Final Results

Preliminary statement of annual results

Five major regional product launches positions Group for future growth

Proven expertise in respiratory development and oral drug delivery

LONDON, ENGLAND, 21 March 2013 - Skyepharma PLC (LSE: SKP), the expert oral and inhalation drug delivery company, today reports its annual results for the year ended 31 December 2012.

Financial Highlights

·; Revenues in line with Board expectations at £49.9m (2011: £55.2m), down 10% primarily due to lower royalties in 2012 and higher sales in 2011 from manufacturing initial flutiform® launch stock

·; Pre-exceptional operating profit slightly ahead of market expectations at £12.6m (2011: £11.9m), reflecting reduced investment in R&D and cost savings

·; Pre-exceptional EBITDA of £15.6m (2011: £14.6m)

·; Total net loss after tax from continuing operations and discontinued operations of £4.4m (2011: £1.6m)

o Net loss reflects exceptional finance charge of £15.4m from the Bond Restructuring

·; Cash and cash equivalents of £16.4m at 31 December 2012 (2011: £15.2m)

·; Debt restructured, aligning repayment obligations with the Group's forecast cash generative potential

Operating Highlights

·; Positive EC decision in favour of granting marketing authorisations/approvals for flutiform® led to:

o Subsequent launches in 8 European countries, and approvals in 10 additional countries to date

o €8.0m (£6.3 m) in related milestones received in October 2012

·; Regulatory filing of flutiform® with the Japanese authorities in September 2012

·; RAYOS® (known as LODOTRA® outside the U.S.) launched in the U.S. in December 2012; also approved in Australia, New Zealand and South Korea

·; Approval and launch of GSK's products, Paxil CR™ and Requip® Once-a-day, in Japan

·; U.S. launch of EXPAREL® in April 2012 triggered milestone of U.S.$10m (£6.2m) and receipt of initial share of net sales from Pacira Pharmaceuticals, Inc

·; Additional contract development services provided to RespiVert

·; Two GSK pipeline products incorporating the Group's technology filed in major markets during 2012

·; Reorganisation of Swiss operations in January 2012 to improve competitiveness and cost base

·; Receipt of U.S.$8.0m (£5.0m) settlement with AstraZeneca in relation to the Pulmicort pMDI termination

·; Peter Grant appointed Chief Executive Officer in January 2012

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

"2012 has been a transformational year for Skyepharma. We saw five major regional product launches alongside a restructuring of the Group's debt to better align repayment obligations with Skyepharma's forecast cash generative potential. After a long and complex development programme, flutiform gained regulatory approval in Europe and resulted in several launches, including the UK and Germany.  flutiform has also been filed in Japan. These developments represent significant further validation of the Group's proprietary respiratory technology and expertise in a complex treatment area.

"The approval and launch of RAYOS in the U.S. is another milestone for the Group, being the first approval and launch in the United States of a product using Skyepharma's unique Geoclock™ chronotechnology. Our revenues will benefit from the approvals and launches of GSK's products Paxil CR and Requip Once-a-day in Japan and EXPAREL in the U.S., for which we received a $10 million launch milestone from Pacira earlier in the year.

"The combination of several product approvals and a much improved capital structure significantly improves the Group's outlook and sets the stage for future growth."

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

For further information please contact:

About Skyepharma PLC

Skyepharma combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products. The Group receives revenues from 13 marketed 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

CHAIRMAN'S STATEMENT

Frank Condella

Overview

2012 was a transformational year for Skyepharma with five major regional product launches, with the potential for significant future revenues, and a restructuring of the Group's debt. During the year, a number of key strategic objectives (described in more detail in the Chief Executive Officer's Review) have been achieved, including:

- Approval and initial launches of flutiform® in a number of European countries, including Germany and the UK in September 2012, triggering milestone receipts of €8.0 million (£6.3 million) from Mundipharma

- Successful completion of two Phase III trials for flutiform® and filing of the New Drug Application ("NDA") in Japan

- Launch of EXPAREL® in April 2012, triggering a U.S.$10 million (£6.2 million) milestone receipt from Pacira Pharmaceuticals, Inc ("Pacira")

- Approval and launch of RAYOS® in the United States - first product approval and launch for Geoclock™ chronotechnology in the United States

- Approval and launch of GSK's products, Paxil CR™ and Requip® Once-a-day, in Japan

- Renegotiation of the Group's debt to align financing obligations with the Group's forecast cash generative potential

Taken together these achievements represent a step-change in prospects for the Group and provide a strong platform for future growth. 

Strategic positioning

Skyepharma combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products.

The Group has developed both metered dose and dry powder inhalation products which have received approvals in more than 35 countries in the world including the United States and the European Union. As well as continuing to support flutiform® the Group aims to capitalise on its proven and long-established expertise in developing respiratory products by seeking further projects to apply its inhalation drug development expertise and intellectual property. These projects are likely to be mainly funded by customers.

Over the past 15 years the Group has been involved in the development of 13 marketed oral products, with approvals in most key markets and sales in over 80 countries. Over the last five years, these products have generated approximately U.S.$4 billion of sales for the Group's partners. During 2012 the Group's delayed-release chronotechnology, Geoclock™, gained its first product approval and launch in the United States with RAYOS®. Further work was carried out on SKP-1052, which also uses Geoclock™, in a potential product to treat nocturnal hypoglycaemia in insulin-dependent diabetics. As well as continuing to offer innovative oral drug delivery solutions to partners using existing technologies, the Group has started feasibility work on new oral drug delivery technologies.

Board

On 31 January 2012, Peter Grant, Chief Financial Officer of the Group since November 2006, was appointed Chief Executive Officer but retained responsibility for the Group's financial matters including restructuring the Group's debt. Having achieved the restructuring and made significant progress with developing the business, the Board has now concluded that it would be appropriate to seek a Chief Financial Officer so that Peter can concentrate on his Chief Executive role. A leading search firm has been appointed to help find a suitable candidate.

A new long-term incentive plan was approved in December 2012 and conditional share awards issued to the Chief Executive Officer and senior management with a challenging range of three-year targets of earnings before interest, tax, depreciation and amortisation ("EBITDA") and total shareholder return.

Key strategic objectives for 2013

The key strategic objectives for 2013 are to support a successful launch by Mundipharma of flutiform®in the remaining European and rest of world countries, to support Kyorin in obtaining approval for flutiform® (KRP-108) in Japan and to support Sanofi in filing the NDAs for flutiform® in Mexico, Central and South America. The Group will also continue 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. 

Outlook

Growth in existing markets and further launches of flutiform® in Europe in 2013 is expected to contribute to the Group's short-term performance as well as the longer-term prospects of the Group. Potential financial milestones over the next 12 months include €3.0 million (£2.5 million) and €2.0 million (£1.6 million) from the launch of flutiform® in France and Italy respectively. In addition, several million U.S. dollars is due on the approval of flutiform® (KRP-108) in Japan.

Contract research and development is expected to continue to utilise a substantial part of the Group's technical resources, but there is likely to be an increase in net investment in research and development as the Group undertakes certain projects to support the flutiform® supply chain, enhance its dry powder inhaler development capability, and carry out some feasibility work for new oral drug delivery technologies. Royalties are expected to be lower in 2013 compared with 2012 due to growing generic competition affecting certain products, partially offset by initial contributions from flutiform® and other products launched in new markets. Manufacturing revenues and costs are expected to increase in 2013 compared with 2012, mainly from the supply of flutiform®, and whilst the net cost of supply is likely to be reduced in 2013 compared with 2012, it is not expected to be profitable in the year. Other revenues in 2013 are expected to increase with a full year's contribution from EXPAREL®. 

The Board looks forward to building on the success achieved in 2012, to drive future growth and to further exploit the Group's proven inhalation drug development and oral drug delivery technologies and expertise.

Frank Condella

Non-Executive Chairman

BUSINESS REVIEW

CHIEF EXECUTIVE OFFICER'S REVIEW

2012 was a pivotal year for the Company, with five key regional product launches. These events demonstrate the Group's expertise in the complex field of inhalation development and oral drug delivery, and position Skyepharma as an attractive and experienced specialist for future partnering opportunities. In addition the balance sheet was significantly restructured, with the equitisation of part of the Group's Convertible Bond debt and restructuring of the balance ("Bond Restructuring") and the amendment of the CRC Facility ("CRC Amendment"), significantly reducing liquidity demands over the next 24 months and aligning repayment obligations with the Group's forecast cash generative potential. 

Financial highlights

Revenue in 2012 was £49.9 million (2011: £55.2 million), with the expected reduction being primarily due to lower royalties and higher sales in 2011 from manufacturing initial flutiform® launch stock. Cost of sales in 2012 totalled £20.9 million down from the £21.8 million recorded in 2011 due to the product mix in manufacturing.

Operating costs excluding exceptional items reduced to £16.4 million in 2012 (2011: £21.5 million), reflecting cost reductions implemented in the year and a reduced investment in research and development to £12.9 million (2011: £16.8 million).

The reduction in operating costs and other operating income during 2012, partially offset by the lower revenues, resulted in the pre-exceptional operating profit from continuing operations being £12.6 million, up 6 per cent. from the £11.9 million earned in 2011.

During 2012, exceptional items included a U.S.$8.0 million (£5.0 million) settlement with AstraZeneca, £0.5 million of restructuring costs and an exceptional financing charge of £15.4 million resulting from the Bond Restructuring of which £13.1 million is non-cash. In addition, the Group received a U.S.$10 million (£6.2 million) milestone from Pacira following the launch of EXPAREL® in the United States which is shown as exceptional income from discontinued operations. These exceptional items are described in more detail in the Financial Review below and in Note 6: Exceptional items and Note 9: Discontinued operations of the preliminary announcement.

The loss after tax from continuing operations was £10.6 million (2011: £1.6 million) and basic loss per share from continuing operations was 36.0 pence (2011: 6.7 pence). The loss after tax from continuing and discontinued operations for 2012 was £4.4 million (2011: £1.6 million) and basic loss per share from continuing and discontinued operations for 2012 was 14.9 pence (2011: 6.7 pence).

During 2012 the Group benefited from revenues from 13 approved and marketed products which together generated £31.9 million of royalty and manufacturing revenues (2011: £40.0 million). In addition flutiform® generated £13.4 million of milestones and contract development revenue in 2012 (2011: £9.1 million) as well as £4.8 million (2011: £6.4 million) of manufacturing revenues. Cash flows benefited from a total of £12.5 million of milestone receipts (2011: £5.7 million).

The Group continues to operate a business model which is inherently cash-generative, with underlying profit after tax (see Financial Review) for 2012 being £0.3 million (2011: £0.5 million) and pre-exceptional EBITDA from continuing operations totalling £15.6 million (2011: £14.6 million) or 31 per cent. of revenues (2011: 26 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 Metered Dose Inhaler ("MDI"), continues to be an important value driver for the Group. As announced on 3 July 2012, the European Commission ("EC") adopted a decision in favour of granting marketing authorisations for flutiform®, which covers the 21 member states in the decentralised procedure. As of ‎20 March 2013, flutiform® has been launched in eight countries: Germany, the UK, Cyprus, Denmark, Ireland, the Netherlands, Norway and Sweden; and national marketing authorisations granted in a further ten countries: Austria, Belgium, Bulgaria, the Czech Republic, Finland, Iceland, Poland, Portugal, Romania and the Slovak Republic. The Group's development, marketing and distribution partner, Mundipharma International Corporation Limited, aims to continue to launch as soon as possible through its network of independent associated companies once national approvals are granted and where relevant, pricing and reimbursement confirmed.

Good progress has also been made on flutiform® in Japan. In September 2012, the Group's licensee, Kyorin Pharmaceutical Company Ltd ("Kyorin") submitted the Japanese NDA following the successful completion of two Phase III clinical trials studies which both met their primary end points. Review of the NDA is underway and, subject to receiving approval, Kyorin is planning to be in a position to launch as soon as possible after receiving approval.

In Mexico, Central and South America, the Group's licensee, Sanofi, is expected to start filing NDAs for flutiform® in Q2 2013.

According to IMS1, the preventative asthma/COPD market sizes in 2011 were estimated at £5.3 billion in Europe, £1.5 billion in Japan and £0.3 billion in Mexico, Central and South America, with four-year compound annual growth rates of 4.9 per cent., 11.5 per cent. and 16.5 per cent. respectively. The asthma segments where flutiform® will compete, are estimated to be over half these total markets, which comprise anti-leukotrienes, ICS, ICS/LABAs, LAMAs and PDE-4 inhibitors.

The Group also has the potential for significant income following the launch of EXPAREL® on 9 April 2012 in the United States. During 2012, Pacira paid a launch milestone of U.S.$10 million (£6.2 million) and reported net sales of EXPAREL® of U.S.$14.6 million (£9.1 million) from which the Group is entitled to a three per cent. share (based on cash received by Pacira).

On 3 December 2012, RAYOS® was launched in the United ‎States by the Group's partner, Horizon Pharma, Inc. ("Horizon"), for the treatment of a broad range of diseases including rheumatoid arthritis, following approval by the U.S. Food and Drug Administration ("FDA") on 27 July 2012. This product, known as LODOTRA® outside the U.S., has continued to enjoy growth in Germany and Italy, and has also recently been approved in Australia, New Zealand and South Korea. 

The Group continues to seek to strengthen the product pipeline through further early stage feasibility and technology development projects funded, where possible, on a time and materials basis by partners. Starting in 2011 the Group's respiratory development team has provided contract development services for RespiVert Ltd ("RespiVert"), a small molecule drug discovery company and a subsidiary of Janssen Biotech, Inc., and, during 2012, this has led to similar feasibility studies to develop DPI dosage forms on further RespiVert compounds. The projects are aimed at the development of new inhaled therapies for patients with severe, chronic respiratory diseases including chronic obstructive pulmonary disease ("COPD") and severe asthma.

As announced on 10 January 2012, the Group reached agreement with the Aenova Group ("Aenova") to sub-let part of its laboratory space in Muttenz, Switzerland and sell some of its surplus laboratory equipment to Aenova. Aenova recruited most of Skyepharma's oral formulation and oral analytical development team. Aenova moved into the space in February 2012 and is using the facility to expand its own non-competing oral product development activities as well as providing sub-contract development services for oral dosage forms to Skyepharma. This move complemented the 2011 agreement with Aenova, through which Aenova has leased the Group's manufacturing facility in Lyon, France, and continues to manufacture a number of Skyepharma's products. This has improved the competitiveness and flexibility of the Group's oral drug delivery offering. The Group is continuing to offer a full range of innovative oral drug delivery solutions to its customers through its business development team, but on a more competitive basis due to lower fixed costs, providing greater flexibility for new business and its own R&D activities.

Refinancing

On 24 September 2012, the Group implemented the Bond Restructuring, significantly reducing liquidity demands on the Group over the next 24 months and better aligning repayment obligations with the Group's forecast cash generative potential. Under the Bond Restructuring, an aggregate principal amount of £22.2 million of the then outstanding £83.0 million Convertible Bonds was converted into 22.2 million Ordinary Shares, bringing the issued share capital to 46.1 million Ordinary Shares and leaving £60.8 million outstanding as non-convertible bonds ("2024 Bonds") on amended terms. Further details are set out in the Financial Review below.

In September 2012, the CRC Amendment further enhanced the Group's short-term liquidity position by deferring four, and optionally six, consecutive quarterly principal repayments, starting 30 September 2012, until 31 December 2016 when they will be paid in a bullet payment. The deferred principal payments amount to approximately U.S.$7.0 million and €5.4 million respectively, equivalent to approximately £8.6 million in total for the six quarters. Further details are set out in the Financial Review below.

1 Source: IMS data for 2011 translated from U.S.$ at £1.00 = $1.57. Europe comprises the EU plus Switzerland, Norway and Croatia. Preventative market defined as: ‎anti-leukotrienes, ICS, ICS/LABAs, LABAs, LAMAs and PDE-4 inhibitors (where available). Definition does not include hospital ‎formulations e.g. IV or nebulised forms, or sustained-release theophylline. Where sales data are limited (e.g. retail only, or none ‎available) appropriate scaling approaches are used. COPD = Chronic obstructive pulmonary disease. LAMA = Long-acting Muscarinic ‎Antagonist. PDE-4 = Phosphodiesterase 4 inhibitor.‎ LABA = Long Acting Beta Agonist. ICS = Inhaled corticosteroids

BUSINESS REVIEW - KEY PRODUCTS

APPROVED PRODUCTS

flutiform®- Europe

flutiform® is comprised of fluticasone propionate and formoterol fumarate, two well-known and established active substances with well recognised tolerability and efficacy profiles and which are combined for the first time for an approved product in Europe. The total development programme comprised nine Phase I/II studies and nine Phase III trials, which were conducted in a patient population of approximately 5,000, of whom 1,900 received flutiform®.

flutiform® is licensed to Mundipharma in Europe and most other territories outside Japan and the Americas. The Marketing Authorisation Application ("MAA") for flutiform®in Europe was accepted for review under the decentralised procedure in May 2010. As announced on 3 July 2012, the EC adopted a decision in favour of granting marketing authorisations for flutiform®, which covers the 21 member states in the decentralised procedure. As of 20 March 2013, flutiform® has been launched in eight countries: Germany, the UK, Cyprus, Denmark, Ireland, the Netherlands, Norway and Sweden; and national marketing authorisations granted in a further ten countries: Austria, Belgium, Bulgaria, the Czech Republic, Finland, Iceland, Poland, Portugal, Romania and the Slovak Republic. On 7 October 2012, the Scottish Medicines Consortium accepted flutiform® for use in NHS Scotland for appropriate asthma patients. Further national marketing authorisations are anticipated during 2013. 

In some countries, negotiations are required with national pricing and reimbursement authorities before the product can be made commercially available. Mundipharma aims to continue to launch as soon as possible through its network of independent associated companies once national approvals are granted and, where relevant, pricing and reimbursement confirmed.

The development and marketing agreement with Mundipharma entered into in 2006, and later amended ("DMA"), includes milestones of up to €73.0 million (£57.7 million), of which €15.0 million (£10.1 million at that time) was paid up front, €3.0 million (£2.9 million at that time) was paid on 31 December 2008, €8.0 million (£6.3 million at that time) was paid in early October 2012 following the launch of flutiform® in Germany and the UK, up to €7.0 million (£5.7 million) is due in instalments as further launches occur in other major markets in Europe and up to €40.0 million (£32.7 million) is sales-related.

Out of the €8.0 million (£6.3 million) received in early October 2012, €4.0 million (£3.2 million) has been paid out as a mandatory prepayment of the Paul Capital Note. Potential milestones over the next 12 months include €3.0 million (£2.5 million) and €2.0 million (£1.6 million) from the launch of flutiform® in France and Italy respectively. Of these amounts, up to U.S.$1.9 million (£1.2 million) may be applied as prepayments of the Paul Capital Note.

Mundipharma has funded third party development costs, capped at €19.0 million (£15.5 million) ("High Strength Costs") principally related to the development of a high strength version of flutiform®.  Mundipharma has also commenced a double blind study of flutiform® in children aged 5-12, 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 and certain other costs ("Recoverable Costs") can be recovered by Mundipharma, subject to a maximum of €25.0 million (£20.4 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 sales from 1 January 2014, increasing to 75 per cent. of such royalties in respect of sales from 1 January 2016 until fully repaid. The amendment also gave the Group certain potential rights to use of data and improved payment conditions for product supply.

Part of the initial upfront milestone of €15.0 million (£10.1 million at the time) and additional funding 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 costs are recovered by Mundipharma by deduction from royalties and sales milestones.

Under the DMA with Mundipharma the Group is entitled to royalties as a percentage escalating upwards from 10 per cent. of net sales. The net royalties received are subject to the 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. The payment of royalties continues whilst the agreement with Mundipharma is in force, which is the period until the later of September 2027 (being 15 years from the date of the first commercial delivery of flutiform® in a major country) and the expiration of the last of the Group's relevant patents utilised in the territory.

Solaraze®

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. The Group earns a low-teens royalty rate on net sales. Certain protections for Solaraze® in Europe and certain other territories excluding the United States expire in 2013, and following this, the royalty rate due from Almirall reduces substantially.

Net sales of Solaraze® in the United States in 2012 were U.S.$58.4 million (£36.8 million), 3 per cent. higher than reported in 2011. Sales in 2012 by Almirall increased to €31.7 million (£26.0 million) from €26.6 million (£23.1 million) in 2011, an increase of 19 per cent. 

An Abbreviated New Drug Application ("ANDA") was filed by Tolmar, Inc. ("Tolmar") and a Paragraph IV Certification Notice was served relating to a potential generic Solaraze® in the United States in April 2010. Fougera and Jagotec AG filed a patent infringement suit against Tolmar. Subsequently, Fougera was acquired by Sandoz which had, prior to such acquisition, been in a collaboration with Tolmar in respect of their potential generic product. As a consequence of agreements entered into by Sandoz with the United States Federal Trade Commission in order to complete the acquisition of Fougera, Sandoz undertook to divest its interest in, amongst other things, the Tolmar generic development, to procure the dismissal of the ANDA infringement action against Tolmar and to grant Tolmar a sub-license under the Jagotec AG/Fougera License with respect to the potential generic product, but with no right to any trademark. Jagotec AG entered into discussions with Sandoz regarding these matters and has subsequently entered into an agreement with Fougera resolving the various issues with regard to Tolmar and the FTC undertakings as well as settling various matters arising from the results of a royalty examination undertaken in 2012. Pursuant to the settlement terms, in the event of the launch of a generic product by Tolmar, the royalty rate payable on sales of Solaraze® will increase from a low teens to high teens percentage of net sales and certain milestones will be payable. Fougera also agreed to pay U.S.$1.2 million plus interest and certain costs in settlement of the issues arising from the royalty examination.

Requip® Once-a-day

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 GlaxoSmithKline ("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. On 28 August 2012, Requip® Once-a-day was launched in Japan having obtained marketing authorisation for the indication of Parkinson's disease on 29 June 2012.

Requip® Once-a-day was launched in the United States in July 2008. Commencing in 2009, a number of ANDAs were filed with the FDA for generic versions of ropinirole extended release tablets and from May 2012 onwards, a number of generic versions have been approved and launched in the United States.

In 2012 net sales of Requip® Once-a-day totalled £89.4 million, a decrease of 36 per cent. from 2011. Of this, £63.0 million was generated in Europe, a 33 per cent. decrease from 2011 and £15.0 million arose in the United States, a decrease of 61 per cent. The remaining £11.4 million, an increase of 73 per cent., arose from emerging markets and Asia Pacific which, following the launch in Japan in August 2012, are expected to be increasingly important.

The Group earns low-mid single digit percentage royalties on net sales of Requip® Once-a-day. On a country by country basis, the royalty will reduce following patent expiry to low-single digit or zero. 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

Xatral® OD (Uroxatral® in the United States) is a once-daily version of Sanofi's Xatral® (alfuzosin hydrochloride), a treatment for the signs and symptoms of benign prostatic hypertrophy ("BPH"). In 2012, reported sales of all forms of Xatral® were €130 million (£105.6 million), down 35 per cent. on 2011 sales of €200 million (£167.6 million). In the United States, sales of Uroxatral® were €20 million (£16.3 million), down 74.7 per cent. from 2011 due to the generic launches in Q3 2011. Western European sales have continued to fall as a result of generic competition, with sales for 2012 of €45 million (£36.5 million), a reduction of 24.1 per cent. from 2011. Sales in other countries were €65 million (£52.8 million). The Group earns low single digit royalties on net sales of Xatral® OD.

Paxil CR™

Paxil CR™ is an advanced formulation of the anti-depressant Paxil® (paroxetine) and was developed by the Group with GSK using the Group's proprietary Geomatrix™ technology. In 2012, reported sales were U.S.$114.2 million (£72.0 million), up 41 per cent. compared with U.S.$81.0 million (£52.4 million) in 2011. Sales in the United States and certain other territories continue to be affected by generic competition. However, growth in sales in Asia and emerging markets, enhanced by the launch in Japan in June 2012, outpaced the decline in the United States and this trend is expected to continue. The Group earns up to mid single digit percentage royalties on net sales of Paxil CR™.

ZYFLO CR®

The Group developed an extended release formulation of the oral asthma drug zileuton for Cornerstone Therapeutics Inc. ZYFLO CR® (zileuton) extended-release tablets, taken twice daily, utilise the Group's proprietary Geomatrix™ technology, and the product was approved by the FDA in May 2007 for the prophylaxis and chronic treatment of asthma in adults and children aged 12 years and older. ZYFLO CR® and ZYFLO® (zileuton immediate release tablets) are the only FDA-approved leukotriene synthesis inhibitors. ZYFLO CR® recorded net sales of U.S.$49.8 million (£31.4 million) in 2012, an increase of 70 per cent. (at constant exchange rates) compared with 2011. The product is manufactured at the Lyon Manufacturing Facility leased by the Group to Aenova. The Group is eligible for a high-mid single digit percentage royalty on net sales of ZYFLO CR®. Certain protections covering ZYFLO CR® expire in H2 2013 and no royalties may be payable from that time.

LODOTRA®/RAYOS®

LODOTRA®, 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"), was approved in Europe, under the European decentralised procedure, in March 2009 for the treatment of moderate to severe active rheumatoid arthritis in adults particularly when accompanied by related morning stiffness. LODOTRA® has been approved in 16 European countries, Israel, and, recently, in Australia, New Zealand and South Korea. LODOTRA® was launched in Germany in April 2009 and in Italy in January 2011. Horizon has signed exclusive distribution and supply agreements with Mundipharma for the commercialisation of LODOTRA® in Europe, Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, Philippines, Singapore, South Africa, Taiwan, Thailand and Vietnam and this was extended, in March 2012, to include Mexico, Brazil, Argentina, Colombia, Venezuela, Peru, Chile, Ecuador, Dominican Republic, Guatemala, Costa Rica, Uruguay, Bolivia, Panama, Nicaragua, El Salvador and Honduras. 

In the United States the product, known as RAYOS®, was approved by the FDA on 27 July 2012 for a range of indications. Horizon initially launched the product for rheumatologic diseases through its own specialist sales force in December 2012. In February 2013, Horizon initiated the full commercial launch to rheumatologists and high-value primary care physicians through its full 150-person sales force.

Horizon reported LODOTRA® gross sales of U.S.$9.0 million during 2012 and net sales of U.S.$8.2 million, after deductions for trade discounts and allowances, compared with gross and net sales of U.S.$6.8 million during 2011. Horizon recognises a significant portion of its 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. Horizon reported RAYOS® gross sales following its U.S. launch in December 2012 of $0.8 million in 2012 and net sales of U.S.$0.4 million, after deductions for discounts and allowances and for co-pay assistance costs. The figures reported by Horizon are not the same as the in-market sales used for 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 North America and a mid-single digit percentage royalty on net sales of LODOTRA® elsewhere. LODOTRA®/RAYOS® is manufactured at the Lyon Manufacturing Facility leased by the Group to Aenova.

Sular®

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

Sales of Sular® continue to be under pressure from a declining market and increasing competition including competitive generic versions of the lower-dose formulations, the first of which was approved and launched in January 2011 in the United States. 

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

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

Triglide®

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

DEVELOPMENT PIPELINE

flutiform®

flutiform®- Japan

flutiform® is licensed to Kyorin in Japan. Under the licensing agreement with Kyorin the Group has received an upfront milestone and certain development milestone payments, including a final pre-approval milestone received in 2011. A milestone worth several million U.S. dollars is payable to the Group on approval and there is a high-mid single digit percentage royalty on net sales payable to the later of 10 years from the date of first commercial sale in Japan and the expiration of the last of the Group's patents in the territory. The development costs associated with obtaining approval for the Japanese market are largely being met by Kyorin, which is responsible for clinical studies and regulatory submissions. On 25 September 2012, Kyorin submitted the NDA to the Japanese authorities for KRP-108/flutiform®. The NDA submission included the results from two additional Phase III clinical studies which both met their primary endpoints. Review of the NDA is underway and subject to receiving approval, Kyorin is planning to be in a position to launch as soon as possible after receiving approval.

flutiform®- Mexico, Central and South America

On 28 July 2011, Skyepharma entered into an exclusive Development, License and Marketing Agreement with Sanofi for flutiform® in Mexico, Central and South America. Under the agreement, the Group is eligible for initial, approval and sales milestones potentially worth several million U.S. dollars and a high single digit percentage royalty on net sales for the life of the agreement which has a normal term of at least 15 years. Sanofi aims to pursue marketing authorisation applications for flutiform® throughout the region, including in Mexico, Brazil, Argentina, Venezuela and Colombia. The applications will be based on data included in the European MAA for flutiform® and Sanofi is expected to start filing NDAs in Q2 2013.

flutiform®- United States

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

SKP-1041

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

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

Under the agreement with Somnus, the Group could receive up to U.S.$35.0 million (£21.3 million) in milestone payments, of which U.S.$4.0 million (£2.0 million at that time) was received on signing and U.S.$1.0 million (£0.7 million at that time) was received on completion of the initial Phase I study. A further U.S.$10.0 million (£6.2 million) is payable on product launch, and U.S.$20.0 million (£12.4 million) is sales-related.

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

SKP-1052

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

EXTERNAL PROGRAMMES

EXPAREL®

EXPAREL® (bupivacaine liposome injectable suspension 1.3 per cent.) 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. Under the terms of the sale of the Injectable Business in 2007, the Group is entitled to certain contingent milestones and share of net sales of EXPAREL® in respect of certain patents sold with the business.

In April 2012 the United States FDA approved the NDA for EXPAREL® and the Group received a milestone payment of U.S.$10 million (£6.2 million at the time), following the first commercial sale of EXPAREL® in the United States. In the longer-term, the Group is entitled to receive further contingent milestone payments up to an aggregate of U.S.$52 million (£32.3 million) from Pacira, depending on the following events occurring: (i) U.S.$4 million (£2.5 million) on first commercial sale in a major EU country (UK, France, Germany, Italy or Spain); (ii) U.S.$8 million (£5.0 million) if worldwide annual net sales reach U.S.$100 million; (iii) a further U.S.$8 million (£5.0 million) if worldwide annual net sales reach U.S.$250 million and (iii) a further $32 million (£19.8 million) if worldwide annual net sales reach U.S.$500 million.

From launch in April to the end of 31 December 2012, EXPAREL® sales totalled $14.6 million (£9.1 million), with Q4 sales totalling $7.8 million (£4.8 million), up from $4.6 million (£2.9 million) in Q3. Pacira has reported that it continues its steady expansion since launch with EXPAREL® accessing 75 per cent. of its top 100 target hospital accounts and 53 per cent. of its top 500 target hospital accounts. 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 approved and launched in Japan, the UK, France, Germany, Italy and Spain.

Licencing

In 2003 the Group signed an agreement with GSK to provide access to one of the Group's proprietary dry powder formulation technologies for inhalation products. GSK made an initial payment to the Group on signature, and subsequent milestones were paid in 2009 and 2011. The Group is entitled to a low single digit royalty on net sales of products using the licensed technology that reach the market, capped at a maximum amount of £3.0 million per annum for each chemical entity for the life of the relevant patent. The two combination products which use this technology involve 3 chemical entities. Both products have been filed for approval in the United States, Europe and one has also been filed in Japan.

FEASIBILITY STUDIES AND TECHNOLOGY DEVELOPMENT

The Group continues to seek to strengthen the product pipeline through further early stage feasibility and technology development projects funded, where possible, on a time and materials basis by partners. Starting in 2011 the Group's respiratory development team has provided contract development services for RespiVert, a subsidiary of Janssen Biotech, Inc., and, during 2012, this has led to similar feasibility studies to develop DPI dosage forms on further RespiVert compounds. The projects are aimed at the development of new inhaled therapies for patients with chronic respiratory diseases including COPD and severe asthma.

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

The Group has also commenced early stage feasibility work on some new oral drug delivery technology.

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, UK. Sanofi also manufactures flutiform® to supply directly to its group companies for Mexico, Central and South America using certain ingredients and components supplied by the Group.

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

To establish the supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes. The manufacturing process for the product for Europe was validated during 2011.

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €9.0 million to €11.0 million (£7.4 million to £9.0 million) per annum through to 2015.

These minimum commitments, along with start-up costs and initial low volumes during the launch phase are expected to delay the profitability of the supply of flutiform® until the product has been successfully established in a number of major countries. In addition to these costs, the Group will need to continue to invest working capital to support additional launches of flutiform® as well as to further scale up and validate the manufacturing process at increased volumes in anticipation for the growth of flutiform®. The Group expects to invest a further £2 million to £3 million per annum in capital expenditure for the next three years to scale up and validate the manufacturing process at increased volumes.  In the medium-term, the Directors are expecting the flutiform® supply chain to contribute to the profitability of the Group.

Lyon Manufacturing Facility

In 2011, Skyepharma entered into an alliance (the "Alliance") with the Aenova Group with the objective of increasing utilisation of Skyepharma's manufacturing facility in Saint Quentin-Fallavier, Lyon, France. 

Aenova France SAS, a wholly-owned subsidiary of Aenova Holding GmbH, a German-based pharmaceutical contract manufacturing organisation, leased the entire pharmaceutical manufacturing business ("Manufacturing Business") and the premises at Saint Quentin-Fallavier, Lyon (together the "Facility") for an initial period of two years from 1 July 2011, extendable for a further three years.

Further details of the lease arrangements are shown in the Financial Review under "Aenova lease". 

Peter Grant

Chief Executive Officer

FINANCIAL REVIEW

Financial highlights

The table below is a summary of the Group's results for the year ended 31 December 2012, showing the underlying performance and exceptional items and results from discontinued operations in separate columns:

Revenue

Revenue recognised from signing and milestone payments was £7.7 million in 2012 (2011: £6.1 million), which benefited from the €8.0 million (£6.3 million) milestones following the commercial launch of flutiform® in Germany and the UK. In 2011, revenue recognised from signing and milestone payments included two £1.5 million milestones from GSK and an additional milestone in respect of flutiform® Japan. The milestone of U.S.$10 million (£6.2 million) received from Pacira following the launch of EXPAREL® in the United States has been recorded under exceptional income from discontinued operations and not within revenue as the launch milestone represents part of the "earn-out" adjustment to the original disposal consideration of the Injectable Business by the Group to Pacira in 2007 as the product approval was significantly uncertain at the time. The three per cent. share of net sales received by the Group and any future sales related milestones will be recorded as revenue from continuing operations, as they are connected to the continuing operations of EXPAREL® following commercial launch.

Contract research and development revenue increased by 8 per cent. to £9.5 million in 2012 (2011: £8.8 million) and included further work on flutiform®, for Kyorin and Mundipharma, and contract development services provided to RespiVert.

Royalty income was £17.4 million in 2012, £4.7 million lower than in 2011, representing a reduction, at constant exchange rates of 22 per cent. The decline is mostly due to the expected reduction in sales across a number of products as a result of generic competition, especially Requip® Once-a-day, Xatral® OD and Paxil CR™, partially offset by an increase in royalties from Solaraze® due to increased net sales.

Manufacturing and distribution revenue totalled £14.5 million in 2012 (2011: £17.9 million), representing a reduction of 16 per cent. at constant exchange rates, due to certain Lyon products being affected by generic competition and higher sales in 2011 from manufacturing initial flutiform® launch stock in anticipation of approval at that time.

Other revenue of £0.8 million (2011: £0.3 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 in respect of the Alliance with the Aenova Group to lease the Group's manufacturing facility in Lyon, France.

Research and development expenses

Research and development expenses incurred in 2012 were reduced to £12.9 million (2011: £16.8 million). The Group's net investment in research and development (expenses, net of contract development revenues) was £3.4 million, compared with £8.0 million in 2011, as the Group carried out less internally funded development projects as well as having completed the preparation in 2011 of the flutiform®supply chain for initial launches. The net expenditure during 2012 is primarily on the development of flutiform®, principally support activities related to product supply. 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 several million pounds a year for the foreseeable future.

Pre-exceptional operating result from continuing operations

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

Exceptional items

During 2012, the Group reported a net exceptional operating credit of £4.5 million (2011: £2.1 million charge) from continuing operations and £6.2 million (2011: nil) from discontinued operations in relation to the U.S.$10 million (£6.2 million) milestone from Pacira following the launch of EXPAREL® in the United States. From continuing operations, the net exceptional operating credit during 2012 comprises the U.S.$8.0 million (£5.0 million) cash received from AstraZeneca in relation to the Pulmicort pMDI termination and £0.5 million of restructuring costs in respect of the facility in Muttenz, Switzerland. The exceptional item for 2011 related to a £2.1 million non-cash goodwill impairment. 

Following the Bond Restructuring in September 2012, the Group reported an exceptional financing charge of £15.4 million in the income statement of the Group and the Company, of which £13.1 million is non-cash and £2.3 million is cash transaction costs. The non-cash charge of £13.1 million arose from de-recognising the carrying value of the outstanding Convertible Bonds of £62.2 million as at 24 September 2012, and recognising the fair value of the 22.2 million shares issued of £20.9 million and the fair value of the 2024 Bonds carried forward of £54.4 million, as described in further detail in Note 13: Borrowings of the preliminary announcement. 

All exceptional items are described in further detail in Note 6: Exceptional items of the preliminary announcement.

Finance costs and income

Finance costs - interest totalled £11.8 million (2011: £11.8 million) and consisted of £7.0 million (2011: £6.2 million) in respect of the Bonds, £2.9 million (2011: £3.0 million) in respect of the CRC finance, £1.5 million (2011: £2.2 million) of interest attributable to the Paul Capital Note and £0.4 million (2011: £0.4 million) on other bank borrowings.

Finance costs - revaluation consisted of a loss of £0.7 million (2011: £0.4 million gain) arising from the revaluation of the carrying value of the Paul Capital Note as described in Note 13: Borrowings of the preliminary announcement.

The implementation of the Bond Restructuring resulted in a £15.4 million exceptional financing charge, of which £13.1 million is non-cash. Following the Bond Restructuring, the ordinary financing charges are also 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 2012 this amounted to a gain of £0.4 million (2011: £0.4 million). 

Result

Operating profit from continuing operations after exceptional items in 2012 was £17.1 million (2011: £9.8 million).

Loss before tax from continuing operations for 2012 was £10.4 million (2011: £1.0 million), Loss for 2012 from continuing operations after exceptional items and taxation was £10.6 million (2011: £1.6 million). Profit for the period from discontinued operations during 2012 was £6.2 million, representing the milestone received from Pacira following the launch of EXPAREL® in the United States. This gives a total net loss from both continuing and discontinued operations in 2012 of £4.4 million (2011: £1.6 million).

Earnings per share

From continuing and discontinued operations during 2012, both basic loss per share and diluted loss per share amounted to 14.9 pence (2011: 6.7 pence). 

From continuing operations during 2012, both basic loss per share and diluted loss per share amounted to 36.0 pence (2011: 6.7 pence). 

As at 31 December 2012 there were 46,127,645 Ordinary Shares in issue (2011: 23,943,162) following the issue of Ordinary Shares to the Bondholders as part of the Bond Restructuring implemented on 24 September 2012.

In addition there were outstanding as at 31 December 2012 a number of potential issues of Ordinary Shares as follows:

At 20 March 2013, the Company's closing share price was 56.75 pence.

Cash position

As at 31 December 2012 the Group had cash and cash equivalents of £16.4 million (2011: £15.2 million). During 2012, the Group generated cash from operations of £18.5 million compared with an inflow of £12.9 million in 2011. During 2012, the cash position also benefited from a U.S.$10 million (£6.2 million) milestone from Pacira following the first commercial sale of EXPAREL® in the United States, €8.0 million (£6.3 million) milestones from Mundipharma following the commercial launch of flutiform® in Germany and the UK, and U.S.$8.0 million (£5.0 million) cash received from AstraZeneca in relation to the Pulmicort pMDI termination. 

The Group also met scheduled financing commitments comprising scheduled repayment of debt of £12.7 million, mainly to CRC and Paul Capital (2011: £12.3 million) and £7.3 million of net interest was paid (2011: £11.5 million) primarily relating to the Bonds, CRC finance and Paul Capital Note.

Key performance indicators

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

Description of KPIs

Revenue excluding milestones

Revenue excluding milestones reflects the level of contract research and development work undertaken for third parties and manufacturing activities, as well as the contribution from royalties earned from products. Revenue in 2012 of £42.2 million is lower than 2011 due to lower royalties and manufacturing revenues recorded in 2012, as shown in Note 2: Revenue by income stream of the preliminary announcement.

Signing and milestone payments received

This shows amounts received with respect to pipeline products and product sales. The total of £12.5 million represents the cash received during 2012, being the milestone received from Pacira of U.S.$10 million (£6.2 million) following the first commercial sale of EXPAREL® in the United States as shown in Note 9: Discontinued operations of the preliminary announcement, and the €8.0 million (£6.3 million) from Mundipharma following the launch of flutiform® in Germany and the UK.

Total research and development expenditure

Research and development expenditure reflects the costs, including direct and indirect overheads, of all research and development activities. A breakdown of the costs during 2012 is shown in Note 4: Research and development expenses of the preliminary announcement. The decrease compared with 2011 is due to the Group carrying out less internally funded development projects as well as the completion of preparing in 2011, the flutiform® supply chain for initial launches. 

Net investment in research and development expenditure

This reflects the Group's total research and development expenditure net of costs reimbursed by development partners. The net expenditure is lower in 2012 compared with 2011 as the Group carried out less internally funded development projects as well as the completion of preparing in 2011, the flutiform® supply chain for initial launches. The net expenditure during 2012 is primarily on the development of flutiform®, principally support activities related to product supply.

Liquidity

This measures the availability of finance to fund current and future activities and to meet debt servicing requirements. Liquidity as at 31 December 2012 consisted of cash and cash equivalents of £16.4 million, as per the balance sheet, plus undrawn facilities of £0.8 million.

Approved and marketable revenue-generating products

This represents the number of products on which the Group does or expects to earn revenues and which were approved for marketing in at least one country at the end of the period. During 2012, the total increased to 13 following the initial launches of flutiform® in Europe.

Product supply volume

This represents the number of units of product manufactured by or on behalf of the Group and invoiced to customers during the year, including oral products (tablets) and inhaled products (flutiform®). The slightly higher volume of 131 million units in 2012 compared with 2011 is due to increased volume of tablets manufactured at the Lyon facility.

Balance sheet

At 31 December 2012, the Group's balance sheet shows total shareholders' equity of £66.0 million deficit (2011: £81.7 million deficit). 

Borrowings and liquidity

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

Total debt has decreased by £17.1 million during 2012. This is due to repayments of £12.7 million, a reduction in the carrying value of the Bonds following the Bond Restructuring, as well as translation and revaluation effects.

Bonds

Prior to the Bond Restructuring, the face value of the 2024 Convertible Bonds and 2025 Convertible Bonds (together the "Convertible Bonds") outstanding was £83.0 million. As at 31 December 2011, the carrying value of the debt was recorded in non-current liabilities at £60.1 million and the carrying value of the conversion option was recorded in share premium at £28.5 million.

On 24 September 2012, the Bond Restructuring was approved and implemented. Following implementation, an aggregate principal amount of £22.2 million of the £83.0 million outstanding Convertible Bonds were converted into 22,184,483 Ordinary Shares in the Company. Following the conversion, a total of £60.8 million 6.5 per cent. 2024 Bonds ("2024 Bonds") are outstanding as non-convertible bonds with the following key amended terms:

- 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.

- 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.

- 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 £83.0m outstanding Convertible Bonds and the recognition of the related consideration, being the fair value 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 fair value of the 22.2 million shares issued of £20.9 million 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.

Although shown in the balance sheet in accordance with IFRS at a value of £56.7 million (2011: £60.1 million), the Bonds had a face value as at 31 December 2012 of £60.8 million plus a redemption premium of £28.8 million.

An illustration of the potential cash payments under the pre-existing £83.0 million Convertible Bonds and the remaining £60.8 million non-convertible 2024 Bonds following the Bond Restructuring is as follows:

Notes:

(i) Under the pre-existing £83.0 million Convertible Bonds and remaining £60.8 million non-convertible 2024 Bonds, capital payments, the redemption premium and accumulated interest amounts may be accelerated in certain circumstances such as a change of control where more than 50 per cent. of consideration is in cash and if there is an acceleration following an event of default.

(ii) In the above table it is assumed that funds are called for repayment by the Bondholders at the earliest normal Put dates.

(iii) Under the remaining non-convertible 2024 Bonds up to £7.9 million of deferred interest is repayable earlier out of proceeds, subject to certain restrictions, of certain cash equity issuances, as well as on early redemption of the bonds.

Paul Capital Note

The Group has a fixed amortisable senior note (the "Paul Capital Note") in the amount of U.S.$92.5 million (£57.2 million) due to Paul Capital. The Paul Capital Note is repayable on a quarterly basis in accordance with an amortisation schedule through to 2015. At 31 December 2012 a cumulative total of U.S.$78.0 million (£48.3 million), has been paid against the Paul Capital Note. The principal outstanding on the Paul Capital Note at 31 December 2012 is U.S.$14.5 million (£9.0 million). Although the Group retains full responsibility for the Paul Capital Note, an estimate as 31 December 2012 of U.S.$2.2 million (£1.4 million) will be paid by Pacira out of DepoCyt® sales.

Pacira (previously the Group's Injectable Business) was sold in March 2007 on the basis that it retained its obligations to Paul Capital to share ‎royalties received in respect of DepoCyt® and Depodur™ and to the extent that payments are made in ‎satisfaction of such obligations, the liability of Jagotec under the 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 2012 a cumulative total of U.S.$9.0 million (£5.6 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 and it is expected that, as a result, there will be no further royalty revenue from DepoDur™ after 2012 as Pacira does not expect to re-license the rights to DepoDur™. In July 2012, Pacira received an inspection letter from the MHRA noting certain critical and major deficiencies in the DepoCyt® manufacturing line, and, as a result manufacturing was temporarily suspended until January 2013 when the deficiencies had been remediated to the satisfaction of the MHRA. The European Medicines Agency also recommended that, until corrective actions were taken allowing new supply to enter the market, alternative medicines be used in European Union member countries where there were suitable alternatives and a selective recall of DepoCyt® in European Union member countries where it was not considered to be an "essential medicinal product." The selective recall contributed to a reduction in product sales and royalty revenue of DepoCyt® in the second half of 2012 which affected payments to Paul Capital by Pacira. Although Pacira does not expect new DepoCyt® product to be available to the European market until the second quarter of 2013, it does not currently expect an out of stock situation in either the United States or Europe as a result of the interruption in manufacturing of DepoCyt®.

As at 31 December 2012 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.$11.3 million (£7.0 million) compared with the value of U.S.$23.9 million (£15.5 million) at 31 December 2011.

The following amortisation schedule shows the scheduled amounts payable under the Paul Capital Note as at 31 December 2012, including the contributions made and forecast to be made by Pacira:

The above table:

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

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

(iii) Includes prepayments of the Paul Capital Note to an aggregate amount of U.S.$10 million out of 50 per cent. of certain milestones and signing fees received and forecast to be received in respect of flutiform® of which U.S.$8.1 million had been paid as at 31 December 2012.

(iv) Excludes contingent amounts of up to U.S.$12.5 million due on the Paul Capital Note if sales of DepoDur™ exceed certain thresholds, which is extremely unlikely.

CRC finance

The CRC finance was taken out in 2006 and is a ten year secured amortising loan facility (the "CRC Facility") which, at inception, totalled approximately £35.0 million at the exchange rates prevailing at that time. The CRC Facility comprises initial commitments of U.S.$35.0 million and €26.5 million repayable over ten years based on a minimum amortisation schedule. The principal outstanding on the CRC Facility as at 31 December 2012 is U.S.$19.6 million (£12.1 million) and €15.2 million (£12.5 million). 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.

On 28 September 2012, the Group announced that it had entered into a further amendment agreement to the CRC Facility in order to enhance the Group's short-term liquidity position.

Under the amendment agreement, the obligation 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 bullet payment. The deferred principal payments amount to approximately U.S.$7.0 million and €5.4 million respectively, equivalent to approximately £8.6 million in total for the six quarters.

The interest rates applicable to the U.S.$ and Euro components of the CRC Facility, which are variable based on LIBOR and Euribor, were increased by 2.08 per cent. and 2.01 per cent. respectively, effective from 1 July 2012.

To enhance short-term liquidity further, the interest payments due at the end of the first three quarters of 2013 were also deferred and will be paid on 31 December 2013. The three delayed interest payments will not bear additional rolled interest.

Skyepharma Holding, Inc., a wholly-owned subsidiary in the United States, has become a guarantor of the CRC Facility and the receivables due to it from Pacira Pharmaceuticals, Inc. (Delaware), principally in respect of EXPAREL®, have been pledged as additional security for the CRC Facility.

The amendment agreement which became effective on 1 July 2012, also includes 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. If this option is exercised the increase in margin described above will reduce to 1.50 per cent. for the U.S.$ loan and 1.45 per cent. for the Euro loan, effective from 1 July 2013.

The following amortisation schedule shows the interest payable and principal outstanding under the CRC Facility as at 31 December 2012:

The above table:

(i) Shows interest on a cash basis (no discounting is applied). The interest rates applicable at 31 December 2012 were 10.05 per cent. on the Euro component (plus an additional 5 per cent. on the first €7.5 million) and 10.24 per cent. on the U.S.$ component.

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

(iii) Excludes prepayments of the debt to an aggregate amount of U.S.$9.0 million out of 50 per cent. of milestones and signing fees forecast to be received in respect of flutiform® as the obligation to pay these amounts has been waived by CRC.

(iv) Assumes the Group will not exercise its option to not defer the two principal payments due on 30 September 2013 and 31 December 2013.

Other borrowings

Other borrowings amounted to £9.0 million at 31 December 2012 (2011: £9.6 million), consisting principally of £7.6 million (2011: £8.2 million) for two property mortgages secured on the assets of Skyepharma AG. 

Liquidity

At 31 December 2012 Skyepharma had liquidity of £17.2 million (2011: £16.0 million), comprised as follows:

Non-current assets marketed for sale

One of the sites in Switzerland has been vacant and marketed for sale since January 2011. As at 31 December 2012, 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. As at 31 December 2011, the total carrying value of £4.1 million was classified as held for sale in the Group's balance sheet. Given the specialist nature of the property, management is of the view that any sale may take longer than a further 12 months to complete and in accordance with IFRS, have reclassified the carrying value of the site back into property, plant and equipment as at 31 December 2012. Although the site is no longer classified as held for sale under IFRS, the site will continue to remain vacant and continue to be actively marketed for sale and be available for immediate sale in the foreseeable future. External agents have also provided management an indicative fair value in excess of the carrying value as at 31 December 2012. During the year ended 31 December 2012 and 2011, 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® which total approximately €9.0 million to €11.0 million (£7.4 million to £9.0 million) per annum through to 2015, subject to certain early termination rights.

At set out in Note 16: Commitments of the preliminary announcement, the Group has a further commitment of £0.3 million outstanding relating to capital expenditure of the flutiform® supply chain. A former partner has funded €3.0 million (£2.5 million) of the expenditure of the flutiform® supply chain, and the Group is repaying this amount in monthly instalments during 2013.

Aenova lease

Aenova France SAS, a wholly-owned subsidiary of Aenova Holding GmbH, a German-based pharmaceutical contract manufacturing organisation, leased the entire pharmaceutical manufacturing business ("Manufacturing Business") and the premises at Saint Quentin-Fallavier, Lyon (together the "Facility") for an initial period of two years from 1 July 2011, extendable for a further three years. During the lease period the parties may have further discussions to extend the Alliance beyond the fifth anniversary and such discussions have commenced.

The Alliance provided Aenova with access to an FDA-registered pharmaceutical manufacturing plant with significant capacity available. The Alliance also enhanced the Group's liquidity through rental income, reduced working capital and lower capital expenditure requirements. The Group retained all its then existing contractual arrangements with its partners and Aenova has continued to manufacture all of the Group's products then manufactured at the Facility and supply them to the Group. The Group continues to work with Aenova to utilise the Facility to manufacture oral products in development by Skyepharma. During August 2012, the Aenova Group was acquired by funds advised by BC Partners and, in December 2012, the Aenova Group acquired the Temmler Group becoming Europe's largest Contract Manufacturing Organisation.

The Facility manufactures six products which use the Geomatrix™ family of technologies: Diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Sular®, LODOTRA®/RAYOS® and Madopar DR®. The Facility also manufactures one other oral product, Triglide®, based on Skyepharma's solubilisation technology. The Facility has cGMP status, with approvals from the European Medicines Agency and United States FDA. Aenova supplies products and services to Skyepharma initially on a pass-through basis. Skyepharma has the opportunity to earn a margin on the sales of these products and services, in the first two years based on the level of net revenues to Aenova from Skyepharma products and services and after that time based on total revenues of Aenova at the Facility.

Under the terms of the lease, Aenova pays rent at a rate of €1.0 million (£0.8 million) per annum in cash, subject to certain deductions, for the first two years (with the first six months' rent free) from 1 July 2011. If renewed on current terms at the end of the first two years the rent is increased to €2.0 million (£1.6 million) per annum in cash, subject to certain deductions.

The lease is for an initial period of two years subject to certain termination rights of Aenova, related to performance or projected performance of the Manufacturing Business (to the extent it relates to Skyepharma products manufactured and services provided at the Facility). At the end of the first two years, Skyepharma has a 12 month option to renew the lease until the end of the fifth anniversary from commencement.

If Skyepharma terminates the lease or doesn't renew it within the 12 month option period, Aenova has a two year rent free termination period during which the parties will discuss arrangements either for the continued production and supply by Skyepharma of Aenova products at the Facility or termination of that production.

On termination or expiry of the lease, the entire Manufacturing Business including all employees, raw materials and work in progress at that time will be transferred back to Skyepharma on similar terms to the transfer to Aenova at inception. On termination or expiry, capital investments made by Aenova during the term of the lease and necessary for manufacturing Skyepharma products will transfer to Skyepharma. These transfers will be free of charge except for certain capital investments related to increase of capacity and/or capabilities to manufacture Skyepharma products, and large environmental protection projects, in which case they will be transferred at net book value and paid for over time.

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that 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 2012.

The Auditors' report on the 2012 Annual Report and Accounts contains no emphasis of matter paragraph and neither did the 2012 Half Year Report. The Auditors' report on the accounts for 2011 was not modified but included an emphasis of matter paragraph to draw attention to the disclosures made in the financial statements indicating material uncertainties about the Group's ability to continue as a going concern. 

Foreign exchange risks

Almost all of the Group's operations are based in Continental Europe and licence royalty payments are typically denominated in various currencies, with sales-related payments based on underlying sales in local currencies. This gives rise to direct and indirect exposures to changes in foreign exchange rates notably the U.S. Dollar, Euro and Swiss Franc. To minimise the impact of any fluctuations, the Group's policy 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, other realised exchange gains and losses and exchange translation gains and losses are included within the revenue or expense line to which they most closely relate. Where subsidiaries are funded centrally, this is achieved by the use of long-term intercompany loans. Where settlement of such intra-group loans is neither planned nor likely to occur in the foreseeable future, they are treated as part of the net investment and exchange differences are taken to reserves. No use was made of currency options and forward currency contracts during 2012 or 2011. 

The Board has continued to monitor the risks related to the Eurozone uncertainties and its impact on the Group's transactions and funding. The Corporate Governance section of the 2012 Annual Report contains further details of the Group's exposure to the Eurozone uncertainties.

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 maintaining regulatory approval for existing, new or expanded indications of existing and new products, risks related to Skyepharma's ability or that of its sub-contractors and partners to manufacture products on a large scale or at all, risks related to Skyepharma's and its marketing partners' ability to market products on a large scale to maintain or expand market share in the face of changes in customer requirements, competition and technological change, risks related to the ownership and use of intellectual property, risks related to Skyepharma's ability to manage growth, and the risk that the Lyon manufacturing Alliance with Aenova is unsuccessful and the lease of the Lyon Manufacturing Facility is terminated. Skyepharma undertakes no obligation to revise or update any forward statement to reflect events or circumstances after the date of this preliminary announcement.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2012

See Notes to the preliminary announcement.

CONSOLIDATED INCOME STATEMENT (CONTINUED)

for the year ended 31 December 2012

See Notes to the preliminary announcement.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(EXPENSE)

for the year ended 31 December 2012

See Notes to the preliminary announcement.

CONSOLIDATED BALANCE SHEET

as at 31 December 2012

Approved by the Board of Directors on 20 March 2013 and signed on its behalf by:

P Grant

Chief Executive Officer

See Notes to the preliminary announcement.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2012

See Notes to the preliminary announcement.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2011

See Notes to the preliminary announcement.

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2012

See Notes to the preliminary announcement.

NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2012

(a) Cash generated by operations

NOTES TO THE PRELIMINARY ANNOUNCEMENT

The preliminary announcement for the year ended 31 December 2012 was approved by the Board on 20 March 2013.

1 Basis of preparation

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

The preliminary announcement has been prepared in accordance with IFRS and the interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. In preparing this preliminary announcement the Group has consistently applied the accounting policies as set out in the Group's consolidated accounts for the year end 31 December 2011, except as set out below.

The financial information in this preliminary announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 for the years ended 31 December 2011 and 2012. The financial information for the years ended 31 December 2011 and 2012 has been extracted from the Group's audited consolidated accounts for the year ended 31 December 2012. 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 2011 have been delivered to the Registrar of Companies.

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

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that 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

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

4 Research and development

5 Other income

In January 2012, the Group reached agreement to sub-let 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 2012, the Group recorded £0.2 million of rental income in respect of the lease of the laboratory space and £0.4 million in respect of the sale of surplus laboratory equipment.

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) payable to the Group. 

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

(d) The Bond Restructuring on 24 September 2012 resulted in a £15.4 million exceptional finance charge of which £13.1 million is non-cash. Refer to Note 13: Borrowings for more information.

Discontinued operations

During the year ended 31 December 2012, the Group received a milestone payment of U.S.$10 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 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 million (£6.2 million) in April 2012 following the launch of EXPAREL® in the United States, and is entitled to further contingent milestone payments of up to U.S.$52.0 million (£33.3 million) and 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.

During the year ended 31 December 2012, the U.S.$10 million milestone has been 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 is recorded in respect of the above exceptional income from discontinued operations as the income is expected to be offset against brought forward losses. Deferred tax assets have not been recognised on the Group's balance sheet due to uncertainty of future recoverability.

10 Earnings per share

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

For the year ended 31 December 2012 and 31 December 2011, there were no differences between the basic and diluted loss per share amounts since the results from continuing operations were losses and as a result, all potential shares from Convertible Bonds (non-convertible bonds from 24 September 2012), stock options, warrants and contingent issuance of shares are 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 discontinuing operations.

From discontinued operations

In order to calculate earnings per share amounts for the discontinued operations (see Note 9), 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 amount used:

11 Cash and cash equivalents

Cash at bank earns interest at floating rates based on the daily bank deposit rates, liquidity funds and money market.

At 31 December 2012, the Group had available £839,000 (2011: £821,000) of undrawn borrowing facilities.

12 Non-current assets classified as held for sale

As at 31 December 2011, the Group had property, plant and equipment with a total net book value of £4.1 million (2011: £4.2 million) classified as held for sale. This primarily represented a surplus building and associated land in Muttenz, Switzerland which was put up for sale in January 2011, following a reorganisation of the space utilisation in Switzerland. As disclosed in Note 13: Borrowings of the preliminary announcement, the mortgage on this building of CHF 3.4 million (£2.3 million) together with a loan of CHF 2.0 million (£1.4 million) will be fully repayable on its sale.

Given the specialist nature of the property, the Board is of the view that any sale may take longer than a further 12 months to complete and in accordance with IFRS, the carrying value of the site has been reclassified back into property, plant and equipment as at 31 December 2012. Although the site is no longer classified as held for sale under IFRS, the site will continue to remain vacant and continue to be actively marketed for sale and be available for immediate sale in the foreseeable future. External agents have also provided management an indicative fair value in excess of the carrying value as at 31 December 2012. During the year ended 31 December 2012 and 2011, there was no depreciation or impairment recorded against the carrying value of the site.

13 Borrowings

*2011: Interest rate percentage in respect of CRC finance was EURIBOR + 7.85/12.85 and LIBOR + 7.85 for the Euro and U.S. Dollar components respectively.

Bank borrowings

At 31 December 2012 bank borrowings consist of a loan of CHF 2.0 million (£1.4 million) (2011: CHF 2.0 million (£1.4 million)) with the Basellandschaftliche Kantonalbank. This loan can be terminated on six weeks' notice by either party and bears interest at 6.5 per cent. per annum. This loan is secured on the assets of Skyepharma AG.

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. 

As at 31 December 2011, the face value of the 2024 Convertible Bonds and 2025 Convertible Bonds (together the "Convertible Bonds") outstanding was £83.0 million. The carrying value of the debt was recorded in non-current liabilities at £60.1 million and the carrying value of the conversion option was recorded in share premium at £28.5 million.

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:

- 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.

- 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.

- 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 £83.0m 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 2012, the carrying value of the 2024 Bonds included in non-current liabilities is £56.7 million.

Property mortgages

In February 2011 the Group renewed its two mortgage agreements with the Basellandschaftliche Kantonalbank. As at 31 December 2012, the carrying value of the first is CHF 3.4 million (£2.3 million), which bears interest at a variable rate (currently 4 per cent. per annum) and is repayable with three months' notice from either party. As at 31 December 2012, the carrying value of the second is CHF 7.9 million (£5.3 million), which bears interest at 3.6 per cent. per annum and is fully repayable in 2016.

One of the sites in Switzerland has been vacated and is being marketed for sale. As at 31 December 2012, this site has a net book value of CHF 6.1 million (£4.1 million) and a mortgage of CHF 3.4 million (£2.3 million) which, together with a loan of CHF 2.0 million (£1.4 million), will be repayable on completion of any sale.

Paul Capital Note

On 23 March 2007, 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-MDI, 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. 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 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 2012 a cumulative total of U.S.$9.0 million (£5.6 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™ after 2012 as Pacira does not expect to re-license the rights to DepoDur™. In July 2012, Pacira received an inspection letter from the MHRA noting certain critical and major deficiencies in the DepoCyt® manufacturing line, and, as a result manufacturing was temporarily suspended until January 2013 when the deficiencies had been remediated to the satisfaction of the MHRA. The European Medicines Agency also recommended that, until corrective actions were taken allowing new supply to enter the market, alternative medicines be used in European Union member countries where there were suitable alternatives and a selective recall of DepoCyt® in European Union member countries where it was not considered to be an "essential medicinal product." The selective recall contributed to a reduction in product sales and royalty revenue of DepoCyt® in the second half of 2012 which affected payments to Paul Capital by Pacira. Although Pacira does not expect new DepoCyt® product to be available to the European market until the second quarter of 2013, it does not currently expect an 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 unlicenced territory, in each case received after 1 ‎January 2009 in an amount up to U.S.$10.0 million. Of this, an amount of U.S.$8.1 million (£5.0 million) has been paid as at 31 December 2012. 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 2012 a cumulative total of U.S.$78.0 million (£48.3 million) has been paid against the Paul Capital Note. The principal outstanding on the Paul Capital Note at 31 December 2012 is U.S.$14.5 million (£9.0 million).

As at 31 December 2012 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.$11.3 million (£7.0 million) compared with the value of U.S.$23.9 million (£15.5 million) at 31 December 2011.

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 additional ‎changes were made effective from 1 July 2011 and 1 July 2012. The CRC Facility has been fully drawn down.‎

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.

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

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

(v) Prior to the amendments which were effective on 1 July 2011, the 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 unlicenced 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 was 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. ‎

On 28 September 2012, the Group announced that it had entered into a further amendment agreement to the CRC Facility in order to enhance the Group's short-term liquidity position.

Under the amendment agreement, the obligation 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 bullet payment. The deferred principal payments amount to approximately U.S.$7.0 million and €5.4 million respectively, equivalent to approximately £8.6 million in total for the six quarters.

The interest rates applicable to the U.S.$ and Euro components of the CRC Facility, which are variable based on LIBOR and Euribor, were increased by 2.08 per cent. and 2.01 per cent. respectively, effective from 1 July 2012.

To enhance short-term liquidity further, the interest payments due at the end of the first three quarters of 2013 were also deferred and will be paid on 31 December 2013. The three delayed interest payments will not bear additional rolled interest.

Skyepharma Holding, Inc., a wholly-owned subsidiary in the United States, has become a guarantor of the CRC Facility and the receivables due to it from Pacira Pharmaceuticals, Inc. (Delaware), principally in respect of EXPAREL®, have been pledged as additional security for the CRC Facility.

The amendment agreement which became effective on 1 July 2012, also includes 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. If this option is exercised the increase in margin described above will reduce to 1.50 per cent. for the U.S.$ loan and 1.45 per cent. for the Euro loan, effective from 1 July 2013.

The principal outstanding on the CRC Facility as at 31 December 2012 is U.S.$19.6 million (£12.1 million) and €15.2 million (£12.5 million). 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.

Effective from 1 July 2012, interest on the U.S.$ portion of the CRC finance is charged at three month U.S LIBOR + 9.93 per cent. Prior to this and as at 31 December 2011, interest was charged at three month U.S LIBOR + 7.85 per cent. As at 31 December 2012, U.S. LIBOR was 0.308 per cent. (2011: 0.581 per cent.).

Effective from 1 July 2012, 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. Prior to this and as at 31 December 2011, interest on the first €7.5 million of the euro portion of the CRC finance was charged at 3 month EURIBOR + 12.85 per cent and interest on the remainder of the facility was charged at 3 month EURIBOR + 7.85 per cent. As at 31 December 2012, EURIBOR was 0.186 per cent. (2011: 1.369 per cent.).

The balance of the CRC finance as at 31 December 2012 is £24.4 million (net of £0.6 million of costs) (2011: £29.0 million net of £0.6 million of costs).

14 Long-term creditors

As at 31 December 2011, the long-term creditor of €3.0 million (£2.5 million) related to an amount payable to a former partner which funded capital expenditure related to the flutiform® supply chain. No interest is payable on the balance. It has been agreed that the funding will be repaid in 12 equal monthly instalments during 2013, and, therefore, the liability is recorded within current 'Trade and other payables' as at 31 December 2012.

15 Share capital

16 Commitments

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