued to decline due to generic competition. Triglide® is manufactured at the Lyon Manufacturing Facility leased by the Group to Aenova. The Group is entitled to receive royalties as a percentage of net sales of Triglide®, less the price of product supplied to Shionogi.

Pulmicort® pMDI

As announced on 7 March 2011, AstraZeneca discontinued the production of Pulmicort® pMDI (budesonide) 100 and 200 µg/dose HFA pMDI (pressurised metered dose inhaler) and AstraZeneca terminated its agreements with the Group. Supplies already manufactured or in the supply chain continued to be distributed until exhausted. There have been subsequent discussions about certain rights relating to the product in respect of which SkyePharma was entitled to a licence, payments due on sales post termination and other issues connected with the fact of and manner of the termination. The Group may have to initiate litigation to assert its rights as well as consider any other steps which it is advised are appropriate in the circumstances.

SkyePharma developed the formulation for Pulmicort® pMDI using its proprietary formulation technology and earned a mid-teens royalty on AstraZeneca's net sales of the product. Royalties from this product comprised about 5 per cent. of SkyePharma's revenues in 2010.

DEVELOPMENT PIPELINE

Flutiform™

Flutiform™ - Europe

Flutiform™ is licensed to Mundipharma in Europe and most other territories outside Japan and the Americas. The MAA was accepted for review in May 2010. Although the RMS and almost all CMSs were in agreement that the product was approvable, a complete consensus had not been achieved by Day 210 of the DCP and by the conclusion of the later referral process. The DCP for the regulatory review of Flutiform™ has now been referred to the EMA and its CHMP for arbitration. As part of the arbitration process, all members of the CHMP are involved in the evaluation and will work together to make a decision by a majority vote on the regulatory position of Flutiform™. The arbitration process is expected to conclude later this year.

Although Flutiform™ is comprised of fluticasone propionate and formoterol fumarate, two well known and established active substances with well recognised safety and efficacy profiles, the Flutiform™ MAA is a stand-alone, complete dossier. The total programme comprised 18 completed studies and included almost 5,000 patients. The five pivotal Flutiform™ phase 3 efficacy studies included approximately 2,500 patients and the safety database includes in excess of 1,900 Flutiform™-treated patients.

The development and marketing agreement with Mundipharma, as amended, includes milestones of up to €73.0 million (£61.2 million), of which €15.0 million (£10.1 million at that time) was paid up front, €3.0 million (£2.9 million at that time) was paid on 31 December 2008, up to €15.0 million (£12.6 million) is due in instalments as launches occur in major markets in Europe and up to €40.0 million (£33.5 million) is sales-related. 

Mundipharma is funding third party development costs of up to €19 million (£15.9 million) principally related to the development of a high strength version of Flutiform™. These costs are initially paid by Mundipharma, which is entitled to recover them out of partial reductions in royalties and sales-related milestones due to the Group for up to four years following commercial launch in one of Europe's five largest markets. 

Mundipharma has commenced preparations for a double blind study of Flutiform™ in children aged 5-12, required under the agreed Paediatric Investigation Plan ("PIP") for Europe. Under the agreements with Mundipharma the Group has certain obligations to contribute to the costs of this study, once it has been completed, up to a maximum of €3.5 million (£2.9 million).

Under the development and marketing agreement with Mundipharma the Group is entitled to royalties as a percentage escalating upwards from 10 per cent. of net sales. The net royalties received are subject to the reductions noted above for the recovery of high strength development costs and also by a cap on the total percentage that cost of goods and royalties can represent of net sales of Flutiform™. The payment of royalties continues whilst the agreement is in force until the later of 15 years from the date of the First Commercial Delivery in a Major Country and the expiration of the last of the Jagotec patents utilised in the Territory.

Flutiform™ - Japan

Flutiform™ is licensed to Kyorin Pharmaceutical Company Ltd ("Kyorin") in Japan. Under the agreement with Kyorin the Group has received an upfront milestone and certain development milestone payments, including a final pre-approval milestone received in 2011. An approval milestone worth several million US dollars is payable to SkyePharma under the agreement and there is a high-mid single digit percentage royalty on net sales. The development costs associated with obtaining approval for the Japanese market are largely being met by Kyorin, which is responsible for clinical studies and regulatory submissions. Good progress continues to be made with two Phase III clinical trials of Flutiform™ in Japan. Kyorin is expected to file the Japanese NDA during Kyorin's fiscal year ending March 2013 and, subject to receiving approval, launch during Kyorin's fiscal year ending March 2015.

Flutiform™ - Mexico, Central and South America

On 28 July 2011, SkyePharma entered into an exclusive Development, License and Marketing Agreement with Sanofi in Mexico, Central and South America for Flutiform™. Under the agreement, SkyePharma is eligible for initial, approval and sales milestones potentially worth several million US dollars and a high single digit percentage royalty on net sales. 

Under the agreement, Sanofi aims to pursue marketing authorisation applications for Flutiform™ throughout the region, including in Mexico, Brazil, Argentina, Venezuela and Colombia. The applications will be based on data included in, and subject to approval of, the MAA for Flutiform™ filed by Mundipharma.

Sanofi currently manufactures Flutiform™ under contract to SkyePharma at its factory in Holmes Chapel, UK, and this arrangement has been extended to allow Sanofi to manufacture Flutiform™ and supply it directly to its group companies for Mexico, Central and South America using certain ingredients and components supplied by SkyePharma.

Flutiform™ - United States

Following the Complete Response Letter from the FDA in January 2010 and subsequent interactions, the Group has carried out a specific amount of chemistry, manufacture and control work to address some of the queries raised by the FDA. A meeting has been held with the FDA at which it was confirmed that the scope of work that would currently need to be undertaken to meet the requirements for approval of Flutiform™ in the United States would be considerable. The FDA confirmed its current position that a substantial safety study would also need to be carried out post-approval, similar to that for currently marketed products containing a long-acting beta agonist. As previously announced, the Group does not plan to carry out substantive work on pursuing the NDA for Flutiform™ unless the costs are covered by a third party.

SKP-1041

Somnus Therapeutics, Inc. ("Somnus") has successfully completed three Phase I studies and a Phase II study of the modified release sleep maintenance drug SKP-1041. The product is a new formulation of zaleplon, a non-benzodiazepine hypnotic agent, which utilises SkyePharma's proprietary Geoclock™ technology for delayed release. The formulation is designed to treat people who have difficulty maintaining sleep but not with sleep onset, and is intended to prevent middle-of-the-night awakening while avoiding morning residual effects.

The Phase II study was initiated in June 2010 and the study met its primary end points. Somnus reported that "at all three doses tested in the study, SKP-1041 significantly reduced time spent awake during the night compared to placebo, with no evidence of next-morning adverse cognitive effects". Somnus is now seeking a partner to fund further development of the product. 

Under the agreement with Somnus, the Group could receive up to U.S.$35.0 million (£21.9 million) in milestone payments, of which U.S.$4.0 million (£2.0 million at that time) was received on signing and U.S.$1.0 million (£0.7 million at that time) was received on completion of the initial Phase I study. A further U.S.$10.0 million (£6.4 million) is payable on product launch, and U.S.$20.0 million (£12.8 million) is sales-related.

SkyePharma is entitled to receive a royalty on future net sales escalating upwards from a high-mid single digit percentage.

SKP-1052

In 2009, the Group commenced formulation work on SKP-1052, an oral product for the treatment of nocturnal insulin-induced hypoglycaemia in patients with type 1 and 2 diabetes mellitus. The project applies the Group's proprietary Geoclock™ technology to improve the delivery of an existing marketed active pharmaceutical ingredient. A proof of concept study has been carried out and a partner is being sought to fund the development through to approval and, subject to approval, to market the product. SKP-1052 is targeted at the growing multi-billion dollar market for diabetes management.

EXTERNAL PROGRAMMES

EXPAREL™

In October 2011 the FDA approved, for marketing in the United States, EXPAREL™ (bupivacaine liposome injectable suspension) 1.3% for administration into the surgical site to produce postsurgical analgesia. Under the terms of the sale of the Group's former Injectables Business, now called Pacira, the Group is entitled to receive a milestone payment of U.S.$10 million (£6.5 million) on first commercial sale of EXPAREL™ in the United States. The Group is also entitled to receive three per cent of net sales of EXPAREL™ in the United States, Japan, the United Kingdom, France, Germany, Italy and Spain. Longer-term the Group is entitled to receive further contingent milestone payments up to an aggregate of U.S.$52 million (£33.7 million) from Pacira, depending on the following events occurring: (i) U.S.$4 million (£2.6 million) on first commercial sale in a major EU country (UK, France, Germany, Italy or Spain); (ii) U.S.$8 million (£5.2 million) if worldwide annual net sales reach $100 million; (iii) a further U.S.$8 million (£5.2 million) if worldwide annual net sales reach $250 million and (iii) a further $32 million (£20.7 million) if worldwide annual net sales reach $500 million.

Pacira has hired and trained a sales force and has announced that it expects to have built sufficient launch stock by April 2012. The Board, therefore, anticipates that the Group will receive the U.S.$10 million (£6.5 million) launch milestone during Q2 2012.

Licence fees

In 2003 SkyePharma signed an agreement with GSK to provide access to one of SkyePharma's proprietary dry powder formulation technologies for inhalation products. GSK made an initial payment to SkyePharma on signature. Subsequently one milestone payment of £1.5 million was received in 2009 and two further milestone payments of £1.5 million have been received in 2011 for use of the technology in two development programs involving three chemical entities. In addition, SkyePharma is entitled to a low single digit royalty on net sales of products using the licensed technology that reach the market, capped at a maximum amount of £3 million per annum for each chemical entity for the life of the relevant patent.

FEASIBILITY STUDIES AND TECHNOLOGY DEVELOPMENT

The Group continues to seek to strengthen the product pipeline through further early stage feasibility and technology development projects, funded where possible, on a time and materials basis by partners. During the last year the Group's respiratory development team has provided contract development services for a company developing new molecules and this has led to a second similar development contract.

SkyePharma continues to seek applications for its proprietary SkyeHaler™ Dry Powder Inhaler ("DPI"). This is one of only a few DPI devices which has been incorporated into a product approved by the FDA, and is the only such device which is not proprietary to a major pharmaceutical company. SkyeHaler™ is a multi-dose reservoir device suitable for acute and chronic therapies with a dose counter and an end of life lockout mechanism.

MANUFACTURING

Lyon

On 1 August 2011 SkyePharma announced that it had agreed terms to enter into an alliance (the "Alliance") with the Aenova Group to increase utilisation of SkyePharma's manufacturing facility in Saint Quentin-Fallavier, Lyon, France. 

Aenova France SAS ("Aenova"), a wholly-owned subsidiary of Aenova Holding GmbH, a German-based pharmaceutical contract manufacturing organisation, leased the entire pharmaceutical manufacturing business ("Manufacturing Business") and the premises at Saint Quentin-Fallavier, Lyon (together the "Facility") for an initial period of two years, extendable for a further three years. During the lease period the parties may have further discussions to extend the Alliance beyond the fifth anniversary.

The Alliance provides Aenova with access to an FDA-registered pharmaceutical manufacturing plant with significant capacity available which Aenova aims to utilise. The Alliance also enhances the Group's liquidity through rental income, reduced working capital and lower capital expenditure requirements. 

The Alliance agreements came into effect on 16 August 2011, at which point the Manufacturing Business was transferred to Aenova as a going concern, including all employees, raw materials and work in progress, and, from that date, Aenova has managed and run the Facility. Notwithstanding the effective date of the agreements, the financial implications of the agreements were effective from 1 July 2011. SkyePharma retains all its current contractual arrangements with its partners and Aenova will continue to manufacture all SkyePharma products currently manufactured at the Facility and supply them to SkyePharma. SkyePharma continues to work with Aenova to utilise the Facility to manufacture oral products in development by SkyePharma. 

The Lyon Facility manufactures six Geomatrix™ based products, diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Sular®, Lodotra®, Madopar DR®, which has recently been been transferred from the Group's R&D centre in Muttenz, Switzerland to Lyon. The Lyon Facility also manufactures one other oral product, Triglide®, based on its solubilisation technology. The Lyon factory has cGMP status, with approvals from the European Medicines Agency and United States FDA. 

During 2010 manufacturing revenues were significantly boosted by non-recurring volumes to support regulatory and commercial activities, which led, in that year, to a very significant contribution from products manufactured at Lyon.

Flutiform™ Supply Chain

Under the agreements with Mundipharma and Kyorin, the Group is responsible for arranging the manufacture and supply of Flutiform™, and has contracted with Sanofi to manufacture and assemble the product at its factory in Holmes Chapel, UK. The Group has entered into agreements with a number of suppliers in order to obtain materials required to manufacture Flutiform™ and have them supplied to Sanofi. 

To establish the supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes. The manufacturing process was validated during 2011 and initial stocks of product ready for packing were manufactured and sold to Mundipharma.

The Group has certain minimum commitments to its suppliers in respect of Flutiform™ which total approximately €9 million to €11 million (£7.5 million to £9.2 million) per annum through to 2015, subject to certain early termination rights.

These minimum commitments, along with start-up costs and initial low volumes during the launch phase are expected to delay the profitability of the supply chain arrangement for Flutiform™ until the product has been successfully established in a number of major countries.

Peter Grant

Chief Executive Officer

1. Source: IMS data for 2010. Europe comprises the EU plus Switzerland, Norway and Croatia. Preventative market defined as: anti-leukotrienes, ICS, ICS/LABAs, LABAs, LAMAs and PDE-4 inhibitors (where available). Definition does not include hospital formulations e.g. IV or nebulised forms, or sustained-release theophylline. Where sales data is limited (e.g. retail only, or none available) appropriate scaling approaches are used. CAGR = Compound Annual Growth Rate. LAMA = Long-acting Muscarinic Antagonist. PDE-4 = Phosphodiesterase 4 inhibitor.

FINANCIAL REVIEW

Revenue

Revenue in 2011 was £55.2 million (2010: £58.1 million) slightly lower than in 2010, as anticipated, due to the substantial non-recurring regulatory and commercial manufacturing volumes recorded last year.

Revenue recognised from signing and milestone payments was £6.1 million in 2011 (2010: £1.6 million) and included two £1.5 million milestones from GSK and an additional milestone received in respect of Flutiform™ Japan.

Contract research and development revenue increased by 2 per cent. to £8.8 million in 2011, from £8.6 million in 2010 due to an increase in revenues relating to the development of Flutiform™ for Japan as well as contract development services for a company developing new molecules.

Royalty income showed a decrease of £2.9 million to £22.1 million in 2011. At constant exchange rates, royalty income declined by 15 per cent. The decline is mostly due to AstraZeneca's decision to cease production of Pulmicort® pMDI and reduction in Xatral® OD sales as a result of generic competition.

Manufacturing and distribution revenue totalled £17.9 million in 2011, a decrease of £5.0 million compared with £22.9 million earned in 2010. This decrease is due to non-recurring volumes that occurred in 2010 to support regulatory and commercial activities partially offset by the sale, in 2011, of initial supplies of Flutiform™ ready for packing, once the product is approved.

Research and development expenses

Research and development expenses incurred in 2011 decreased to £16.8 million (2010: £23.5 million). The Group's net investment in research and development (expenses, net of contract development revenues) was £8.0 million, a reduction in net investment of £6.9 million compared with 2010, as the Group carried out less own-funded development projects. The net expenditure was primarily on preparing the Flutiform™ supply chain for commercial launch in Europe together with a number of early stage feasibility and technology development projects, especially SKP-1052 for diabetes care.

Corporate costs

In January 2011, the Group's corporate office in London moved from 105 Piccadilly to its new offices at 46-48 Grosvenor Gardens. The move saves the Group approximately £0.2 million per annum.

Operating Result

The operating result before exceptional items was £11.9 million (2010: £15.3 million). Pre-exceptional EBITDA was £14.6 million (2010: £18.6 million), as shown below:

Finance costs and income

Finance costs - interest totalled £11.8 million (2010: £12.3 million) and consisted of £6.2 million (2010: £6.1 million) payable on the Convertible Bonds, £3.0 million (2010: £3.0 million) payable on the CRC finance, £2.2 million (2010: £2.8 million) of interest attributable to the Paul Capital Note and £0.4 million (2010: £0.4 million) on other bank borrowings.

Finance costs - revaluation consisted of a gain of £0.4 million arising from the revaluation of the carrying value of the Paul Capital Note (2010: charge of £1.5 million) as a result of revisions made to the timing of prepayments to be made to Paul Capital on receipt of certain Flutiform™ milestones as detailed in Note 11: Borrowings.

Group finance income consists of £0.2 million (2010: £0.2 million) of bank interest.

Foreign exchange

Foreign exchange consists of net translation gains and losses on borrowings and cash denominated in a currency other than the entity's functional currency. In 2011 this totalled a credit of £0.4 million (2010: £5.6 million). Although benefiting from the foreign exchange movements on borrowings, the exceptional strength of the Swiss Franc has negatively affected the operating profit. In cash terms the impact has mainly been on the net R&D expenditure.

Result

Operating profit after exceptional items in 2011 was £9.8 million (2010: £14.5 million).

The loss for 2011 after exceptional items and taxation was £1.6 million (2010: £6.3 million profit).

Earnings per share

Basic loss per share amounted to 6.7 pence (2010: 26.3 pence earnings) in 2011. Diluted loss per share in 2011 was 6.7 pence (2010: 15.3 pence earnings). As at 31 December 2011 there were 23,943,162 Ordinary Shares in issue.

In addition there were outstanding as at 31 December 2011 a number of bond conversion rights and employee share schemes as follows:

* Employee share schemes include the long-term incentive plans, international share purchase plan and one-off share plan.

More details of the Convertible Bonds and share scheme arrangements are set out in Note 11: Borrowings. At 21 March 2011, the Company's mid-market share price was 41.0 pence.

Cash flows

In 2011 the Group had a cash inflow from operating activities of £12.3 million compared with an inflow of £26.0 million in 2010.

In 2011 the Group has incurred £2.4 million of capital expenditure on plant and equipment, including tooling for the Flutiform™ supply chain, bringing the cumulative expenditure on establishing the supply chain to £14.3 million.

Borrowings of £12.3 million have been repaid during the period, mainly to CRC and Paul Capital. In addition £11.5 million of net interest was paid (2010: £11.7 million) primarily relating to the Convertible Bonds, CRC finance and Paul Capital Note.

In February 2011, the two mortgages on land and buildings in Switzerland were renewed, and totalled CHF 11.9 million (£8.2 million) as at 31 December 2011. One of the sites in Switzerland remains vacated and is being marketed for sale. This has a net book value of CHF 6.1 million (£4.2 million) and a mortgage of CHF 3.8 million (£2.6 million) which together with a loan of CHF 2.0 million (£1.4 million), will be repayable on completion of any sale. The Directors have been advised that the market value of the property for sale is higher than the net book value.

Key performance indicators

The Board considers the following Key Performance Indicators ("KPIs") to be the most relevant to the Group's operations:

Description of KPIs

Revenue excluding milestones

Revenue reflects the level of contract research and development work undertaken for third parties and manufacturing activities, as well as the growth in royalties earned as new products are launched. The £49.1 million for 2011 excludes milestone revenue of £6.1 million and is shown in Note 2: Revenue by income stream.

Signing and milestone payments received

The KPI shows amounts received with respect to pipeline products and product sales. £5.7 million represents the cash received in 2011. The amount is higher than the prior years following receipt of the two £1.5 million milestones from GSK as described above. 

Research and development expenditure

Research and development expenditure reflects the costs, including direct and indirect overheads, of all research and development activities. A breakdown of the 2011 costs is shown in Note 4: Research and development. The decrease in costs from 2010 is related to the higher investment in the Flutiform™ supply chain in 2010 and costs incurred on a number of early stage feasibility and technology development projects, especially SKP-1052 for diabetes care.

Research and development expenditure net of contract research and development revenue

This KPI reflects the Group's expenditure on research and development expenses net of costs reimbursed by development partners. The net expenditure is lower in 2011 as the Group spent more on self-funded projects, especially costs related to the Flutiform™ supply chain, in 2010.

Liquidity

This KPI measures the availability of finance to fund current and future activities and to meet debt servicing requirements. Liquidity consists of cash and cash equivalents of £15.2 million, as per the balance sheet and undrawn facilities of £0.8 million.

Approved and marketable revenue-generating products at year end

This KPI represents the number of products on which the Group does or expects to earn revenues and which are approved for marketing in at least one country.

Manufacturing output

This KPI represents the number of units of product manufactured by or on behalf of the Group and invoiced to customers during the year. During 2011 the numbers include the supply of Flutiform™ to Mundipharma ready for packing once the product is approved.

Balance sheet

At 31 December 2011, the Group's balance sheet shows total shareholders' equity of £81.7 million deficit (2010: £79.9 million deficit). 

Borrowings and liquidity

The Groups' total net debt, measured in accordance with IFRS, comprises:

Total debt has decreased £13.1 million in the year. This is due to repayments of £12.3 million, adjusted by translation and revaluation effects.

Convertible Bonds

The Convertible Bonds outstanding at 31 December 2011 comprise £63.0 million 6 per cent. Convertible Bonds due May 2024 (2010: £63.0 million) and £20.0 million 8 per cent. Convertible Bonds due June 2025 (2010: £20.0 million). The £63.0 million May 2024 bonds are convertible into Ordinary Shares at £3.71 per share and may be called for repayment by the bondholders at par in November 2013, November 2015, November 2017 and November 2020. The £20.0 million June 2025 bonds are convertible into Ordinary Shares at £3.82 per share and may be called for repayment by the bondholders at par in December 2014, December 2016, December 2018 and December 2021.

No Convertible Bonds were converted in 2011 and 2010.

Although shown in the balance sheet in accordance with IFRS at a value of £60.1 million (2010: £59.3 million), the Convertible Bonds have a face value totalling £83.0 million. The Group's total net debt with Convertible Bonds at face value is £121.9 million (2010: £122.0 million).

Paul Capital Note

The Group has a fixed amortisable note ("Note") of U.S.$92.5 million (£59.9 million) due to Paul Capital. The Note is repayable in accordance with an amortisation schedule through to 2015. At 31 December 2011 a cumulative total of U.S.$60.6 million (£39.2 million), has been paid against the Note. The principal outstanding at 31 December 2011 is U.S.$31.9 million (£20.6 million).

Pacira Pharmaceuticals (previously the Injectable Business) was sold in 2007 on the basis that it retained responsibility to Paul Capital for its existing obligations to make payments based on sales of DepoCyt® and DepoDur™ and, to the extent that payments are made in respect of these, the Group's liability under the Note will be reduced accordingly. The amount of the Group's liability therefore depends on estimates of the sales of DepoCyt® and DepoDur™ by Pacira Pharmaceuticals. At 31 December 2011 a cumulative total of U.S.$7.7 million (£5.0 million) of the Group's repayments of the Note had been made by Pacira Pharmaceuticals.

As at December 2011 the net present value of the Note (net of anticipated payments by Pacira Pharmaceuticals to Paul Capital) discounted at an annual rate of 11.2 per cent. is U.S.$23.9 million (£15.5 million) compared with the value of U.S.$34.1 million (£22.0 million) at 31 December 2010.

The following amortisation schedule shows the scheduled amounts payable under the Note, including the contributions made and forecast to be made by Pacira Pharmaceuticals:

The above table:

(i) Shows payments on a cash basis (no discounting is applied)

(ii) Includes reductions for past and estimated future sales related payments by Pacira Pharmaceuticals for DepoDur™ and DepoCyt®

(iii) Includes prepayments of the Note to an aggregate amount of U.S.$10 million out of 50 per cent. of certain milestones and signing fees received and forecast to be received in respect of Flutiform™

CRC finance

The CRC finance was taken out in 2006 and is a 10 year secured amortising loan facility which, at inception, totalled approximately £35.0 million at the exchange rates prevailing at that time. The facility comprises initial commitments of U.S.$35.0 million and €26.5 million repayable over ten years based on a minimum amortisation schedule. 

The following amortisation schedule shows the interest payable and principal outstanding under the CRC finance:

The above table:

(i) Shows interest on a cash basis (no discounting is applied). The interest rates applicable at 31 December 2011 were 9.22 per cent. on the Euro component (plus an additional 5 per cent. on the first €7.5 million) and 8.43 per cent. on the U.S.$ component

(ii) Shows the minimum amortisation schedule assuming the cumulative milestones and royalties from Coruno®, Lodotra® and Requip® Once-a-day are not in excess of the levels triggering the principal to be repaid earlier without penalty

(iii) Excludes prepayments of the debt to an aggregate amount of U.S.$9 million out of 50 per cent. of milestones and signing fees forecast to be received in respect of Flutiform™ on the assumption that an obligation to pay these amounts is waived because the Convertible Bonds are refinanced before 4 September 2013

Other borrowings

Other borrowings amounted to £9.6 million at 31 December 2011 (2010: £10.1 million), consisting principally of £8.2 million (2010: £8.6 million) of property mortgages secured on the assets of SkyePharma AG.

Liquidity

At 31 December 2011 SkyePharma had liquidity of £16.0 million (2010: £29.7 million), comprised as follows:

Commitments

The Group has certain minimum commitments to its suppliers in respect of Flutiform™ which total approximately €9 million to €11 million (£7.5 million to £9.2 million) per annum through to 2015, subject to certain early termination rights.

At set out in Note 14: Commitments to the Preliminary Statement, the Group has a further commitment of £0.3 million outstanding relating to capital expenditure of the Flutiform™ supply chain. A former partner is funding €3.2 million (£2.6 million) of the expenditure of the Flutiform™ supply chain, of which €3.0 million (£2.5 million) had been funded as at 31 December 2011, and the Group is obliged to repay this funding by March 2013 or earlier if the supply chain is outsourced. Further, following the agreement with Aenova to lease the Lyon pharmaceutical manufacturing business and facility announced in July 2011, the Group was committed to purchasing £2.9 million of manufactured products and laboratory services from Aenova France SAS as at 31 December 2011.

Post balance sheet events

Post balance sheet events are described in Note 15 of the preliminary announcement.

Going concern

The Directors have made an assessment of the risks and uncertainties inherent in the business, as disclosed in this preliminary announcement, and of the working capital requirements of the Group for at least the next twelve months. The Directors have prepared cash flow forecasts for the period to 31 December 2013 and have considered events that may occur in that time and that might have a material impact on the Group. These events include the timing of the approval of Flutiform™, the ongoing generation of core revenues and the Board's expectations that it will be possible to renegotiate or refinance the Convertible Bonds as described below.

The Group started 2012 with £15.2 million of cash and cash equivalents and the Board anticipates receipt, in Q2, 2012, of a launch milestone of U.S.$10 million (£6.5 million) due from Pacira when EXPAREL™, which was approved by the FDA in October 2011, is launched in the United States. Over the next twelve months, a large part of the Group's net cash is earmarked to meet the scheduled debt and interest payments not covered by cash generated from normal operations and to fund the Flutiform™ supply chain, which is loss-making at initial low volumes.

The approval and launch of Flutiform™ in initial markets in Europe, which the Directors anticipate will take place during the next 12 months, is pivotal to the value and the cash generative potential of the Group and is expected to generate initial launch milestones worth €4 million (£3.3 million) net of payments to Paul Capital. The liquidity of the Group also depends on continued careful management of costs and working capital and the receipt of forecast operating cash inflows, including the receipt of the EXPAREL™ milestone noted above and aggregate royalty and contract development revenues continuing to run at similar levels to 2011. The Board believes that there are a number of operational and financing steps which could be pursued to improve the working capital position of the Group if this becomes necessary. Some of these steps would involve reaching agreements with third parties and would be easier to achieve with the timely approval and launch of Flutiform™. If the approval of Flutiform™ in Europe is significantly delayed or denied the Board would have to consider implementing more significant courses of action to meet its debt obligations and working capital requirements such as restructuring or refinancing the Group's debt.

As set out in Note 11: Borrowings, the Group has in issue £63.0 million (at nominal value) of bonds which may be converted into Ordinary Shares at £3.71 per share and may be called for repayment ("Put") on various dates, the earliest being November 2013, and £20.0 million (at nominal value) of bonds which may be converted into Ordinary Shares at £3.82 per share and may be Put on various dates, the earliest being December 2014 (collectively "Convertible Bonds"). Even with the expected launch of EXPAREL™ and approval and initial launch of Flutiform™, it is unlikely, based on current financing and licensing agreements, that the Group will generate sufficient cash from normal trading to meet the earliest possible bond Puts if the Convertible Bonds are not converted prior to those dates. The Group continues to work with Jefferies International Limited, which is advising on the Group's capital structure. SkyePharma (Jersey) Ltd will seek to commence a dialogue with bondholders during the coming months. The aim is to seek a consensual solution to rebalance the Group's financing obligations to be in line with forecast cash generation and this may involve substantial dilution to shareholders. The ability to find a consensual solution with the bondholders may be influenced by, but is not necessarily entirely dependent on, the approval and launch of Flutiform™ as the business has a substantial enterprise value apart from Flutiform™. The Board, therefore, has reasonable expectations that a consensual solution should be achieved before the earliest Put date of November 2013.

IAS1: "Presentation of Financial Statements" requires the Directors to disclose "material uncertainties related to events or conditions that may cast significant doubt upon the Group's ability to continue as a going concern". After careful consideration of IAS1 and the Financial Reporting Council's Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 the Directors consider that the uncertainties described above are "material uncertainties". Nevertheless, the Board has reasonable expectations that forecast operating cash flows will be achieved, that Flutiform™ will be approved and launched successfully in its initial markets in Europe, that a consensual solution to the Group's capital structure will be reached with the bondholders, and that the Group will have adequate resources to continue in operational existence for the foreseeable future. Accordingly the Board considers that the business is a going concern and continues to adopt the going concern basis in preparing the Annual Report and Accounts. The financial statements do not contain the adjustments that would result if the Group was unable to continue as a going concern.

The Auditors' report on the financial statements for 2011 includes an emphasis of matter paragraph to draw attention to the disclosures made in the financial statements indicating material uncertainties about the Group's ability to continue as a going concern. The Auditors' opinion is not modified in this respect.

Foreign exchange - risks

Almost all of the Group's operations are based in Continental Europe and licence royalty payments are typically denominated in various currencies, with sales-related payments based on underlying sales in local currencies. This gives rise to direct and indirect exposures to changes in foreign exchange rates notably the U.S. Dollar, Euro and Swiss Franc. To minimise the impact of any fluctuations, the Group's policy has historically been to maintain natural hedges by relating the structure of borrowings to the underlying trading cash flows that generate them. Exchange translation gains and losses relating to funding (cash and debt) are included in foreign exchange gain or loss on net debt, other realised exchange gains and losses and exchange translation gains and losses are included within the revenue or expense line to which they most closely relate. Where subsidiaries are funded centrally, this is achieved by the use of long-term intercompany loans. Where settlement of such intra-group loans is neither planned nor likely to occur in the foreseeable future, they are treated as part of the net investment and exchange differences are taken to reserves. No use has been made of currency options and forward currency contracts in 2011. 

The Board has considered risks related to a potential Eurozone crisis and its impact on the Group's transactions and funding. Refer to the Corporate Governance section of the Annual Report for further details of the Group's exposure to a potential Eurozone crisis.

Forward looking statements

The foregoing discussions contain certain forward looking statements. Although SkyePharma believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance that these expectations will materialise. Because the expectations are subject to risks and uncertainties, actual results may vary significantly from those expressed or implied by the forward looking statements based upon a number of factors. Such forward looking statements include, but are not limited to, the timescales for approval, launch or regulatory filings for Flutiform™ and other products, the statements under "Outlook", the forecast sales of Flutiform™, the development of new products, risks related to obtaining and maintaining regulatory approval for existing, new or expanded indications of existing and new products, risks related to SkyePharma's ability or that of its sub-contractors and partners to manufacture products on a large scale or at all, risks related to SkyePharma's and its marketing partners' ability to market products on a large scale to maintain or expand market share in the face of changes in customer requirements, competition and technological change, risks related to the ownership and use of intellectual property, risks related to SkyePharma's ability to manage growth, risks related to the negotiation of an agreement with the bondholders and the risk that the Lyon manufacturing Alliance with Aenova is unsuccessful and the lease of the Lyon Manufacturing Facility is terminated. SkyePharma undertakes no obligation to revise or update any forward statement to reflect events or circumstances after the date of this preliminary announcement.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2011

See Notes to the preliminary announcement.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(EXPENSE)

for the year ended 31 December 2011

See Notes to the preliminary announcement.

CONSOLIDATED BALANCE SHEET

as at 31 December 2011

Approved by the Board of Directors on 21 March 2012 and signed on its behalf by:

P Grant

Chief Executive Officer

See Notes to the preliminary announcement.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2011

See Notes to the preliminary announcement.

 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2010

See Notes to the preliminary announcement.

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2011

See Notes to the preliminary announcement.

NOTES TO THECONSOLIDATED CASH FLOW STATEMENT

(a) Cash flow from operating activities

 NOTES TO THEPRELIMINARY ANNOUNCEMENT

The preliminary announcement for the year ended 31 December 2011 was approved by the Board on 21 March 2012.

1. Basis of preparation

The preliminary announcement has been prepared in accordance with International Financial Reporting Standards ("IFRS") adopted by the European Union. All IFRS's issued by the International Accounting Standards Board ("IASB") that were effective at the time of preparing the preliminary announcement and adopted by the European Commission for use inside the EU were applied by SkyePharma.

The preliminary announcement has been prepared in accordance with IFRS and the interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. In preparing this preliminary announcement the Group has consistently applied the accounting policies as set out in the Group's consolidated accounts for the year end 31 December 2010, except as set out below.

The financial information in this preliminary announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 for the years ended 31 December 2010 and 2011. The financial information for the years ended 31 December 2010 and 2011 has been extracted from the Group's audited consolidated accounts for the year ended 31 December 2011. The auditors' opinion on those accounts was unmodified and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

The audited accounts for the year ended 31 December 2010 have been delivered to the Registrar of Companies.

The preliminary announcement has been prepared under the historical cost convention, as modified by the revaluation to fair values of financial instruments at fair value through the income statement and available for sale financial instruments. The preliminary announcement is presented in pounds sterling and all values are rounded to the nearest £0.1 million.

Going concern

The Directors have made an assessment of the risks and uncertainties inherent in the business, as disclosed in this preliminary announcement, and of the working capital requirements of the Group for at least the next twelve months. The Directors have prepared cash flow forecasts for the period to 31 December 2013 and have considered events that may occur in that time and that might have a material impact on the Group. These events include the timing of the approval of Flutiform™, the ongoing generation of core revenues and the Board's expectations that it will be possible to renegotiate or refinance the Convertible Bonds as described below.

The Group started 2012 with £15.2 million of cash and cash equivalents and the Board anticipates receipt, in Q2, 2012, of a launch milestone of U.S.$10 million (£6.5 million) due from Pacira when EXPAREL™, which was approved by the FDA in October 2011, is launched in the United States. Over the next twelve months, a large part of the Group's net cash is earmarked to meet the scheduled debt and interest payments not covered by cash generated from normal operations and to fund the Flutiform™ supply chain, which is loss-making at initial low volumes.

The approval and launch of Flutiform™ in initial markets in Europe, which the Directors anticipate will take place during the next 12 months, is pivotal to the value and the cash generative potential of the Group and is expected to generate initial launch milestones worth €4 million (£3.3 million) net of payments to Paul Capital. The liquidity of the Group also depends on continued careful management of costs and working capital and the receipt of forecast operating cash inflows, including the receipt of the EXPAREL™ milestone noted above and aggregate royalty and contract development revenues continuing to run at similar levels to 2011. The Board believes that there are a number of operational and financing steps which could be pursued to improve the working capital position of the Group if this becomes necessary. Some of these steps would involve reaching agreements with third parties and would be easier to achieve with the timely approval and launch of Flutiform™. If the approval of Flutiform™ in Europe is significantly delayed or denied the Board would have to consider implementing more significant courses of action to meet its debt obligations and working capital requirements such as restructuring or refinancing the Group's debt.

As set out in Note 11: Borrowings, the Group has in issue £63.0 million (at nominal value) of bonds which may be converted into Ordinary Shares at £3.71 per share and may be called for repayment ("Put") on various dates, the earliest being November 2013, and £20.0 million (at nominal value) of bonds which may be converted into Ordinary Shares at £3.82 per share and may be Put on various dates, the earliest being December 2014 (collectively "Convertible Bonds"). Even with the expected launch of EXPAREL™ and approval and initial launch of Flutiform™, it is unlikely, based on current financing and licensing agreements, that the Group will generate sufficient cash from normal trading to meet the earliest possible bond Puts if the Convertible Bonds are not converted prior to those dates. The Group continues to work with Jefferies International Limited, which is advising on the Group's capital structure. SkyePharma (Jersey) Ltd will seek to commence a dialogue with bondholders during the coming months. The aim is to seek a consensual solution to rebalance the Group's financing obligations to be in line with forecast cash generation and this may involve substantial dilution to shareholders. The ability to find a consensual solution with the bondholders may be influenced by, but is not necessarily entirely dependent on, the approval and launch of Flutiform™ as the business has a substantial enterprise value apart from Flutiform™. The Board, therefore, has reasonable expectations that a consensual solution should be achieved before the earliest Put date of November 2013.

IAS1: "Presentation of Financial Statements" requires the Directors to disclose "material uncertainties related to events or conditions that may cast significant doubt upon the Group's ability to continue as a going concern". After careful consideration of IAS1 and the Financial Reporting Council's Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 the Directors consider that the uncertainties described above are "material uncertainties". Nevertheless, the Board has reasonable expectations that forecast operating cash flows will be achieved, that Flutiform™ will be approved and launched successfully in its initial markets in Europe, that a consensual solution to the Group's capital structure will be reached with the bondholders, and that the Group will have adequate resources to continue in operational existence for the foreseeable future. Accordingly the Board considers that the business is a going concern and continues to adopt the going concern basis in preparing the Annual Report and Accounts. The financial statements do not contain the adjustments that would result if the Group was unable to continue as a going concern.

The Auditors' report on the financial statements for 2011 includes an emphasis of matter paragraph to draw attention to the disclosures made in the financial statements indicating material uncertainties about the Group's ability to continue as a going concern. The Auditors' opinion is not modified in this respect.

2. Revenue by income stream

Effective from 1 July 2011, the Group entered into an Alliance with Aenova Group to increase utilisation of the Group's manufacturing facility in Lyon, France. Aenova agreed to lease the entire manufacturing business and the premises in Lyon for an initial period of two years, extendible for a further three years. Rental income of £0.3 million in respect of the lease was recognised under 'other revenue' during the year ended 31 December 2011.

3. Cost of sales

4. Research and development

5. Exceptional items

(a) At 31 December 2011 the Group incurred a non-cash impairment charge of £2.1 million on the IDD® goodwill. The charge has arisen due to the re-assessment of future cash flows from the Triglide® product manufactured by the Lyon pharmaceutical manufacturing business which was leased to Aenova with effect from 1 July 2011. Following the lease of that business the cash flows related to Triglide® primarily accrue to Aenova rather than to the Group and this has led to a full impairment of the remaining IDD® goodwill carrying value. This is treated as an exceptional item in view of its magnitude and non-recurring nature.

(b) During the year ended 31 December 2010 the Group recorded exceptional charges of £0.8 million non-cash impairment charge relating to a licence for Flutiform™ in North America and £0.2 million for costs incurred during restructuring activities within the Group. The Group also recorded exceptional credits of £0.2 million for the release of accruals related to restructuring activities in Lyon, France.

6. Finance costs and income

7. Foreign exchange gain on net debt

8. Earnings per share

Earnings per share is calculated based on earnings after tax and the weighted number of Ordinary Shares in issue during the year.

For the calculation of diluted earnings per share in the year ended 31 December 2011, there is no difference between basic and diluted loss per share since in a loss making year all potential shares from Convertible Bonds, stock options, warrants and contingent issuance of shares are anti-dilutive. For the year ended 31 December 2010, the weighted average number of Ordinary Shares in issue was adjusted to assume full conversion of all potential new Ordinary Shares which were regarded as dilutive for this purpose. The Group had two classes of dilutive potential Ordinary Shares (see Note 13: Share capital): those granted to employees and shares to be issued on conversion of the 2024 Convertible Bonds.

9. Cash and cash equivalents

Cash at bank earns interest at floating rates based on the daily bank deposit rates.

At 31 December 2011, the Group had available £821,000 (2010: £783,000) of undrawn borrowing facilities.

10. Non-current assets classified as held for sale

As at 31 December 2011 the Group had land and buildings with a net book value of £4.2 million (2010: £4.2 million) classified as held for sale. This represents a building and associated land in Switzerland which was put up for sale in January 2011, following a review of the space requirements in Switzerland. As disclosed in Note 11: Borrowings, the mortgage on this building of CHF 3.8 million (£2.6 million) together with a loan of CHF 2.0 million (£1.4 million) will be fully repayable on its sale.

In 2011 the Group engaged an agent to find potential buyers for the land and buildings held for sale. A sale has taken longer than initially anticipated given the specialist nature of the property. Additional agents have now been appointed and the indicative market value provided by the agents exceeds the net book value as at 31 December 2011.

11. Borrowings

Bank overdraft and borrowings

At 31 December 2011 bank borrowings consist of a loan of £1.4 million (CHF 2.0 million) (2010: £1.3 million (CHF 2.0 million)) with the Basellandschaftliche Kantonalbank. This loan can be terminated on six weeks' notice by either party and bears interest at 6.5 per cent. per annum. This loan is secured on the assets of SkyePharma AG.

Convertible Bonds

The Group holds £63.0 million (2010: £63.0 million) 6 per cent. Convertible Bonds due 2024, which are convertible into Ordinary Shares at a conversion price of £3.71. The bonds may be called for repayment in November 2013, November 2015, November 2017 and November 2020.

The Group also holds £20.0 million (2010: £20.0 million) 8 per cent. Convertible Bonds due 2025 which are convertible into Ordinary Shares at a conversion price of £3.82. The bonds may be called for repayment in December 2014, December 2016, December 2018 and December 2021.

In the year ended 31 December 2011 no bonds were converted into Ordinary Shares (2010: nil).

The bonds are included partly in non-current liabilities (2011: £60.1 million. 2010: £59.3 million) and partly in share premium (2011 and 2010: £28.5 million). The total face value of Convertible Bonds outstanding at 31 December 2011 is £83.0 million (2010: £83.0 million).

Property mortgages

In February 2011 the Group renewed its two mortgage agreements with the Basellandschaftliche Kantonalbank. The first is for CHF 3.8 million (£2.6 million), which bears interest at a variable rate (currently 4 per cent. per annum) and is repayable with three months notice from either party. The second is for CHF 8.1 million (£5.6 million), which bears interest at 3.6 per cent. per annum and is fully repayable in 2016.

One of the sites in Switzerland has now been vacated and is up for sale. This has a net book value of CHF 6.1 million (£4.2 million) and a mortgage of CHF 3.8 million (£2.6 million) which, together with a loan of CHF 2.0 million (£1.4 million), will be repayable on completion of any sale.

Paul Capital Note

On 23 March 2007, SkyePharma PLC and its subsidiary, Jagotec AG (together "Jagotec") entered into an agreement with Paul Capital and a subsidiary (together "PCRF"). Pursuant to this agreement, PCRF assigned its existing interests in the royalties and certain milestones from Solaraze®, Xatral® OD, Triglide®, Pulmicort® HFA-MDI, Foradil® Certihaler® and Paxil CR™ ("PCRF Products") in exchange for a fixed amortisable senior note (the "Note") in the amount of U.S.$92.5 million issued by Jagotec. This would be increased by up to an additional U.S.$12.5 million to U.S.$105 million if worldwide sales of Depodur™ reached certain thresholds prior to 31 December 2015. The Board does not believe that these thresholds will be reached. The Note is repayable on a quarterly basis in accordance with an amortisation schedule beginning on 31 March 2007 through to 31 December 2015. The outstanding amount under the Note at 31 December 2011 is U.S.$31.9 million (£20.6 million) (2010: U.S.$46.5 million (£30.2 million)), excluding the additional U.S.$12.5 million.

The Injectable Business was sold on the basis that it retained its obligations to PCRF to share royalties received in respect of DepoCyt® and Depodur™ and to the extent that payments are made in satisfaction of such obligations, the liability of Jagotec under the Note is reduced accordingly.

The Note must be prepaid in certain circumstances, including 50 per cent. of any milestone payments for any Flutiform™ licence agreements or 50 per cent. of any signing fees with respect to Flutiform™ license agreements entered into with regard to any unlicensed territory, in each case received after 1 January 2009 in an amount up to U.S.$10 million. As at 31 December 2011 a total of U.S.$2.9 million has been repaid in respect of these obligations. Jagotec must also prepay the Note in an amount equal to 50 per cent. of the proceeds received upon the disposal of any of the intellectual property related to the PCRF Products. Jagotec has the option to prepay the Note by providing 10 days' prior written notice. Such prepayment amount will be calculated at a discount to the remaining scheduled amortisation payments due more than 12 months after the date of prepayment at a rate of U.S. Dollar LIBOR plus 75 basis points. Following any such prepayment the minimum amortisation schedule is amended.

The terms of the Note contain representations and warranties and covenants customary for agreements of this type. There is also a covenant (negative pledge) not to grant security over Flutiform™ intellectual property, and the requirement for prior consent from PCRF for certain transactions that could affect PCRF's security and risk. The Note is secured by milestone payments and royalty receipts receivable by Jagotec under licence agreements related to the PCRF Products. These receipts are paid into a blocked bank account and used to meet quarterly amortisation payments to PCRF, with any balance above those amounts being remitted back to the Group once the quarterly payment is covered.

In connection with the Note, Jagotec granted PCRF a royalty-free, fully paid-up and worldwide, license or sub-license, as applicable, subject to third party rights, limited to the right to grant sub-licenses (through multiple tiers) under the intellectual property in the PCRF Products, which becomes operable following an event of default and in certain other circumstances, pursuant to a Licence Agreement dated as of 23 March 2007.

The liability was initially recorded at fair value, calculated by discounting the expected cash flows based on management's estimation of a fair market rate at inception. Subsequently the carrying value of the Note is at amortised cost, calculated as the net present value of the expected future minimum payments (net of the amounts expected to be paid by the Injectable Business) discounted at 11.2 per cent. (the effective comparable interest rate at inception).

At 31 December 2011, the carrying value of the Note was £15.5 million (2010: £22.0 million).

CRC Finance

On 22 December 2006, SkyePharma PLC and various of its subsidiaries entered into an agreement with a specialised lending entity ("CRC"), advised by Christofferson, Robb & Company LLC, for a 10 year secured amortising loan facility. This facility was amended on 23 March 2007 and additional changes were made effective from 1 July 2011. The facility has been fully drawn down.

Key terms of the CRC finance facility are as follows:

(i) the total loans of U.S.$35 million and €26.5 million are repayable over 10 years based on a minimum amortisation schedule. The schedule was based on expected receipts from milestones and royalties in respect of Coruno®, Lodotra™ and Requip® Once-a-day (the "CRC Products"). In the event that the cumulative milestones and royalties from the CRC Products exceed the minimum principal and interest payments, the excess will be applied to repay principal early without penalty;

(ii) interest is charged on a quarterly basis. Effective from 1 July 2011, the applicable interest rate increased by 2 percentage points to the three month U.S. Dollar LIBOR rate plus a 7.85 per cent. margin on the U.S. Dollar facility and at the three month EURIBOR rate plus a 12.85 per cent. margin on the first €7.5 million of the euro facility and EURIBOR plus 7.85 per cent. margin on the balance;

(iii) the loan facility was secured by a comprehensive security package, including pledges of shares of certain key subsidiaries, charges over certain bank accounts, charges over certain intra-group debts, a floating charge over the assets of SkyePharma PLC and charges over or, subject to third party consents being received, assignments of receivables in respect of the CRC Products, Sular® and Zyflo CR®.

(iv) there is a comprehensive covenant package, including a negative pledge, so that further security over the Group's assets may not be granted, nor may certain other transactions that could affect CRC's security and risk be entered into, without prior consent from CRC;

(v) Prior to the amendments which were effective on 1 July 2011, the loan required prepayment in certain circumstances, including 50 per cent. of any milestone payments for any Flutiform™ license agreements, or 50 per cent. of any signing fees with respect to Flutiform™ license agreements entered into with regard to any unlicensed territory, in each case received after 1 January 2009 in an amount up to U.S.$ 10.0 million. Effective from 1 July 2011, the obligation to make mandatory prepayments out of Flutiform™ milestones and signing fees has been deferred until 4 September 2013 and waived altogether if, by 4 September 2013, the Group's Convertible Bonds have been converted to equity or rescheduled or refinanced on certain terms, including that the earliest date on which the Bonds may be called for repayments is at least five years later than the date of such rescheduling or refinancing. As at 31 December 2011 and 31 December 2010, a total of U.S.$1.0 million had been repaid in respect of these obligations. Such prepayments comprised a capital element and an amount based on a pre-agreed schedule to compensate CRC for loss of future interest. Following any such prepayment the minimum amortisation schedule is amended; and

(vi) CRC was granted a royalty-free, fully-paid up and worldwide license or sub-license, as applicable, subject to third party rights, in favour of CRC limited to the right to grant sub-licenses (through multiple tiers) under the intellectual property in the CRC Products, which becomes operable following an event of default and certain other circumstances.

Effective from 1 July 2011, interest on the U.S.$ portion of the CRC finance is charged at three month U.S LIBOR + 7.85 per cent. Prior to this and as at 31 December 2010, interest was charged at three month U.S LIBOR + 5.85 per cent. As at 31 December 2011, U.S. LIBOR was 0.581 per cent. (2010: 0.303 per cent.).

Effective from 1 July 2011, interest on the first €7.5 million of the euro portion of the CRC finance is charged at 3 month EURIBOR + 12.85 per cent and interest on the remainder of the facility is charged at 3 month EURIBOR + 7.85 per cent. Prior to this and as at 31 December 2010, interest on the first €7.5 million of the euro portion of the CRC finance was charged at 3 month EURIBOR + 10.85 per cent and interest on the remainder of the facility was charged at 3 month EURIBOR + 5.85 per cent. As at 31 December 2011, EURIBOR was 1.369 per cent. (2010: 1.01 per cent.).

The balance of the CRC finance as at 31 December 2011 is £29.0 million (net of £0.6 million of costs) (2010: £35.9 million net of £0.7 million of costs).

Finance lease liabilities

Obligations under hire purchase and finance leases are secured upon the assets to which they relate and as at 31 December 2011 total £nil (2010: £0.1 million).

12. Long-term creditors

The long-term creditor of £2.5 million (2010: £3.0 million) relates to an amount payable to a former partner which has funded capital expenditure related to the Flutiform™ supply chain. No interest is payable on the balance and the funding is repayable in March 2013, or earlier, if the supply chain is outsourced. Refer to Note 14: Commitments for further disclosure.

13. Share Capital

14. Commitments

Future minimum lease payments under operating non-cancellable operating leases are as follows:

In addition the Group has committed to fund or partially fund certain clinical trials on behalf of its partners under development and licensing agreements. The Group is committed to make certain payments to third parties contingent upon future events such as the approval and launch of products, although such payments may be funded from amounts received from development partners.

To establish the Flutiform™ supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes. The Group committed to capital expenditure of £14.6 million, of which £14.3 million has been paid for as at 31 December 2011. A former partner is funding €3.2 million (£2.6 million) of the expenditure of the Flutiform™ supply chain, of which €3.0 million (£2.5 million) had been funded as at 31 December 2011, and the Group is obliged to repay this funding by March 2013, or earlier if the supply chain is outsourced. The amount funded as at 31 December 2011 is included in long-term creditors as disclosed in Note 12: Long-term creditors.

The Group has certain minimum commitments to its suppliers in respect of Flutiform™ which total approximately €9 million to €11 million (£7.5 million to £9.2 million) per annum through to 2015, subject to certain early termination rights.

Following the agreement with Aenova to lease the Lyon pharmaceutical manufacturing business and facility announced in July 2011, the Group was committed to purchasing £2.9 million of manufactured products and laboratory services from Aenova France SAS as at 31 December 2011.

15. Post-balance sheet events

On 10 January 2012, the Group announced the reorganisation of Swiss operations which led to a reduction of approximately 21 of its 101-strong workforce in Muttenz, Switzerland. On 8 February 2012, the Group announced that Aenova now employs 15 skilled staff in its new development centre, including 11 skilled technical staff recruited by agreement from SkyePharma's oral formulation and oral analytical development team. Aenova will use its Muttenz development centre to expand its own oral product development activities as well as carrying out oral product formulation and analytical services for SkyePharma on a sub-contracting basis. Separately, the Group entered into agreements with the Aenova Group to sub-let part of its laboratory space in Muttenz and sell some of its surplus laboratory equipment to Aenova. The reorganisation of Swiss operations improved SkyePharma's competitiveness and reduced the cost base of the business by approximately £1.6 million in 2012 and £1.8 million per annum thereafter.

On 31 January 2012, Peter Grant was appointed as Chief Executive Officer following the resignation of Dr Axel Müller on 30 January 2012 and has retained responsibility for financial matters. The employment contract with Dr Axel Müller required a 12 months' notice period.

EXPAREL™ - the FDA approved the NDA for EXPAREL™ (bupivacaine liposome injectable suspension) 1.3% for administration into the surgical site to produce postsurgical analgesia. In January 2012, Pacira announced that it expects to have sufficient product availability in April 2012 to enable the product to be launched in the U.S. A launch milestone of U.S.$10 million (£6.5 million) will then become payable to the Group.