Final Results

Statement of annual results

Significant increase in revenues with growing momentum

from seven recently approved or launched products

LONDON, UK, 31 March, 2014 - Skyepharma PLC (LSE SKP), the expert oral and inhalation drug delivery company, today announces its annual results for the year ended 31 December 2013.

Financial Highlights

· Revenues up 25% per cent. to £62.6m (2012: £49.9m), primarily due to growth in flutiform® supply, increased contract development, and the Group's share of higher net sales of Pacira's EXPAREL®

· Pre-exceptional operating profit up 8% to £13.6m (2012: £12.6m)

· Pre-exceptional EBITDA up 15% to £17.9m (2012: £15.6m)

· Total profit after tax from continuing operations and discontinued operations of £0.8m (2012: £4.4m loss)

- Profit includes a tax credit of £1.8m arising from the recognition of a £2.0m deferred tax asset reflecting expected utilisation of tax losses in 2014

· Cash and cash equivalents of £16.5m at 31 December 2013 (2012: £16.4m)

Operating Highlights

· Substantial progress with flutiform®:

- Growth of in-market sales in Germany, UK and the Netherlands, following launch in 2012

- Further launches in Japan, Italy and 10 other countries

- Substantial growth in supply revenues

· Significant revenue-generating potential from third-party products:

- Strong growth of sales of Pacira's product, EXPAREL®

- Approval and launches in the United States and Japan of GSK's products Relvar® Ellipta®/Breo® Ellipta®

- Approval of GSK's products Relvar® Ellipta® in Europe and Anoro™ Ellipta™ in the United States

· Renewal of lease of Lyon Facility to June 2016

Post year-end

· flutiform® launched in France, the Czech Republic and South Korea, and approved in Spain

· Planned implementation of a £112m capital raising to pay off bond debt and increase the Group's capacity to strengthen the product pipeline

Commenting on the achievments of 2013, Peter Grant, Chief Executive Officer, said:

"2013 was another year of increasing momentum for Skyepharma. We saw further launches in major markets of our key product, flutiform®, along with a number of approvals and a growth in sales of existing products. The approval of GSK's Relvar® Ellipta®/Breo® Ellipta® and Anoro™ Ellipta™, which utilise one of Skyepharma's dry powder inhalation technologies licensed to GSK, gives the Group potential income of up to £9m per annum for the life of the patents. It also brings the total number of products launched or approved in major markets to seven over the past two years from which the Group is eligible for revenues under long-term agreements.

The combination of further launches and product approvals and the planned reduction of debt through the proposed capital raise significantly improves the Group's outlook and sets the stage for further growth."

Antony Mattessich, Regional Director, Europe, Mundipharma, commented:

"We are delighted with the successful launch of flutiform for the treatment of bronchial asthma. In Europe, flutiform has now been approved in 23 countries and has been launched in 15 European countries, Hong Kong, South Korea and Australia. Sales are growing in line with our expectations and we look forward to the further roll out of flutiform and its continued growth."

A PDF version of the 2013 Annual Report and Accounts along with the results presentation has been published on the Company's website and a webcast of the analysts' results presentation will be available shortly.

-Ends-

For further information please contact:

About Skyepharma

Skyepharma combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products. The Group is eligible for revenues from 15 approved products in the areas of inhalation, oral, topical and injectable drug delivery as well as generating income from the development of further products and technology licenses. The products developed by the Group are marketed throughout the world by big pharma as well as speciality pharmaceutical companies. For more information, visit www.skyepharma.com 

This announcement is an advertisement for the purposes of the UK Prospectus Rules and does not constitute a prospectus or prospectus equivalent document. Investors should not subscribe for or purchase any securities referred to in this announcement except on the basis of information in the prospectus to be published by the Company in due course in connection with the Capital Raising. Copies of the prospectus will, following publication, be available from the Company's registered office at 46-48 Grosvenor Gardens, London SW1W 0EB.

This announcement is not an offer of securities for sale, or a solicitation of an offer to buy securities, in the United States or in any other jurisdiction where such offer or solicitation would not be permitted. Securities may not be offered or sold in the United States absent registration with the United States Securities and Exchange Commission or an exemption from registration. The securities described in this announcement, when and if offered, will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act"), or with any regulatory authority or under the applicable securities laws of any state or other jurisdiction of the United States, or the relevant laws of any state, province or territory of Australia, Canada, Hong Kong, Japan or New Zealand and the New Ordinary Shares may not be offered, sold, pledged, or otherwise transferred directly or indirectly, within the United States (as defined in Regulation S under the Securities Act), except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state or local securities law. There will be no public offering of securities in the United States.

Operating Review

2013 was a year of good progress for the Group with a number of approvals, launches and growth in sales of products which have the potential to generate substantial revenues for Skyepharma in the coming years. Key events in the year were as follows:

· Approval and launch of flutiform® in Japan, and launch in 13 further countries including Italy

· Further growth of in-market sales of flutiform® in Germany, the UK and the Netherlands following launches in these countries during 2012

· Continued growth of revenues from the supply of flutiform® which remains on track to move into positive gross profit during 2014

· Strong growth of EXPAREL®, a product of the Group's former Injectable Business from which the Group receives a share of net revenues

· Approvals of GSK's new inhalation products which use technology licensed from Skyepharma - Breo® Ellipta® and Anoro™ Ellipta ™ in the United States and Relvar® Ellipta® in Europe and Japan 

· Strong financial and operating cash performance for the year with operating profit of £13.6 million and a closing cash balance of £16.5 million

· Renewal of the lease for Lyon Facility until the end of June 2016

Since the year end, in February 2014, flutiform® was launched in France, triggering payment to Skyepharma of a €3.0 million (£2.5 million) launch milestone. Also, following a positive conclusion of a mutual recognition procedure, national approval was received in March 2014 for flutiform® in Spain, where pricing and reimbursement discussions have commenced.

On 28 March 2014 the Directors decided to implement a Firm Placing, Placing and Open Offer ("Capital Raise") and the Bond Amendment ("Bond Proposals") (together "Transactions") which will enable the Group to pay off the bond debt at a discount of £25.2 million. The total capital raise is approximately £112 million and has already been placed with institutional investors, subject to clawback to satisfy the Open Offer. The proceeds will be used to repay the Group's bond debt in full at a cost of £95.6 million on terms already agreed by 78.7% by value of the bonds. After costs, the balance of the proceeds of approximately £8.4 million will be available for general corporate purposes. The Transactions are expected to be concluded in early May 2014 and will increase the Group's capacity to invest in research and development and leverage the Group's expertise, technologies and reputation to strengthen the product pipeline.

Financial highlights

The Group achieved revenues of £62.6 million for 2013, up 25 per cent. from the £49.9 million in 2012. The increase was primarily due to growth in supply revenues of flutiform®, reflecting its first full year of sales in certain countries and new launches in Europe and Japan, as well as additional contract development revenues and growth in the Group's share of EXPAREL® net sales.

Net operating costs excluding exceptional items increased to £15.8 million in 2013 (2012: £15.4 million), with additional costs of an expert determination which led to the renewal of the lease for the Lyon Facility and an increased share-based payment charge, offset by reduced contract research and development expenditure which in the prior year included significant amounts related to Phase III trials of flutiform®. The prior year also benefited from a gain of £0.4 million from the sale of laboratory equipment in Switzerland following Aenova leasing the Group's oral product development laboratories.

Cost of sales increased to £33.2 million (2012: £21.9 million), reflecting the higher product supply revenues. Pre-exceptional operating profit from continuing operations was up 8 per cent. to £13.6 million (2012: £12.6 million). No exceptional items arose during 2013.

The profit after tax from continuing operations was £0.8 million (2012: £10.6 million loss), having benefited from a £1.8 million tax credit (2012: £0.2m expense) arising from recognising a deferred tax asset. Basic earnings per share from continuing operations were 1.8 pence (2012: 36.0 pence loss per share).

The profit after tax from continuing and discontinued operations for 2013 was £0.8 million (2012: £4.4 million loss). Basic earnings per share from continuing and discontinued operations for 2013 was 1.8 pence (2012: 14.9 pence loss per share).

By the end of 2013, the Group was entitled to revenues from 15 approved products which together generated £44.9 million of royalty and product supply revenues (2012: £31.9 million) of which £9.7 million (2012: £9.8 million) related to the seven products which have achieved key market launches or approvals in the last two years.

In addition, flutiform® generated £10.1 million of milestones and contract development revenue in 2013 (2012: £13.4 million).

Cash flows benefited from a total of £5.5 million of milestone receipts (2012: £12.5 million). Pre-exceptional EBITDA (earnings before interest, tax, depreciation and amortisation) from continuing operations totalled £17.9 million (2012: £15.6 million) and represented 29 per cent. of revenues (2012: 31 per cent. of revenues).

Operational highlights

flutiform®, the fixed dose combination of fluticasone, an inhaled corticosteroid ("ICS"), and formoterol, a long-acting beta agonist ("LABA") in a pressurised metered dose inhaler ("pMDI"), continues to be an important value driver for the Group. As of 27 March 2014, flutiform® has been launched in 15 European countries, Japan, Australia, Hong Kong and South Korea.

In-market sales of flutiform® for the year ended 31 December 2013 totalled €19.4 million (£16.5 million) (2012: €0.8 million (£0.5 million)). In Q4, 2013, total in-market sales of flutiform® were €9.5 million, up 103% from the €4.7 million achieved in Q3, 2013. Note: In-market sales are internal calculations using IMS Health data Q4, 2013 - based on sales to pharmacies excluding Cyprus, and are not the same as sales to wholesalers on which royalties are payable to the Group.

In-market sales in the three months ended 31 December 2013 (included in the above sales) totalled €1.5 million (£1.3 million) in Japan, where the product was launched on 19 November 2013 as a 56-puff version.

In-market sales trends for flutiform® have been as follows:

The Group's former Injectable Business, Pacira Pharmaceuticals Inc. ("Pacira"), continued to make strong progress with the growth of EXPAREL®, for which Skyepharma receives 3 per cent. of sales (on a cash received basis) and potential milestones of up to U.S.$52 million. In Q4, 2013, Pacira reported growth in sales of EXPAREL®, up 52% from Q3, 2013, and increasing sales as shown in the table below:

The Group has the potential for significant income of up to £9 million per annum from its license of one of its inhalation technologies to GSK. This technology is used in Relvar® Ellipta®/Breo® Ellipta®, Anoro® and Incruse® (umeclidinium). During Q4 2014, Breo® Ellipta® was approved in the United States for Chronic Obstructive Pulmonary Disease ("COPD"), and the same product approved as Relvar® Ellipta® in Japan for asthma and in Europe for both COPD and asthma. Anoro™ Ellipta™ was approved in the United States in December 2013 for COPD and, in February 2014, the Committee for Medicinal Products for Human Use ("CHMP") issued two positive opinions recommending marketing authorisation in the European Union for Anoro® and Incruse®.

During 2013, Skyepharma continued 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.

The Group continues to provide RespiVert Ltd ("RespiVert"), a subsidiary of Janssen Biotech, Inc., with chemistry, manufacturing and control development services to develop dry powder inhaled ("DPI") dosage forms of RespiVert's new chemical entities. The projects are aimed at the development of new inhaled therapies for patients with severe, chronic respiratory diseases including COPD and severe asthma.

In December 2013, Skyepharma renewed the lease of its manufacturing business and premises in Lyon (together "the Facility") with Aenova France SAS ("Aenova") until 30 June 2016 at a rental of €2.0 million (£1.7 million at current rates) per annum. This followed an expert determination process which was resolved in Skyepharma's favour. Aenova continues to be obliged to manage and be responsible for the financial performance of the Facility on a day-to-day basis. Unless both parties agree otherwise, the lease will normally expire on 30 June 2016 and, subject to obtaining appropriate consents and consultations, the Facility would revert to Skyepharma following termination of the lease. In anticipation of this, and with Aenova's agreement, Skyepharma has initiated a process to identify whether one or more third parties would be interested in making use of surplus capacity at the Facility.

2014 objectives

Whilst continuing to maximise revenues from approved and pipeline product candidates, the Group aims to strengthen its product pipeline by developing new products and technologies, through its own research, through collaborations with partners and targeted in-licensing and/or acquisition. 

The key objectives for 2014 are to:

· Maximise revenue from approved products and pipeline product candidates;

· Continue to grow operating profit and operating cash generation;

· Seek further opportunities, which may be from own development, collaborations with partners, targeted in-licensing and/or acquisition, to develop additional products and technologies;

· Progress the development of a new oral drug delivery technology platform to proof of concept and seek development and out-licensing opportunities; and

· Strengthen the balance sheet through reduction of debt.

Outlook

The Board expects further substantial growth in revenues in 2014 compared with 2013 mainly from the products launched in 2012 to date, especially flutiform®, Relvar® Ellipta®/Breo® Ellipta®, Anoro™ Ellipta™, and EXPAREL®. 

A milestone of €3.0 million (£2.5 milllion) has been received following the launch of flutiform® in France and continuation of the growth of EXPAREL® to achieve U.S.$100 million in annual net sales (on a cash received basis) would lead to a milestone of U.S.$8 million (£4.9 million) during 2014. The Directors believe that the growth of royalties from recently launched products is likely to offset the decline in royalties from products which are off patent, such as Zyflo CR® and Solaraze® (in Europe and certain other territories), or which are otherwise facing generic competition. The Directors also believe that revenues from product supply are likely to continue to grow to support increasing market penetration of flutiform® and this would lead to flutiform® supply generating a positive gross profit during 2014. A full year's rental income relating to the Lyon Facility and growing EXPAREL® sales would increase "Other income" substantially in 2014 compared with 2013.

Currently the Group has increased demand for contract development work and, as a consequence, additional skilled technical and support staff are being recruited at the research and development facility in Muttenz, Switzerland, with most focussed on projects paid for by partners. Operating costs are, therefore, expected to increase to support the customer-funded work as well as plans to increase the Group's own expenditure on developing technologies and products once the Transactions are completed. 

At the time of the interim results announcement in August 2013, the Board stated that its plan was to allocate between £5 million and £10 million per annum on own-funded research and development, subject to suitable opportunities being available, including £2 million to £3 million per annum on supporting flutiform®. The flutiform® support costs are now mainly recorded in cost of sales as they relate to supply rather than new product development. For 2014, the Board's guidance is for net expenditure on research and development of between £3 million and £6 million. Once the Transactions are concluded, and subject to suitable opportunities being available, the Board will consider whether it would be in the interests of shareholders to increase the level of research and development expenditure in future years as the Group's net income rises.

Once they have been implemented, the Transactions are forecast to give rise to a substantial reduction in pre-exceptional financing costs, although they are also expected to give rise to one-off exceptional charges of an estimated £0.4 million related to the costs of the Bond Proposals and approximately £25.1 million being the book loss on extinguishment of the Bond debt. The estimated costs relating to the Capital Raising of £7.6 million will be charged to the share premium account.

The Group will continue to support its partners, Mundipharma International Corporation Limited ("Mundipharma"), Kyorin Pharmaceutical Co Ltd ("Kyorin") and Sanofi, in making further progress with flutiform® in Europe, Japan and Latin America respectively. The Board looks forward to building on recent successes to drive future growth and to further exploit the Group's proven inhalation drug development and oral drug delivery technologies and expertise.

Approved products

flutiform® is a novel combination of the most commonly prescribed inhaled corticosteroid, fluticasone propionate, with the long-acting beta agonist, formoterol fumarate, in a pressurised metered dose inhaler. Fluticasone, an ICS, provides a high local anti-inflammatory activity to reduce the symptoms and exacerbations of asthma. Formoterol (a selective long-acting ß2 adrenergic agonist) has a rapid onset of bronchodilation in approximately three minutes.

In Europe, flutiform® is indicated for the treatment of bronchial asthma in patients 12 years and older (50/5µg and 125/5µg strengths) and in adults (250/10µg strength) whilst in Japan, the 50/5µg and 125/5µg strengths are approved for the treatment of bronchial asthma in those aged 16 years and over. 

As of 27 March 2014, flutiform® hasbeen launched by Kyorin in Japan, and by affiliates of Mundipharma in Australia, Hong Kong, South Korea and 15 European countries: Germany, the UK, Italy, Belgium, Cyprus, the Czech Republic, Denmark, Finland, France, Iceland, Ireland, the Netherlands, Norway, Slovakia and Sweden. National marketing authorisations have been granted in a further eight European countries, as well as in Israel.

Recent sales for flutiform® information is set out within the Operating Review.

In September 2013, Mundipharma, the Group's development, marketing and distribution partner in Europe and most other territories outside Japan and the Americas, commenced a clinical trial into the use of flutiform® for the treatment of COPD. Sanofi, Skyepharma's licencee for Latin America, filed its first NDAs in countries in the region in Q3 2013 and the Group anticipates that further submissions will take place during 2014. As previously announced, the Group does not plan to carry out the substantive work on pursuing the NDA for flutiform® in the United States unless the costs are covered by a third party.

The Development and Marketing Agreement with Mundipharma entered into in 2006, and later amended ("DMA"), includes signing and other fees, and milestones of up to €73.0 million (£60.9 million), of which €28.0 million had been paid by the end of 2013, €3.0 million (£2.5 million at that time) was received in March 2014 following the launch in France, a further €2.0 million (£1.7 million) is due as and when flutiform® is launched in Spain and up to €40.0 million (£33.4 million) is dependent on reaching certain levels of annual net sales.

Out of the €2.0 million (£1.7 million) milestones received in 2013, €1.0 million (£0.9 million) was paid as a mandatory prepayment of the Paul Capital Note. No further prepayments are required in respect of the Paul Capital Note which is due to be settled in 2014.

Mundipharma has funded third-party development costs, capped at €19.0 million (£15.8 million) ("High Strength Costs") principally related to developing the high strength version of flutiform®. Mundipharma has also funded a double blind study of flutiform® in children aged 5 to 12, as required under the agreed Paediatric Investigation Plan ("PIP") for Europe. The DMA was amended in March 2013 to change the previous obligations to refund High Strength Costs, paediatric development and certain other costs so that, now, the funding of High Strength Costs together with 50 per cent. of the paediatric study costs (up to a capped amount) and certain other costs ("Recoverable Costs") can be recovered by Mundipharma, subject to a maximum of €25.0 million (£20.9 million), against 100 per cent. of net sales-related milestones and 50 per cent. of royalties due to the Group in accordance with the DMA in respect of net sales from 1 January 2014, increasing to 75 per cent. of such royalties in respect of net sales from 1 January 2016 until fully repaid. The amendment also gave the Group certain potential rights to use of data and extended payment terms for product supplied until 31 December 2015.

Part of the initial upfront milestone of €15.0 million (£10.1 million at the time) and additional funding by Mundipharma in respect of the development of a high strength version of flutiform® has been recorded in deferred income in the Group's balance sheet and will be recognised in the Group's income statement as the recoverable costs are recovered by Mundipharma by deduction from royalties and sales-related milestones. As at 31 December 2013, this amounted to £9.7 million.

Under the DMA, 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 deductions noted above for Recoverable Costs. Royalties are also subject to a cap which limits the aggregate amount of royalties and costs of product supplied to Mundipharma by the Group to a maximum of 35 per cent. of net sales, and the Board estimates that this has reduced the effective royalty rate in 2013 to a rate materially below 10 per cent.

The payment of royalties continues whilst the agreement with Mundipharma is in force, which is the period until the latest of September 2027 (being 15 years from the date of the first commercial delivery of flutiform® in a major country) and the expiry of the last of the Group's relevant patents utilised in the territory.

Under the agreement with Kyorin in Japan, there is a high-mid single digit percentage royalty on net sales payable to the latest of 10 years from the date of first commercial sale in Japan, being November 2013, and the expiry of the last of the Group's relevant patents in the territory.

Already granted patents relating to flutiform® in most territories expire in August 2019. Patent extensions and supplementary protection certificates are being sought where available, which may provide additional periods of protection up to a maximum of five years. In addition, patent applications have been filed which could, if granted, extend the patent life in the main markets to 2030. In Europe there is data exclusivity which prevents a generic from being marketed for 10 years from the first approval of flutiform®, which was in July 2012.

Breo® Ellipta® (marketed as Relvar® Ellipta® in Japan and the UK) is an inhaled combination product developed by GSK for the treatment of respiratory diseases. Breo® Ellipta® combines the ICS fluticasone furoate with the LABA vilanterol and incorporates one of the Group's proprietary dry powder formulation technologies for inhalation products accessed under a licensing arrangement. 

Breo® Ellipta® was launched in the United States in October 2013 where it is indicated for the treatment of COPD. Marketing authorisation for COPD was also granted in Canada in July 2013. Relvar® Ellipta® was launched in the UK in January 2014 following approval for the treatment of asthma and COPD in 31 European Countries by the European Commission in November 2013. A further combination product (known as Anoro™ Ellipta™), containing two bronchodilator molecules: umeclidinium and vilanterol inhalation powder, has been approved in the United States and Canada and received a recommendation by the CHMP for marketing authorisation in Europe for the treatment of COPD. A monotherapy, Incruse® (umeclidinium) also received a recommendation by the CHMP for marketing authorisation in Europe in February 2014. GSK commenced launch activities for Anoro™ Ellipta™ in the United States in the first quarter of 2014.

A summary of the regulatory status in major markets of the GSK respiratory products which utilise one of the Group's DPI formulation technologies under licence is set out in the table below:

The Group is entitled to a low-single digit percentage royalty on net sales of products using the licensed technology, capped at a maximum amount of £3 million per annum for each GSK chemical entity for the life of the relevant patents. The two GSK combination medicines and Incruse® between them involve three chemical entities, with a total potential income to the Group of up to £9 million a year. The technology licensed to GSK is covered by granted patents with the earliest expiry date for one of the granted patents in major markets of November 2019. Skyepharma does not have the information at present to determine whether later-expiring patents cover the particular applications for these products. If they do, the relevant royalty stream could continue for several years longer.

Solaraze® (diclofenac), a topical gel treatment for actinic keratosis, is marketed in the United States by Fougera Pharmaceuticals Inc. ("Fougera"), which was acquired by Sandoz, a division of Novartis ("Sandoz") in July 2012. Almirall, S.A. ("Almirall") is the Group's distribution and marketing partner in Europe and certain other territories. 

In the United States, Tolmar, Inc. launched a competing product in November 2013 and, under the terms of an amendment agreement with Fougera negotiated in 2013, from that launch date, the royalty rate on net sales of Solaraze® by Fougera increased from a low-teens percentage to 20 per cent., and the Group has also received payment of a milestone. In addition, the increased royalty rate applies to net sales by Fougera of its own authorised generic which was also launched in November 2013. Patents in the United States expire in Q3 2015 and after that, royalty rates will decrease from 20 per cent. to a low-teens percentage royalty.

Following the expiry in H1 2013 of certain protections for Solaraze® in Europe and certain other territories excluding the United States, and a renegotiation to provide Almirall with continued exclusivity, the royalty rate on net sales due from Almirall has reduced from a low double digit percentage to a high-mid single digit percentage and will reduce further to a low-mid single digit percentage upon the entry of direct generic competition into the market.

Net sales of Solaraze® in the United States in 2013 were U.S.$47.6 million (£30.4 million), 18 per cent. lower than reported in 2012. Net sales in 2013 by Almirall increased by 1 per cent to €31.9 million (£26.8 million).

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

In 2013 net sales of Requip® Once-a-day totalled £77.1 million, a decrease of 14 per cent. from 2012 (£89.4 million). Of this, £43.3 million was generated in Europe, a 31 per cent. decrease from 2012 (£63.0 million) due to generic competition. £33.8 million of these sales arose in rest of the world (including the United States), an increase of 28 per cent (£26.4 million in 2012). The growth in the rest of the world was driven by an increase in sales from emerging markets and Asia Pacific which, following the launch in Japan in August 2012, have become increasingly important.

In addition to increasing sales pressure from generics, the royalty received by the Group will reduce following patent expiry from low-mid single digit to low-single digit or zero on a country-by-country basis. During the patent term, the basis of calculation will change from net sales to gross margin upon, and for so long as, substantial competition occurs from ropinirole-containing modified release products in that country.

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"). The US rights to Uroxatral® were sublicensed in March 2013 by Sanofi to Covis Pharmaceuticals. The Group earns low-single digit royalties on net sales of Xatral® OD and Uroxatral®. In 2013, net sales of Xatral® OD and Uroxatral® were €92.0 million (£78.2 million), down 18 per cent. on 2012 sales of €108.9 million (£88.4 million). In the United States, net sales of Uroxatral® were €14.2 million (£12.1 million), down 29 per cent. from 2012 due to generic competition. Western European and rest of world net sales have continued to fall as a result of generic competition, with net sales for 2013 of €77.8 million (£66.0 million), a reduction of 14 per cent. from 2012.

Paxil CR™ is an advanced formulation of the anti-depressant Paxil® (paroxetine) and was developed by the Group with GSK using the Group's proprietary Geomatrix™ technology. In 2013, net sales outside of the United States were U.S.$112.2 million (£71.7 million), up 59 per cent compared with U.S.$71.8 million (£45.2 million) in 2012 driven by growth in sales in Asia and emerging markets, enhanced by the launch in Japan in June 2012.

In the first half of 2013, net sales in the United States were U.S.$21.3 million (£13.6 million), (H1 2012 U.S.$20.4 million (£12.9 million)). In the second half of 2013 GSK did not report sales of Paxil CR™ in the United States to Skyepharma. GSK have stated that no royalties are due to Skyepharma due to the expiry of certain protections covering Paxil CR™ in the United States. The Company is disputing this.

The Group earns from zero to mid-single digit percentage royalties on net sales of Paxil CR™ on a country-by-country basis depending on generic competition, number of years since launch and patent expiry.

ZYFLO CR® - The Group developed an extended release formulation of the oral asthma drug zileuton for Cornerstone Therapeutics Inc. In February 2014, Cornerstone became a wholly-owned subsidiary of Chiesi Farmaceutici S.p.A. ZYFLO CR® (zileuton) extended-release tablets, taken twice daily, utilise the Group's proprietary Geomatrix™ technology, and the product is approved for the prophylaxis and chronic treatment of asthma in adults and children aged 12 years and older. ZYFLO CR® and ZYFLO® (zileuton immediate release tablets) are the only FDA-approved leukotriene synthesis inhibitors. In the first three quarters of 2013, ZYFLO CR® net sales were U.S.$45.2 million (£29.2 million), an increase of 29 per cent. compared with the first three quarters of 2012. The Group received a high-mid single digit percentage royalty on net sales of ZYFLO CR®, but following the expiry of certain protections covering ZYFLO CR® in the second half of 2013, no further royalties are expected and Cornerstone are no longer reporting ZYFLO CR® sales to the Group.

LODOTRA®/RAYOS®, a novel delayed-release formulation of low dose prednisone, utilising the Group's proprietary Geoclock™ chronotechnology and developed in collaboration with Horizon Pharma, Inc ("Horizon"), is approved for the treatment of moderate to severe active rheumatoid arthritis in adults particularly when accompanied by related morning stiffness in over 35 territories including 30 European countries, Israel, Australia, New Zealand and South Korea. Horizon has signed exclusive distribution and supply agreements with Mundipharma for the commercialisation of LODOTRA® in most other territories outside of Japan and the United States, including an additional agreement signed in 2013 for over 55 countries in Africa and the Middle East.

In the United States the product, known as RAYOS®, was launched in December 2012 and from January 2013, Horizon initiated the full launch to the majority of rheumatologists and key primary care physicians. Horizon promotes RAYOS® through its rheumatology sales force which has been expanded from 25 representatives in 2013 to 40 representatives in January 2014.

Horizon reported net sales of LODOTRA® of U.S.$8.2 million (£5.2 million) in 2013 compared with net sales of U.S.$8.2 million (£5.3 million) for 2012. Horizon recognises a significant portion of LODOTRA® sales at the time of delivery to its distribution partner, Mundipharma, and those deliveries are not linear or related to end market sales in terms of timing and therefore sales can fluctuate from year to year. In addition, Horizon reported net sales of RAYOS® of U.S.$5.8 million (£3.7 million) (2012: nil), following the RAYOS® launch in December 2012. The figures reported by Horizon are not the same as the net sales used in the calculation of the royalties paid to the Group.

The Group is entitled to receive a small share of any future milestones received by Horizon for LODOTRA®/RAYOS®, a low-mid single digit percentage royalty on net sales of RAYOS® in the United States and a mid-single digit percentage royalty on net sales of LODOTRA® elsewhere.

The Group is currently in discussions with Horizon regarding the exclusivity under the existing Manufacture and Supply Agreement. The Group believes that the exclusive supply arrangements remain in place unless, and until, the agreement is amended or 24 months prior written notice of termination is served, neither of which has occurred. There is no provision for non-exclusive supply in the current agreement. Horizon have, however, stated that they disagree with this view and that the manufacturing and supply arrangements for LODOTRA®/RAYOS® with Skyepharma are only exclusive until April 2014. The Group is reserving all its rights and is in discussion with Horizon regarding the correct application of the license agreement terms.

In March 2013, Horizon and the Group received purported notice letters indicating that a Paragraph IV Patent Certification had been filed by Alvogen Pine Brook Inc. ("Alvogen") and advising that Alvogen had filed an Abbreviated New Drug Application ("ANDA") with the FDA for a generic version of RAYOS® containing up to 5mg of prednisone. In the notice letter, Alvogen did not indicate the timing or status of the FDA's review of its filing and the validity of the letters for ANDA notification purposes were challenged. Subsequently, Alvogen has agreed that if its ANDA is accepted by the FDA a notification letter will need to be served after such acceptance and that all time periods will run from the date of service of such letters. No such notification letter has been received as of 27 March 2014 (being the latest practicable date prior to publication of these financial statements).

On July 15, 2013, the Group and Horizon received a Paragraph IV Patent Certification from Watson Laboratories, Inc. - Florida ("WLF"), advising that WLF had filed an ANDA with the FDA for a generic version of RAYOS®, containing up to 5 mg of prednisone. WLF has not advised the Group and Horizon as to the timing or status of the FDA's review of its filing. On August 26, 2013, a member of the Group together with Horizon, filed suit in the United States District Court for the District of New Jersey against Watson, Actavis Pharma, Inc., Andrx Corp., and Actavis, Inc., or collectively "WLF". The lawsuit alleges that WLF has infringed U.S. Patent Nos. 6,488,960, 6,677,326, 8,168,218, 8,309,124 and 8,394,407 by filing an ANDA seeking approval from the FDA to market generic versions of RAYOS® containing 1 mg, 2 mg, and 5 mg of prednisone prior to the expiration of the patents. The subject patents are listed in the FDA's Orange Book (the United States FDA listing of approved drugs along with the patents relating to them). The commencement of the patent infringement lawsuit stays, FDA approval of WLF's ANDA for 30 months or until an earlier district court decision that the subject patents are not infringed or invalid.

A further ANDA filed by Par Pharmaceutical, Inc. in 2013 has subsequently been withdrawn.

On or about August 12, 2013, Horizon received a Notice of Opposition to a European patent covering LODOTRA®, EP 2049123, filed by Laboratorios Liconsa, S.A. In the European Union, the grant of a patent may be opposed by one or more private parties.

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

Sales of Sular® were substantially reduced in prior years due to a declining market and competitive factors.

During 2013 Shionogi reduced the rate of royalty paid from a low-mid single digit percentage to a low single digit percentage on net sales. The Group has recorded royalties at this lower rate but has reserved all its rights and is in discussions with Shionogi about whether such a reduction was a correct application of the licence agreement terms.

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. The Group is entitled to receive royalties as a percentage of net sales of Triglide®, less the price of product supplied to Shionogi. The Group has not received royalty payments with respect to Triglide® since Q1 2010 because Shionogi are claiming that they have overpaid royalties with respect to periods prior to such date and are seeking to credit such overpayments against royalties which would otherwise have been payable after such date. The Group has reserved all its rights and is in discussions with Shionogi regarding the correct application of the licence agreement terms.

EXPAREL® (bupivacaine liposome injectable suspension) is an injectable product for administration into the surgical site to produce postsurgical analgesia and has been developed by the Group's former Injectable Business, now called Pacira Pharmaceuticals, Inc. ("Pacira"). Under the terms of the sale of the Injectable Business in 2007, the Group is entitled to three per cent. of net sales of EXPAREL® in the United States (based on cash received by Pacira), and a similar share of net sales if the product is approved and launched in Japan, the UK, France, Germany, Italy and Spain, for the life of certain patents sold with the business. The latest expiry date listed in the Orange Book for EXPAREL® is 18 September 2018. 

The Group is also entitled to a milestone of U.S.$4.0 million (£2.4 million) on first commercial sale of EXPAREL® in a major EU country (UK, France, Germany, Italy or Spain) and milestones on Pacira first achieving certain targets for 12-month net sales (on a cash received basis) of EXPAREL® as follows: U.S.$8.0 million (£4.8 million) if worldwide annual net sales reach U.S.$100 million, a further U.S.$8.0 million (£4.8 million) if worldwide annual net sales reach U.S.$250 million and a further U.S.$32.0 million (£19.4 million) if worldwide annual net sales reach U.S.$500 million.

In 2012 the Group received a milestone payment of U.S.$10.0 million (£6.2 million at the time), following the regulatory approval and the first commercial sale of EXPAREL® in the United States.

Pacira has reported that EXPAREL® net sales in 2013, the first full year of sales, totalled U.S.$76.2 million (£48.3 million) with quarter on quarter growth in Q4 2013 of 52 per cent versus Q3 2013. Pacira has reported that it continues its steady expansion since launch, reporting 374 total new accounts in the fourth quarter of 2013, an average of 29 new customers per week. The strong demand for EXPAREL® has continued due to major hospital system formulary wins and continued penetration into the soft tissue and orthopaedic markets.

Research and Development

SKP-1041

Somnus Therapeutics, Inc. ("Somnus") has successfully completed three Phase I studies and a Phase II study of the modified release sleep maintenance product SKP-1041. The product is a new formulation of zaleplon, a non- benzodiazepine hypnotic agent, which utilises the Group's proprietary Geoclock™ chronotechnology 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.

Following the Phase II study which met its primary end points, Somnus continues to seek a partner to fund further development of the product. Under the terms of the agreement with Somnus, the Group has already received milestones totalling U.S.$5.0 million (£2.7 million at the time) and is entitled to receive up to a further U.S.$30.0 million of launch and sales-related milestones as well as royalties on net sales.

SKP-1052

This product concept was developed in-house and uses the Group's proprietary Geoclock™ chronotechnology to reduce the risk of nocturnal hypoglycaemia in insulin-treated patients with type 1 and 2 diabetes mellitus. There is currently no recognised medication to reduce the risk of this side-effect of insulin treatment.

Following the generation of supportive data in a proof of concept study, the Group has received encouraging advice from the FDA on the development plan and regulatory pathway in the United States for SKP-1052 and is actively seeking a partner to fund further development.

Manufacturing and Supply

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, Cheshire, UK. Sanofi will also manufacture flutiform® to supply directly to its group companies for Mexico, Central and South America using certain ingredients and components supplied by the Group. The manufacturing process was successfully validated at initial launch scale during 2011 for the 30-day product and during 2013 for the 56-puff presentation for Japan and all launch supplies have been manufactured to support the Group's partners' earliest planned launch dates.

The Group has entered into agreements with a number of suppliers in order to obtain materials required and have them supplied to Sanofi to manufacture flutiform®.

To establish the flutiform® supply chain the Group committed to substantial development and capital expenditure to scale-up and validate the manufacturing processes. To 31 December 2013 cumulative capital expenditure has been £14.5 million of which £0.2 million was incurred in 2013 (2012: nil). In addition, in 2013 the Group incurred £3.3 million for product maintenance costs (2012: £1.5 million), which are included as part of cost of sales. In addition to these costs, the Group will need to continue to invest in:

(a) working capital to support growth in supply volumes of flutiform®;

(b) further expenditure (to be included in cost of sales) to maintain the product supply (forecast to be approximately £2 to 3 million per annum at least for 2014 and 2015); and

(c) additional capital expenditure to further scale up and validate the manufacturing process at higher batch sizes in anticipation of growth in demand (expected to be approximately £2 to 3 million per annum in capital expenditure for 2014 and 2015).

Lyon Manufacturing Facility

As noted in the Operating Review, Skyepharma's manufacturing facility in Saint Quentin-Fallavier, Lyon, France, continues to be leased to the Aenova Group which manages the Facility on a day-to-day basis. Further details of the lease arrangements are shown in the Operating Review.

The Facility manufactures five products which use the Geomatrix™ family of technologies: Diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Madopar DR® and lower-dose formulations of Sular® and also LODOTRA®/RAYOS®, which uses the Group's Geoclock™ chronotechnology. The Facility also manufactures one other oral product, Triglide®, based on Skyepharma's solubilisation technology. The Facility has current good manufacturing ("cGMP") status, with approvals, amongst others, from the European Medicines Agency, United States FDA and Anvisa (Brazil). The Facility was inspected during 2013 by the United States FDA, and no concerns were raised.

Feasibility and technology development

The Group continues to seek to strengthen the product pipeline through further early stage feasibility and technology development projects funded, where appropriate, on a time and materials basis by partners. Since 2011, the Group's respiratory development team has provided contract development services for RespiVert, a subsidiary of Janssen Biotech, Inc., to provide chemistry, manufacturing and control services to help develop DPI dosage forms on RespiVert's new chemical entities which are aimed at providing new inhaled therapies for patients with chronic respiratory diseases including COPD and severe asthma.

The Group continues to seek applications for its proprietary SkyeHaler™ DPI. This is one of only a few DPI devices which have been incorporated into a product approved by the FDA. SkyeHaler™ is a multi-dose reservoir-type DPI device suitable for a range of inhalation therapies and incorporates a number of advanced features, including breath-triggered dose delivery confirmed by a counter, and a high level of technical performance and product protection.

The Group has commenced proof of concept work on a new oral drug delivery technology which is aimed at meeting what the Directors believe is an unmet oral drug delivery need and the Directors are expecting to get the results of an in vivo proof of concept study for this technology later in 2014. The Group is also planning further early stage feasibility work on two other novel oral drug delivery technologies.

Financial review

The results for 2013 reflect strong growth in revenues, especially from the supply of flutiform®, and cash inflows from milestones and royalties from our portfolio of approved and marketed products. There was also continued investment to support the flutiform® supply chain and in research and development, most of which was partner-funded. 

The table below summarises the Group's results for the year ended 31 December 2013 and shows underlying performance excluding exceptional items as well as the results of discontinued operations, both of which only affect the prior year and are explained in detail in the following sections:

Revenue

Revenues in 2013 were £62.6 million (2012: £49.9 million) comprising signing and milestone receipts, contract research and development, royalties, product supply, share of sales of EXPAREL® and rental income from the Lyon Facility. The increase from 2012 is mainly due to growth in revenues from the supply of flutiform®.

Revenue recognised from signing and milestone payments was £5.7 million in 2013 (2012: £7.7 million), which included a milestone of several million U.S. dollars following regulatory approval of flutiform® in Japan in September 2013, a milestone of €2.0 million (£1.7 million) in respect of the launch of flutiform® in Italy in June 2013, and a milestone from Sandoz in December 2013 following the U.S. launch by Tolmar, Inc. of a generic competitor to Solaraze®. In 2012, signing and milestone revenues included €8.0 million (£6.3 million) milestones following the launches of flutiform® in Germany and the UK, together with the milestone of U.S.$10 million (£6.2 million) received from Pacira following the launch of EXPAREL® in the United States. This latter milestone was recorded under exceptional income from discontinued operations and not within revenue as the launch milestone related to the "earn-out" adjustment to the original disposal consideration of the Injectable Business by the Group to Pacira in 2007.

Contract research and development revenue increased by 8 per cent. to £10.3 million in 2013 (2012: £9.5 million) and included further work on flutiform® for Kyorin and Mundipharma, and contract development services provided to RespiVert.

Royalty income was £16.8 million in 2013, £0.6 million lower than in 2012, representing a reduction, at constant exchange rates of 5 per cent. The income relates to 14 approved and marketed products, including royalty receipts for the first time in 2013 from Relvar® Ellipta®/Breo®Ellipta® in the United States and Japan, RAYOS® in the United States and flutiform® in Italy and a number of other countries. The decrease in total royalty receipts was mostly due to the expected reduction in sales of Solaraze® resulting from generic competition in the United States, partially offset by increased sales from the additional launches of flutiform® in Europe and in Japan, and higher royalties from Requip® Once-a day following its launch in Japan in 2012.

Product supply revenue totalled £28.1 million in 2013 (2012: £14.5 million), representing an increase of 91 per cent. at constant exchange rates, reflecting supply of flutiform® throughout the year following launches which began in late September 2012 and continued with new launches during 2013 and early 2014. Based on forecasts received from partners, the Board expects that revenues from the supply of flutiform® will be an increasing proportion of the Group's revenues in the next three years.

Other revenue of £1.7 million (2012: £0.8 million) comprises the Group's three per cent. share of Pacira's cash receipts from net sales of EXPAREL® in the United States and rental income from Lyon. Rental income was not due in the period from 1 July 2013 until the lease was renewed following the expert determination process. Following the expert determination in the Group's favour, the lease was renewed on 19 December 2013 and rent then became due at an annual rental of €2.0 million (£1.7 million at current rates) until June 2016.

Cost of sales

A review of the accounting policies relating to expenses has been undertaken to better present the costs associated with both product supply activities and research and development activities, given the significant growth of the flutiform® supply chain. As a result, £1.0 million of project expenditure previously reported under research and development costs in 2012 has now been included in cost of sales, and research and development costs in 2012 have reduced by a corresponding amount. For further details, please see Note 1: Basis of preparation.

Due to the complexity of a combination respiratory product like flutiform®, it is anticipated that there will be a long-term continuing requirement to support the product, both to scale-up and maintain manufacturing capacity and to deal with maintenance of the supply chain. In addition to anticipated capital costs described in the flutiform® supply chain section (under Manufacturing and Supply), this could cost £2 to 3 million a year for at least 2014 and 2015, reported within cost of sales.

Accordingly for 2013, cost of sales increased to £33.2 million compared with £21.9 million in 2012 (as restated) due to increased flutiform® supply. As production volumes have increased compared with the prior year, the Group has benefited from reduced pricing for a number of raw materials under its long-term agreements with suppliers as well as lower capacity reservation charges from its manufacturing partner Sanofi. With higher orders for flutiform®, year-end inventories increased to £4.7 million (2012: £1.6 million), which includes £0.8 million of capitalised overheads (2012: nil).

As anticipated, in 2013 the flutiform® supply chain made a gross loss for the year but, with growth in volumes above initial launch levels, it is anticipated that it will start to move into positive gross profit during 2014 and be an increasingly important part of the Group's revenues.

Research and development expenses

Gross research and development expenses incurred in 2013 reduced to £10.8 million from £11.9 million incurred in 2012 as the prior year included significant costs for flutiform® Phase III trials. The majority of the Group's research and development resources were focused on partner projects and as a result, net investment in research and development (expenses, net of contract development revenues) was £0.5 million, compared with £2.4 million in 2012.

Pre-exceptional operating result from continuing operations

Pre-exceptional operating result and EBITDA from continuing operations are as follows:

There were no exceptional items recorded during 2013. The net exceptional operating credit from continuing operations in 2012 is explained in Note 6: Exceptional items.

Finance costs and income

Finance costs - interest totalled £14.1 million (2012: £11.8 million) and consisted of £10.0 million (2012: £7.0 million) in respect of the Bonds, £3.1 million (2012: £2.9 million) in respect of the CRC finance, £0.6 million (2012: £1.5 million) of interest attributable to the Paul Capital Note and £0.4 million (2012: £0.4 million) on other bank borrowings.

Finance costs - revaluation consisted of a loss of £0.1 million (2012: £0.7 million loss) arising from the revaluation of the carrying value of the Paul Capital Note as described in Note 12: Borrowings.

Finance income of £0.1 million during the year (2012: nil) related to interest income.

Following the Bond Restructuring in 2012, ordinary financing charges are higher than the historical charges due to the additional interest charge on the 2024 Bonds, the redemption premium and accounting for the liability falling due on the earliest ordinarily redemption date (rather than through to the final maturity dates of 2024 and 2025) using a discount rate of 17 per cent.

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 2013 this amounted to a loss of £0.5 million (2012: £0.4 million gain).

Result

Operating profit from continuing operations after exceptional items in 2013 was £13.6 million (2012: £17.1 million). As noted above, no exceptional items were recorded during 2013.

Loss before tax from continuing operations for 2013 was £1.0 million (2012: £10.4 million loss). Profit for 2013 from continuing operations after exceptional items and taxation was £0.8 million (2012: £10.6 million loss), having benefited from a tax credit of £1.8 million (2012: £0.2 million charge) arising from recognition of deferred tax as described under Taxation below. Profit for the period from discontinued operations during 2013 was nil (2012: £6.2 million). This gives a total net profit from both continuing and discontinued operations in 2013 of £0.8 million (2012: £4.4 million net loss).

Taxation

In 2013, the Group recognised a deferred tax asset of £2.0 million. This reflected a prudent assessment that a portion of the Swiss and U.S. tax losses would be utilised in 2014 given the improving outlook for future profitability indicated by the growth in 2013 revenues from flutiform® and other products, and income from milestones and share of net cash receipts in respect of EXPAREL®.

Earnings per share

From continuing and discontinued operations during 2013, basic earnings per share amounted to 1.8 pence and diluted earnings per share amounted to 1.7 pence (2012: 14.9 pence loss per share for both basic earnings per share and diluted earnings per share).

From continuing operations during 2013, basic earnings per share amounted to 1.8 pence and diluted earnings per share amounted to 1.7 pence (2012: both basic and diluted loss per share amounted to 36.0 pence).

As at 31 December 2013 there were 46,127,645 Ordinary Shares in issue (2012: 46,127,645). In addition there were outstanding as at 31 December 2013 potential obligations to issue Ordinary Shares as follows:

The Directors believe that the options in respect of the deferred consideration relating to the acquisition of Krypton in 1998 are unlikely to be exercised as the exercise price is very substantially above the prevailing market price of shares in Skyepharma PLC and the exercise price increases by ten per cent. per annum.

Cash position and liquidity

As at 31 December 2013 the Group had cash and cash equivalents of £16.5 million (2012: £16.4 million). During 2013, the Group generated a cash inflow from operations of £14.4 million compared with an inflow of £18.5 million in 2012. During 2013, the Group's cash position benefited from the receipt of milestones of €2.0 million (£1.7 million at that time) from Mundipharma following their launch of flutiform® in Italy, several million U.S. dollars from Kyorin following their launch of flutiform® in Japan, and a milestone payment by Fougera following Tolmar's launch in the United States of a generic competitor of Solaraze®.

In 2013, the Group paid scheduled financing commitments comprising the scheduled repayment of debt of £7.1 million (2012: £12.7 million), mainly to Paul Capital and the Swiss mortgages, and net interest of £3.6 million (2012: £7.3 million) primarily relating to the CRC finance, the Paul Capital Note and the Swiss mortgages.

A former partner had previously funded €3.0 million (£2.5 million) of the expenditure of the flutiform® supply chain, and the Group repaid this amount in monthly instalments during 2013.

As at 31 December 2013, the Group had liquidity of £17.3 million (2012: £17.2 million), consisting of cash of £16.5 million and an undrawn overdraft facility of £0.8 million.

Borrowings 

In September 2012, the Group implemented a Bond Restructuring and entered into a further amendment agreement in relation to the CRC facility in order to enhance the Group's short-term liquidity position.

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

Total debt has increased by £3.6 million during 2013. This is due to an increase in the carrying value of the Bonds of £10.0 million, offset by repayments of other debt of £7.1 million as well as translation and revaluation effects. Although shown in the balance sheet in accordance with IFRS, the Bonds had a face value as at 31 December 2013 of £60.8 million plus a redemption premium of £28.8 million.

The Group exercised its option under the terms of the Bonds to defer the payment of interest due at the end of the first three quarters to 31 December 2013 without additional rolled interest.

Further details on the refinancing, interest rates and other key terms of the agreements can be found in the Notes to the Results Announcement.

Other borrowings amounted to £8.7 million at 31 December 2013 (2012: £9.0 million), consisting principally of £7.3 million (2012: £7.6 million) for two property mortgages secured on the assets of Skyepharma AG.

A schedule of forecast payments in relation to borrowings is set out in Note 12: Borrowings.

Balance sheet

At 31 December 2013, the consolidated balance sheet shows total shareholders' deficit of £64.6 million (2012: £66.0 million deficit).

Non-current assets marketed for sale

One of the sites in Switzerland remains vacant and marketed for sale since January 2011. As at 31 December 2013, the net book value of the site is £4.1 million and has been recorded in the Group's balance sheet under property, plant and equipment, of which £3.9 million relates to land and buildings and £0.2 million relates to laboratory and manufacturing equipment.

The facility was classified as held for sale under IFRS in the Group's 31 December 2011 balance sheet, having been vacant and marketed since January 2011. However, given the specialist nature of the property impacting the length of time for a sale, the carrying value was reclassified back into property, plant and equipment in 2012. The site remains vacant and is being actively marketed having reached the end of its useful life for the Group. External agents have provided management an indicative fair value which continues to be in excess of the carrying value as at year end for both 2012 and 2013 and accordingly during the years ended 31 December 2013 and 2012 there was no depreciation or impairment recorded against the carrying value of the site.

Commitments

The Group has certain minimum commitments to its suppliers in respect of flutiform® with a total value of approximately €10.0 million to €11.0 million (£8.3 million to £9.2 million) per annum through to 2015, subject to certain early termination rights.

Aenova lease

As already noted earlier within this press release, the Group has extended the lease of its manufacturing business and premises in Lyon to Aenova until 30 June 2016 at a rental of €2.0 million (£1.7 million at current rates) per annum commencing on 19 December 2013. The rental income is included in "Other Income" in the Consolidated Income Statement.

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the Annual Report and Accounts 2013.

Foreign exchange risks

Almost all of the Group's operations are based in Continental Europe and milestones 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 is 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, and 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 may include 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 was made of currency options and forward currency contracts during 2013 or 2012.

Forward-looking statements

The foregoing disclosures 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", prospects and any forecast sales of flutiform® and other products, the development of new products, risks related to obtaining and/or 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 regulatory and technological change, risks related to the ownership and use of intellectual property, risks related to Skyepharma's ability to manage growth, and the risk that the lease of the Lyon Facility is terminated early. Skyepharma undertakes no obligation to revise or update any forward-looking statement to reflect events or circumstances after the date of this Annual Report and Accounts.

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2013

See Notes to the results announcement

CONSOLIDATED INCOME STATEMENT (CONTINUED)

For the year ended 31 December 2013

See Notes to the results announcement

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME/(EXPENSE)

For the year ended 31 December 2013

See Notes to the results announcement

CONSOLIDATED BALANCE SHEET

As at 31 December 2013

Approved by the Board of Directors on 28 March 2014 and signed on its behalf by:

See Notes to the results announcement

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2013

See Notes to the results announcement

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2012

See Notes to the results announcement.

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2013

See Notes to the Consolidated Cash Flow Statement

NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2013

(a) Cash generated by operations

 NOTES TO THE RESULTS ANNOUNCEMENT

The results announcement for the year ended 31 December 2013 was approved by the Board on 28 March 2013.

1 Basis of preparation

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

The results 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 results announcement the Group has consistently applied the accounting policies as set out in the Group's consolidated accounts for the year end 31 December 2012, except as set out below.

The financial information in this results announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 for the years ended 31 December 2012 and 2013. The financial information for the years ended 31 December 2012 and 2013 has been extracted from the Group's audited consolidated accounts for the year ended 31 December 2013. 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 2013 are available on the Company's website and have also been delivered to the National Storage Mechanism. The audited accounts for the year ended 31 December 2012 have been delivered to the Registrar of Companies.

The results 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 results announcement is presented in pounds sterling and all values are rounded to the nearest £0.1 million.

Changes in accounting policies and reclassification of 2012 income statement

Due to the growth in flutiform® supply during 2013, a review of the allocation of operating costs was undertaken to ensure appropriate presentation of the expenses associated with supply activities within the Group. As a result, operating costs which had been previously recorded under research and development costs, but which related to the support of the ongoing flutiform® commercial supply chain (including the manufacturing processes at the subcontractor, Sanofi), have now been included within cost of sales (manufacturing costs). All 2012 comparatives have been restated accordingly, the financial effect of this has been as follows:

- Cost of sales has increased by £1.0 million to £21.9 million

- Research and development expenses have decreased by £1.0 million to £11.9 million

Under the new classifications costs are as follows:

Cost of Sales

Cost of sales comprises direct and indirect costs of manufacturing, agents' commissions and royalties payable as well as project costs relating to the support of the ongoing commercial operation of the supply chain.

Research and Development

Research and development expenses comprise the direct and indirect costs of projects (including third-party costs), feasibility studies and technology development; costs of chemistry, manufacturing and control development and clinical work. These expenses exclude the costs of projects relating to the support of the ongoing commercial operation of the supply chain.

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. 

2 Revenue by income stream

Product supply revenue includes £20.6 million in respect of the supply of flutiform® (2012: £4.8 million). Other revenue comprises the Group's share of net sales of EXPAREL® in the United States and rental income in respect of the Alliance with Aenova Group to lease the Group's manufacturing facility in Lyon, France.

3 Cost of sales

During the year ended 31 December 2013, the Group incurred £23.4 million in the supply of flutiform® (2012 restated: £10.4 million).

4 Research and development expenses

5 Other income

In January 2012, the Group reached agreement to sublet part of its laboratory space in Muttenz, Switzerland and to sell some of its surplus laboratory equipment to the Aenova Group. During the year ended 31 December 2013, the Group recorded £0.2 million (2012: £0.2 million) of rental income in respect of the lease of the laboratory space and £0.1 million (2012: £0.4 million) in respect of the sale of surplus laboratory equipment to third parties.

6 Exceptional items

(a) During 2011, AstraZeneca discontinued the production of Pulmicort®‎ pMDI (budesonide) 100 and 200 mg/dose HFA pMDI (pressurised metered dose inhaler) due to complex manufacturing issues related to technical aspects of their device. Subsequently, AstraZeneca terminated its agreements with the Group, which developed the formulation for Pulmicort® pMDI using its proprietary formulation technology. During the year ended 31 December 2012, the Group negotiated terms to settle certain disputes arising from the termination, including a final settlement amount of U.S.$8.0 million (£5.0 million) paid to the Group in December 2012. 

(b) During the year ended 31 December 2012, the Group recorded £0.5 million in restructuring charges for costs incurred during the reorganisation of the facility in Muttenz, Switzerland.

(c) The Bond Restructuring on 24 September 2012 resulted in a £15.4 million exceptional finance charge of which £13.1 million was non-cash. Refer to Note 12: Borrowings for more information.

Discontinued operations

During the year ended 31 December 2013, the Group recognised no exceptional items under discontinued operations. During the year ended 31 December 2012, the Group received a milestone payment of U.S.$10.0 million (£6.2 million) from Pacira following the launch of EXPAREL® in the United States. Refer to Note 9: Discontinued operations.

7 Finance costs and income

8 Foreign exchange (loss)/gain on net debt

9 Discontinued operations

On 23 March 2007, the Group disposed of the Injectable Business to Pacira. Under the terms of the sale, the Group received a milestone payment of U.S.$10.0 million (£6.1 million) in April 2012 following the launch of EXPAREL® in the United States, and is entitled to a milestone of U.S.$4.0 million if the product is launched in a major country of Europe and further contingent sales-related milestone payments of up to U.S.$48.0 million (£31.6 million). The Group is also entitled to receive three per cent. of net sales of EXPAREL® (based on cash received by Pacira) in the United States, Japan, United Kingdom, France, Germany, Italy and Spain until the expiry of certain patents and patent applications. The three per cent. and milestone revenue based on net sales is treated as income from continuing operations.

During the year ended 31 December 2012, the U.S.$10.0 million milestone was treated as exceptional income arising from discontinued operations.

Financial effects of discontinued operations

Apart from the financial implications under the terms of sale, the financial effects of the operations in respect of the Injectable Business have not been included in the consolidated results of the Group since the completion of sale to Pacira on 23 March 2007.

During the year ended 31 December 2012, no income tax expense was recorded in respect of the above exceptional income from discontinued operations as the income was expected to be offset against interest costs and brought forward losses.

10 Earnings per share

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

For the year ended 31 December 2013, contingent issuance of shares was dilutive since the result from continuing operations was a profit.

For the year ended 31 December 2012, there was no difference between the basic and diluted loss per share amounts since the result from continuing operations was a loss and accordingly, all potential shares from Convertible Bonds (non-convertible bonds from 24 September 2012), stock options, warrants and contingent issuance of shares were anti-dilutive. 

From continuing and discontinued operations

From continuing operations

The denominators used are the same as those detailed above for both basic and diluted earnings per share from continuing and discontinued operations.

From discontinued operations

In order to calculate earnings per share amounts for the discontinued operations (see Note 9: Discontinued operations), the weighted average number of Ordinary Shares for both basic and diluted amounts is as per the table above. The following table provides the profit attributable used in the calculation:

11 Cash and cash equivalents

Cash at bank earns variable interest based on the rates offered by daily bank deposits, liquidity funds and money market funds.

At 31 December 2013, the Group had available £0.8 million (2012: £0.8 million) of undrawn borrowing facilities.

12 Borrowings

Bank borrowings

At 31 December 2013 bank borrowings consist of a loan of CHF 2.0 million (£1.4 million) (2012: CHF 2.0 million (£1.4 million)) with the Basellandschaftliche Kantonalbank ("BLKB"). 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.

During the year ended 31 December 2013, BLKB implemented a repayment schedule for this loan whereby repayments of CHF 0.3 million (£0.2 million) are due on 31 December 2014 and every six months thereafter, until the balance has been repaid.

Bonds

In 2004, the Group issued £69.6 million 6 per cent. Convertible Bonds (the '2024 Convertible Bonds') due 4 May 2024, which were convertible into Ordinary Shares at a conversion price of £3.71. The 2024 Convertible Bonds could have been called for repayment in November 2013, November 2015, November 2017 and November 2020.

On 31 May 2005 the Group signed agreements for a private placement of £20.0 million 8 per cent. Convertible Bonds (the '2025 Convertible Bonds') due December 2025, which were convertible into Ordinary Shares at a conversion price of £3.82. The 2025 Convertible Bonds could have been called for repayment in December 2014, December 2016, December 2018 and December 2021.

In 2009, £6.6 million of the 2024 Convertible Bonds were converted into Ordinary Shares of Skyepharma PLC at a conversion price of £3.71 per share. 

On 24 September 2012, the Bond Restructuring was approved and implemented. Following implementation, an aggregate principal amount of £22,184,483 of the £83,007,000 outstanding Convertible Bonds were converted into 22,184,483 Ordinary Shares in the Company. Following the conversion, a total of £60,822,124 6.5 per cent. 2024 Bonds ("2024 Bonds") are outstanding as non-convertible bonds with the following key amended terms:

(i) Ordinary interest of 6.5 per cent. per annum, with an option (which the Group has exercised), for the Group to defer payment of the next four semi-annual interest payments (totalling up to £7.9 million) until up to 4 November 2017, subject to the right to further deferrals ceasing on certain change of control events or a significant cash equity issuance. Deferred interest will become payable earlier out of the proceeds, subject to restrictions, of certain cash equity issuances as well as on early redemption.

(ii) Additional interest of 3 per cent. per annum to 4 November 2017 (up to £9.3 million) and a redemption premium of 47.3 per cent. (£28.8 million) are both payable on redemption.

(iii) The earliest date when the Bondholders may ordinarily redeem the 2024 Bonds is 4 November 2017.

The accounting for the Bond Restructuring resulted in the de-recognition of the £83.0 million outstanding Convertible Bonds and the recognition of the related consideration, being the fair values of the 22.2 million shares issued and the £60.8 million non-convertible 2024 Bonds carried forward. The difference between the carrying value of the outstanding Convertible Bonds of £62.2 million as at 24 September 2012 and the total consideration resulted in an exceptional non-cash financing charge of £13.1 million included in the income statement in addition to the £2.3 million cash transaction costs.

In addition, following the Bond Restructuring and the conversion of £22.2 million of the outstanding Convertible Bonds to Ordinary Shares, the carrying value of the conversion option recorded in share premium of £28.5 million was transferred to retained earnings.

As at 31 December 2013, the carrying value of the 2024 Bonds included in non-current liabilities is £66.8 million (2012: £56.7 million). The movement year on year relates to accretion of interest expense and redemption premium.

Property mortgages

In February 2011 the Group renewed its two mortgage agreements with the Basellandschaftliche Kantonalbank. One of the sites in Switzerland has been vacated and is being marketed for sale and/or lease (which could be to multiple occupants). As at 31 December 2013, this site has a net book value of CHF 6.1 million (£4.1 million) and a mortgage of CHF 3.0 million (£2.0 million) which, together with the amortising loan (above) of CHF 2.0 million (£1.4 million), will be repayable on completion of any sale. This mortgage bears interest at a variable rate (currently 3.7 per cent. per annum) and is repayable with three months' notice from either party.

As at 31 December 2013, the carrying value of the mortgage relating to the buildings which are in use by the business is CHF 7.7 million (£5.3 million), which bears interest at 3.6 per cent. per annum and is fully repayable, if not extended, in 2016.

Paul Capital Note

On 23 March 2007, the Company and its subsidiary, Jagotec AG (together "Jagotec") entered into ‎an agreement with Paul Capital and a subsidiary of Paul Capital (together "PCRF"). Pursuant to this agreement, ‎PCRF assigned its existing interests in the royalties and certain milestone payments from Solaraze®, Xatral® ‎OD, Triglide®, Pulmicort® HFA-pMDI, Foradil® Certihaler® and Paxil CR™ ("PCRF Products") in exchange ‎for a fixed amortisable senior note (the "Paul Capital 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.$105.0 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 as DepoDur™ is no longer on the market. The Paul Capital Note is repayable on a quarterly basis in ‎accordance with an amortisation schedule beginning on 31 March 2007 through to 31 December ‎‎2015. ‎

Pacira (previously the Group's Injectable Business) was sold in March 2007 on the basis that it retained its obligations to PCRF to share ‎royalties received until 31 December 2014 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 Paul Capital Note is reduced accordingly. The amount of the Group's liability therefore depends on estimates of the sales of DepoCyt® and DepoDur™ by Pacira. At 31 December 2013 a cumulative total of U.S.$10.1 million (£6.1 million) of the Group's repayments of the Paul Capital Note had been made by Pacira. On 8 June 2012, Pacira's licensing, distribution and marketing and associate supply agreements for DepoDur™ were terminated in the United States. It is expected that there will be no further royalty revenue from DepoDur™ as Pacira does not expect to re-licence the rights to DepoDur™. In July 2012, Pacira received an inspection letter from the United Kingdom's Medicines and Healthcare products Regulatory Agency ("MHRA") noting certain critical and major deficiencies in the DepoCyt® manufacturing line, and, as a result manufacturing was temporarily suspended. This, along with a selective recall, contributed to a reduction in DepoCyt® product sales and royalty revenue in the second half of 2012, which affected payments to Paul Capital by Pacira. Following the MHRA's re-inspection and confirmation of Pacira's successful remediation efforts in January 2013, Pacira resumed DepoCyt® production in the first quarter of 2013 and has now resupplied the U.S. and European markets. There was no out of stock situation in either the United States or Europe as a result of the interruption in manufacturing of DepoCyt®.

The Paul Capital 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® ‎licence 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. This amount has been paid off in full as at 31 December 2013. Jagotec must also pre-pay the Paul Capital 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 pre-pay the Paul Capital 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 Paul Capital Note contain representations, warranties and covenants which are 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 Paul Capital 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 Paul Capital Note, Jagotec granted PCRF a royalty-free, fully paid-up and worldwide ‎licence or sub-licence, as applicable, subject to third-party rights, limited to the right to grant sub-‎licences (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 Paul Capital 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 Pacira) discounted ‎at 11.2 per cent. (the effective comparable interest rate at inception).‎

As at 31 December 2013 a cumulative total of U.S.$90.2 million (£54.7 million) has been paid against the Paul Capital Note. The principal outstanding on the Paul Capital Note at 31 December 2013 is U.S.$2.3 million (£1.3 million).

As at 31 December 2013 the net present value of the Paul Capital Note (net of anticipated payments by Pacira to Paul Capital) discounted at an annual rate of 11.2 per cent. is U.S.$1.2 million (£0.7 million) compared with the value of U.S.$ 11.3 million (£7.0 million) at 31 December 2012.

The following amortisation schedule shows the scheduled amounts payable under the Paul Capital Note as at 31 December 2013:

CRC finance

On 22 December 2006, Skyepharma 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 (the "CRC Facility"). This facility was amended on 23 March 2007 and with effect from 1 July 2011 and 1 July 2012. The last amendment ("2012 Amendment"), announced on 28 September 2012, was made at the same time as the Bond Restructuring in order to enhance the Group's short-term liquidity position.

Key terms of the CRC Facility (as amended) are as follows:‎

(i) The total loans of U.S.$35.0 million and €26.5 million are repayable over 10 years based ‎on a minimum amortisation schedule. The schedule was based on expected receipts ‎from milestone payments and royalties in respect of Coruno®, LODOTRA® and Requip® Once-a-day ‎‎(the "CRC Products"). In the event that the cumulative milestone payments and royalties from the ‎CRC Products exceed the minimum principal and interest payments, the excess will be ‎applied to repay the principal early without penalty;‎

(ii) Interest is charged on a quarterly basis; the interest rates applicable to the U.S.$ and Euro components of the CRC Facility are variable based on LIBOR and EURIBOR, and were increased in the 2012 Amendment by 2.08 per cent. and 2.01 per cent. respectively, effective from 1 July 2012. From that date, interest on the U.S.$ portion of the CRC Facility is charged at three month U.S LIBOR + 9.93 per cent. and interest on the first €7.5 million of the Euro portion of the CRC finance is charged at 3 month EURIBOR + 14.86 per cent and interest on the remainder of the facility is charged at 3 month EURIBOR + 9.86 per cent.;

(iii) The CRC Facility is 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) From the amendment of 23 March 2007 until the amendment which was effective on 1 July 2011, the CRC Facility required ‎prepayment 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® licence 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® milestone payments ‎and signing fees was deferred and, from 24 September 2012, waived altogether following the Bond Restructuring (discussed above);

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

(vii) In the 2012 Amendment, the obligations for the Group to pay the six consecutive quarterly principal repayments, starting 30 September 2012, on each of the U.S.$ and Euro components of the CRC Facility were deferred until 31 December 2016 when they will be paid in a single payment. The deferred principal payments amount to approximately U.S.$7.0 million and €5.4 million respectively, equivalent to approximately £8.6 million (at 30 September 2012 exchange rates) in total for the six quarters. The Group had an option, exercisable up to 30 June 2013, for the Group to choose not to defer the two principal payments due on 30 September 2013 and 31 December 2013 in return for a reduction in interest margin. This option was not exercised;

(viii) In the 2012 Amendment the interest payments due at the end of the first three quarters of 2013 were also deferred and were paid on 31 December 2013. The three delayed interest payments did not bear additional rolled interest;

(ix) In the 2012 Amendment, Skyepharma Holding, Inc., a wholly-owned subsidiary in the United States, became a guarantor of the CRC Facility and the receivables due to it from Pacira Pharmaceuticals, Inc. (Delaware), principally in respect of EXPAREL®, were pledged as additional security for the CRC Facility;

(x) The CRC Facility specifies make-whole percentages, which decline over time to the end of the loan, for optional prepayments of the loan, and which are designed to compensate CRC for lost future interest margin. At 31 December 2013, the make-whole percentage was 6.69 per cent.

The principal outstanding on the CRC Facility is as follows:

Interest rates applicable on the facility have been as follows:

*As at 31 December 2013, U.S. LIBOR was 0.246 per cent. (2012: 0.308 per cent.).

**As at 31 December 2013, EURIBOR was 0.287 per cent. (2012: 0.186 per cent.).

The following amortisation schedule shows the interest payable and principal outstanding under the CRC Facility as at 31 December 2013:

Maturity analysis of financial liabilities

The following tables detail the Group's remaining contractual maturity for its borrowings and the related interest payments. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group could be required to pay and includes, for the 2012 table, the prepayments forecast at the time the 2012 Report and Accounts was finalised, would become due to Paul Capital from flutiform® milestones, which depended on the Directors' assumptions about approval and launch of flutiform® in Europe. The table includes cash flows for both interest, based on rates applicable at 31 December 2013, and principal amounts.

*previously Convertible Bonds

The amounts for the 2024 Bonds are included in the maturity analysis on the basis of becoming repayable on the earliest Put date of 4 November 2017. Following the Bond Restructuring in September 2012 and as described above, ordinary interest is calculated at 6.5 per cent. per annum and additional interest is calculated at 3 per cent. per annum. 

The Paul Capital Note is included in the analysis above based on the amortisation schedule agreed on signing modified terms in 2007 which included additional payments of U.S.$10 million due on receipt of the flutiform® milestones received after 1 January 2009, of which none is outstanding as at 31 December 2013 (2012: U.S.$1.9 million). This excludes additional contingent payments to be made if sales of DepoDur™ reach certain thresholds and any reductions for future sales-related payments by the Injectable Business for DepoCyt®. 

The CRC finance maturity has been based on the minimum amortisation schedule following the 2012 Amendment.

The below table represents the Group's best view of forecast cash outflow in relation to borrowings, prior to implementation of the Transactions*:

*Assumes mortgages are retained, principal and one year's mortgage interest only shown in "Over 5 years from 2019". Interest rates as applicable at 31 December 2013.

13 Share capital

The Company's issued share capital is as follows:

14 Commitments 

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

During the year ended 31 December 2013, the Group and the Company recognised an operating lease expense of £0.1 million (2012: £0.1 million) in its respective income statement.

Mundipharma has funded third-party development costs, capped at €19.0 million (£15.8 million) ("High Strength Costs") principally related to developing the high strength version of flutiform®. Mundipharma has also funded a double blind study of flutiform® in children aged 5 to 12, as required under the agreed Paediatric Investigation Plan ("PIP") for Europe. The DMA was amended in March 2013 to change the previous obligations to refund High Strength Costs, paediatric development and certain other costs so that, now, the funding of High Strength Costs together with 50 per cent. of the paediatric study costs (up to a capped amount) and certain other costs ("Recoverable Costs") can be recovered by Mundipharma, subject to a maximum of €25.0 million (£20.9 million), against 100 per cent. of sales-related milestones and 50 per cent. of royalties due to the Group in accordance with the DMA in respect of net sales from 1 January 2014, increasing to 75 per cent. of such royalties in respect of net sales from 1 January 2016 until fully repaid. The amendment also gave the Group certain potential rights to use of data and extended payment terms for product supplied until 31 December 2015.

To establish the flutiform® supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes, of which £6.3 million is outstanding as at 31 December 2013 (31 December 2012: £0.3 million, which related to an earlier project). A former partner funded €3.0 million (£2.6 million) of the expenditure of the flutiform® supply chain which the Group repaid in instalments during 2013.

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €10.0 to €11.0 million (£8.3 million to £9.2 million) per annum through to 2015, subject to certain early termination rights.

15 Post balance sheet event

On 28 March 2014, the Directors decided to implement a capital raise of approximately £104.4 million net of estimated expenses pursuant to a Firm Placing and Placing and Open Offer ("Capital Raising") at an issue price of 191 pence per New Ordinary Share. The Group has also announced that certain Bondholders (representing around 79 per cent. of the aggregate nominal amount of the Bonds outstanding) have given irrevocable support for the early repayment and redemption of the Bonds in full at a price of 114.85% of the face value of the Bonds for a total consideration of £95.6 million ("Bond Proposals") plus estimated costs of £0.4 million. The consideration represents a saving to the Group of £25.2 million compared with the amount which was normally scheduled to be paid to in respect of the Bonds between 31 December 2013 and 4 November 2017 and is equivalent to an internal rate of return of 7.25 per cent.

The proceeds of the Capital Raising will be applied in full to the repayment of the Bonds pursuant to the Bond Proposals and the balance will be used for general corporate purposes. Implementation of the Bond Proposals is inter-conditional upon the Resolutions relating to the Capital Raising being passed at the General Meeting and on the receipt by the Group of the proceeds of the Capital Raising.

It is estimated that, had the Capital Raising and Bond Proposals ("the Transactions") been completed as at 31 December 2013, net assets would have increased by £75.2 million from net liabilities of £64.6 million to net assets of £10.6 million and total net debt (including the Bonds) would have reduced from £84.2 million to £9.0 million. The Transactions are expected to reduce cash outflows in respect of borrowings (as shown in the last table of Note 12: Borrowings) by £120.8 million over the period to 31 December 2017.