Final Results

Preliminary announcement of 2014 annual results

Significant growth in revenue and cash generation from the rejuvenated product portfolio and transformed balance sheet

LONDON, UK, 24 March, 2015 - Skyepharma PLC (LSE SKP), the expert oral and inhalation drug development company, today announces its annual results for the year ended 31 December 2014.

Financial Highlights

· Revenues up 18% to £73.8m (2013: £62.6m) driven by flutiform® and EXPAREL®

· Pre-exceptional operating profit up 67% to £22.7m (2013: £13.6m)

· Pre-exceptional EBITDA up 46% to £26.1m (2013: £17.9m); EBITDA of 35% of sales (2013: 29%)

· Pre-exceptional profit after tax of £16.1m (2013: £0.8m)

· Total loss after tax of £10.5m (2013: £0.8m profit) reflecting exceptional costs incurred in relation to repayment of bond debt and Lyon restructuring

· Cash and cash equivalents of £32.4m at 31 December 2014 (2013: £16.5m) and net cash of £15.0m (2013: net debt of £84.2m)

· Successful Capital Raise of £112.0m used for early repayment of bond debt, saving £25.2m in future payments; Paul Capital Note repaid and terminated and early repayment of Euro principal of the CRC Finance facility, saving £1.8m in future finance charges

Operating Highlights

· Products launched since March 2012 represent 66% of total revenues (2013: 47%)

· Substantial growth in royalties and supply revenues from flutiform® 

· Total 2014 in-market sales €72.2m, up 272%

· Japan - launch of 120-puff version; Q4 sales up 124% from Q3

· Progress with developments for COPD studies (Europe, Asia Pacific), Asthma (China) and on breath-actuated version

· Growing revenues and milestones from share of Pacira's EXPAREL®

· Restructuring of Lyon facility to improve efficiency

· Strong balance sheet and cash generation enabling measured investment in new Inhalation products and Oral drug delivery technologies

· Acquisition of the global rights and IP to commence development of SKP-2075 (COPD)

· Preliminary study for Soctec™, a gastro-retentive drug delivery platform, supports further development which is under way

Post year-end

· Early redemption and termination of remaining CRC Finance facility (being the U.S. Dollar element), saving a further £0.9m in future financing charges

· flutiform® filed for paediatric indication in Europe by Mundipharma

· Incruse® Ellipta® launched by GSK in U.S. for once-daily treatment of COPD

· Based on recent increases in demand forecasts and allowing for potential launch, if successfully filed and approved, of the breath-actuated version of flutiform®, the Board has decided to increase capital expenditure by approximately £4m - £6m in 2015, to achieve a faster step up in planned flutiform® manufacturing capacity. To improve efficiency and capabilities at the Lyon Facility, there may be potential additional capital expenditure of £1m - £2m prior to the Facility returning to Skyepharma's management during 2016.

"The Board is confident that the Group has good prospects for growth from the 16 approved products already being marketed and is looking forward to adding further potential from Skyepharma's proven inhalation and oral drug development capabilities."

Commenting on the 2014 results, Peter Grant, Chief Executive Officer, said:

"Skyepharma transformed its performance and prospects in 2014. Our rejuvenated product portfolio is delivering sustained revenue growth and the strengthened balance sheet is enabling us to look to, and invest selectively in, the future with justified confidence. Our business is performing well, with strong cash generation reflecting increased profitability and tight control of working capital. We were very pleased with the institutional support for our successful and substantial Capital Raise last year.

"We are now well-placed to make measured investments from internally generated funds in developing new products and technologies to drive additional growth in the medium to long-term. In 2014 we made good progress in advancing this strategy, acquiring an innovative inhaled corticosteroid (ICS)-sensitising platform from Pulmagen, now in development for chronic obstructive pulmonary disease (COPD), and undertaking a proof of concept trial for Soctec™ a novel oral drug delivery technology for gastro-retention."

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

The Board has decided that, following the removal of the requirement for companies to publish Interim Management Statements (IMSs) announced by the Financial Conduct Authority in November 2014, future scheduled communications will comprise close period updates relating to the first six months and full year around the end of June and December respectively; Interim and Final Results in August and March respectively; and a trading update ahead of the Annual General Meeting statement in May.

-Ends-

For further information please contact:

About Skyepharma PLC

Skyepharma combines proven scientific expertise with validated proprietary technologies to develop innovative oral and inhalation pharmaceutical products. The Group's licenses cover 16 approved inhalation, oral, topical and injectable products, which generate milestones, recurring royalties, and in some cases, product supply revenues. The Group also earns milestones and contract development revenues from new product developments. Products developed by Skyepharma are marketed by some of the world's most respected pharmaceutical companies. For more information, visit www.skyepharma.com

Operating Review

2014 was a significant year for Skyepharma. Based on substantial and growing momentum in revenues from new products, a successful equity raise enabled the expensive bond debt to be paid off early at a discount of £25.2 million. This has set the Group on a path of growing profitability and measured investment in further product and technology development. Key events in the year included:

· Strong financial and operating cash performance for the year with a pre-exceptional operating profit of £22.7 million and a closing cash balance of £32.4 million

· A Capital Raise of £112.0 million to pay off the Group's bond debt early, saving £25.2 million and transforming the Group's balance sheet and capacity to invest in the pipeline and future growth

· Launch of flutiform® in France and Spain, meaning flutiform® is now available in all five of the largest European markets, as well as launches in nine other countries

· Launch of the 120-puff version of flutiform® in Japan in addition to the 56-puff version launched in November 2013

· Continued growth in revenues from the supply of flutiform® which moved into positive gross profit during 2014

· Strong growth of EXPAREL® and receipt of the first sales-related milestone of U.S.$8.0 million

· Focus on pipeline development including commencing the development of SKP-2075 in COPD, based on a novel respiratory therapy platform acquired from Pulmagen Therapeutics (Synergy) Limited ("Pulmagen")

· An initial proof of concept trial for Soctec™, a potential new gastro-retentive oral delivery technology, with data which is encouraging for further development

Financial Highlights

The Group achieved revenues of £73.8 million for 2014, up 18 per cent from £62.6 million in 2013. This increase was mainly due to growth in flutiform® royalty and supply revenues, increased revenue from a share of growing net sales of EXPAREL® as well as the first EXPAREL® sales milestone and a full year of rental income in respect of the Lyon Facility leased by Aenova France SAS ("Aenova") following the renewal of the lease in December 2013.

By the end of 2014, the Group was earning revenues from 16 approved products which together generated £51.4 million of royalty and product supply revenues (2013: £44.9 million) of which £36.4 million (2013: £27.9 million) related to the eight products which have achieved key market launches in the last three years.

In addition, flutiform® generated £7.6 million of milestones and contract development revenue in 2014 (2013: £10.1 million).

Revenues from products launched since March 2012 represented 66% of total revenues in 2014 (2013: 47%).

Cost of sales decreased slightly to £32.9 million (2013: £33.2 million) due to lower sales of Lyon products, a favourable change in flutiform® product supply mix, unit costs benefiting from economies of scale and reduced expenditure on flutiform® product support.

Net operating costs excluding exceptional items increased to £18.2 million in 2014 (2013: £15.8 million), with higher investment in research and development projects (an increase of £1.3 million), increased corporate costs due to increased activity levels and higher staff costs partially reflecting the CFO appointment in late 2013, and share-based payments. Pre-exceptional operating profit was up 67 per cent to £22.7 million (2013: £13.6 million). After exceptional operating items, operating profit was up 59 per cent to £21.6 million (2013: £13.6 million).

An exceptional operating charge of £1.1 million has been recognised as the Group's share of the costs of restructuring the Lyon site, as outlined below.

The loss after tax was £10.5 million (2013: £0.8 million profit), including £26.6 million exceptional costs related to the repayment of the bond debt and the Lyon restructuring, having benefited in 2013 from a £1.8 million tax credit (2014: £0.6 million charge) arising from recognising a deferred tax asset. Basic earnings per share were a loss of 12.3 pence (2013: 1.8 pence profit per share). Pre-exceptional basic earnings per share were 18.8 pence (2013: 1.8 pence) whilst pre-exceptional diluted earnings per share were 18.5 pence (2013: 1.7 pence).

Cash flows benefited from a total of £9.2 million of milestone receipts (2013: £5.5 million). Pre-exceptional EBITDA (earnings before interest, tax, depreciation and amortisation) totalled £26.1 million (2013: £17.9 million) and represented 35 per cent of revenues (2013: 29 per cent of revenues).

In April 2014, Skyepharma raised gross proceeds of £112.0 million ("Capital Raise") to pay off the Group's bond debt early at a cost of £95.6 million. This saved £25.2 million compared with the total amount which would have been payable at the earliest normal redemption date of November 2017. After costs and the debt repayment, the balance of the proceeds of the Capital Raise was approximately £8.2 million. An exceptional finance charge of £25.5 million was recognised reflecting the difference between the book value of the bonds and the amount paid (including attributable costs). Costs of £7.8 million associated with the issue of shares have been charged to equity. During the year, the Paul Capital Facility was repaid and terminated, and the Euro part of the CRC Finance facility was repaid early, at a cost of £10.6 million. This early repayment increased the Group's full year net finance cost in the consolidated income statement by £0.1 million in 2014 but will reduce it by £1.1 million in 2015 and £0.8 million in 2016 compared with the costs forecast prior to the repayment.

As at 31 December 2014, the Group's cash was £32.4 million (up £15.9 million since 31 December 2013). Gross debt amounted to £17.4 million and the Group had net cash of £15.0 million (31 December 2013: net debt £84.2 million). Debt has reduced further since the year end by the early redemption of the remaining U.S. Dollar balance of the CRC Finance facility on 27 February 2015 at a cost of £10.5 million, saving £0.9 million in future finance charges.

Operational Highlights

flutiform®, the fixed dose combination of fluticasone, an inhaled corticosteroid ("ICS"), and formoterol, a long-acting beta agonist ("LABA") in a pressurised metered dose inhaler, continues to be an important value driver for the Group. As of 23 March 2015, flutiform® had been approved in 36 countries and launched in 26, including recent launches in Austria, Singapore and Spain. In November 2014 the product was launched in Italy under the Abriff® brand name by Zambon Italia srl, Mundipharma's co-marketing partner in that country, where flutiform® was launched as flutiformo®in June 2013. In December 2014 the 120-puff version of flutiform® was launched in Japan (in addition to the 56-puff version launched in 2013).

In-market sales of flutiform® for the year ended 31 December 2014 totalled €72.2 million (£56.5 million) (2013: €19.4 million (£16.5 million)). In Q4, 2014, total in-market sales of flutiform® were €25.9 million, up 45 per cent from €17.9 million in Q3, 2014. Note: in-market sales are internal calculations using IMS Health data Q4, 2014, based on sales to pharmacies and exclude certain minor countries not covered by IMS. In-market sales are not the same as sales to wholesalers on which royalties are payable to the Group.

In Japan, in-market sales for the year ended 31 December 2014 (included in the above sales) totalled €15.2 million (£11.9 million) (2013: €1.5 million (£1.3 million)), where the 120-puff version was launched on 1 December 2014, following the launch of the 56-puff version in late 2013.

Mr Masahiro Yamashita, President and CEO of Kyorin Holdings Inc, said:

"flutiform® grew strongly in 2014, particularly in the fourth quarter, in this highly competitive market. The response from clinicians and patients to this new combination therapy has been very positive, and we look forward to continuing to roll out the four-week version across Japan."

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

Mundipharma, the Group's development, marketing and distribution partner in Europe and most other territories outside Japan and the Americas, is seeking to extend the reach of flutiform® both geographically and through line extensions. As at 23 March 2015, applications for marketing authorisations were under review in 13 countries in the Middle East, Far East and Africa. In September, the results of Mundipharma's pivotal Phase III study for flutiform® in paediatric asthma demonstrated that the primary endpoints had been met (pflutiform®with over 1,500 patients in Europe for the treatment of chronic obstructive pulmonary disease ("COPD"). Mundipharma is also undertaking clinical trials in Asia-Pacific (including China) for COPD and in China for Asthma and hopes to launch the product in China within the next four years.

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

"We are encouraged by the growth of flutiform® for the treatment of bronchial asthma in Europe and in an increasing number of important markets around the world. Sales continue to rise in line with our expectations and we are pleased to be making progress in other areas, including filing a paediatric indication in Europe, advancing international COPD studies and developing a breath-actuated version."

Skyepharma is supporting Mundipharma in its development of a novel breath-actuated version of flutiform®, where the flutiform® pMDI press-and-breathe actuator is replaced with Mundipharma's breath-actuated device. Skyepharma is providing contract development services to Mundipharma for the chemistry, manufacturing and controls ("CMC") aspects of this development and will also support Mundipharma during the regulatory filing process. Skyepharma's license and manufacturing and supply agreements with Mundipharma for flutiform® also cover the breath-actuated version from which the Group will be eligible for revenues from royalties, milestones and filled canister supply on a similar basis to flutiform®.

In 2014, Sanofi, the Group's licensee in Latin America, received marketing approval for flutiform® in Argentina. A new drug application is under review in Colombia and further applications are being prepared. The potential for launching in the region continues to be under discussion with Sanofi taking into account the impact of continued weakness in local currencies against Sterling and the Euro, the main currencies underpinning the production cost.

The Group's former Injectable Business, Pacira Pharmaceuticals, Inc. ("Pacira"), continued to make strong progress with EXPAREL®(bupivacaine liposome injectable suspension), an injectable product for administration into the surgical site to produce postsurgical analgesia. Skyepharma receives three per cent of net sales of EXPAREL® (on a cash received basis) and potential future milestones of up to U.S.$44.0 million (£28.3 million) over and above the milestone of U.S.$8.0 million (£4.7 million at that time) received during 2014 when annual net sales of EXPAREL® reached U.S.$100.0 million. Further milestones are potentially receivable of which U.S.$40.0 million (£25.7 million) are based on certain annual sales targets and U.S.$4.0 million (£2.6 million) payable on launch in a major EU country.

Pacira reported full year 2014 net sales of EXPAREL® of U.S.$188.5 million and the most recent quarterly sales figures are presented in the chart below:

On 2 March 2015 Pacira announced the receipt of a Complete Response Letter ("CRL") from the U.S. Food and Drug Administration ("FDA") following a review of its supplemental New Drug Application ("sNDA") for the use of EXPAREL® in nerve block to provide postsurgical analgesia. Pacira have stated that they will immediately schedule an End-of-Review meeting with the Division of Anesthesia, Analgesia and Addiction Products of the Center for Drug Evaluation and Research to discuss the contents of the CRL.

The Group has the potential for significant royalty income of up to £9.0 million per annum from the license of inhalation technologies to GlaxoSmithKline ("GSK"). Our technology is used in GSK's new once-a-day treatments for asthma and COPD: Relvar®/Breo® Ellipta®, Anoro® Ellipta® and Incruse® Ellipta®.

Relvar®/Breo® Ellipta® is an inhaled combination product developed by GSK for the treatment of asthma and COPD. Relvar®/Breo®Ellipta® combines the ICS fluticasone furoate with the LABA vilanterol and incorporates one of the Group's proprietary dry powder formulation technologies for inhalation products accessed under a licensing arrangement. Breo®Ellipta® was launched in the U.S. in October 2013 where it is indicated for the treatment of COPD. Relvar® Ellipta® was launched in the UK and Germany in January 2014 following approval for the treatment of asthma and COPD in 31 European countries by the European Commission in November 2013. A further combination product also utilising the Group's dry powder formulation technology, Anoro® Ellipta®, containing two bronchodilator molecules, umeclidinium and vilanterol inhalation powder, was launched in the U.S. in April 2014 for the once-daily treatment of COPD and had its first European launches in July 2014. Marketing authorisation for Anoro® Ellipta® was granted in Australia and Japan in July 2014 for the treatment of COPD. A further COPD treatment utilising the Group's dry powder formulation technology, Incruse® Ellipta®(umeclidinium), was approved in Canada in April 2014, filed in Japan in May 2014 and launched in the UK and the U.S. in October 2014 and January 2015 respectively.

GSK reported sales of these products as follows:

As of 31 December 2014, Relvar®/Breo® Ellipta® had been approved in 58 countries for marketing and had been launched in 36 countries, including the U.S., Canada, UK, Germany and Japan. As of the same date, Anoro® Ellipta®had been approved in 47 countries for marketing and has been launched in 20 countries, including the U.S., UK, Germany and Japan. Incruse® Ellipta® was launched in the UK in October 2014 and in the U.S. in January 2015.

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

Research and Development

During 2014, Skyepharma continued to seek to strengthen the product pipeline through a mix of own-funded feasibility and technology development projects with the potential for significant sales and further collaborations where partners fund the development on a time and materials basis. Own-funded development projects included SKP-2075, SKP-1052 and work on oral drug delivery technologies, as outlined below:

SKP-2075 is the first potential product of a family of products being developed to provide a new treatment for COPD. COPD affects an estimated 210 million people worldwide and its treatment is currently a U.S.$8.4 billion market in the U.S. (Chronic obstructive pulmonary disease. Forecast. Datamonitor, DMKC0047510, Publication Date: 03/10/2014), Japan and the largest five EU countries.

In August 2014 the Group acquired (for no up-front consideration) the global rights and related intellectual property (including granted patents and patent applications) to a novel inhaled therapy platform from Pulmagen. Pulmagen discovered that the inhalation of an ultra-low dose of theophylline, which is prescribed as an oral bronchodilator for severe asthma and COPD, together with an established ICS has an effect of unlocking the anti-inflammatory potential of ICS in the treatment of COPD. Based on preliminary data, the inhalation of an ultra-low dose of theophylline with an ICS is predicted to deliver efficacy with an appropriate tolerability and safety profile. Pulmagen has already conducted a Phase II clinical trial in moderate to severe COPD patients where the observed treatment difference in lung function supported the hypothesis. Pulmagen and Skyepharma believe that the use of ultra-low dose inhaled theophylline to increase sensitivity to ICS could have applications in a range of COPD products, including combinations which include an ICS, especially for patients whose condition is inadequately controlled by available therapies. The approach may also have potential for certain patients with bronchial asthma.

Skyepharma is applying its proven expertise in inhaled drug development to develop a first product (SKP-2075) (low dose theophylline with ICS) to treat COPD to include a Phase II efficacy and safety trial sized to produce clinically significant data. It will then seek to out-licence SKP-2075 to a pharmaceutical partner for late-stage development and commercialisation. Skyepharma commenced development of SKP-2075 in the second half of 2014 and aims to have results of the Phase II efficacy and safety trial available in 2017. The Group anticipates spending approximately £14.0 million, through internally-generated funds, to develop SKP-2075 up to completion of the Phase II trial. Under the terms of the acquisition, Pulmagen will receive a share of Skyepharma's potential future revenues and launch milestones from the successful exploitation of the acquired platform.

SKP-1052 - this product concept was developed in-house and uses the Group's proprietary Geoclock™ chronotechnology to reduce the risk of severe nocturnal hypoglycaemia in insulin-treated patients with type 1 and 2 diabetes mellitus. There is currently no recognised medication to reduce the risk of this side-effect of insulin treatment. Research undertaken by the Group indicates significant potential opportunity of over 1.2 million adult patients in the United States alone.

Following the generation of supportive data in a proof of concept study, the Group has received encouraging advicefrom the FDA on the development plan and regulatory pathway in the U.S. for SKP-1052 and is actively seeking a partner to fund further development as well as considering other funding options for this project.

Oral drug delivery technologies - work is also continuing on a number of internally developed concepts for novel oral drug delivery platform technologies. These include Soctec™, a concept for a novel, proprietary gastro-retentive drug delivery platform technology comprising a buoyant self-orienting capsule.

Collaborative development work

Development projects largely funded by partners in 2014 included the development for Mundipharma of the breath-actuated version of flutiform® described above. In addition, the Group continues to provide RespiVert Ltd ("RespiVert"), a subsidiary of Janssen Biotech, Inc., with early stage formulation and process development services to develop dry powder inhaled dosage forms of some of RespiVert's new chemical entities. The projects are aimed at the development of new inhaled therapies for patients with severe, chronic respiratory diseases including COPD and severe asthma. As anticipated, this work is reducing as the projects transition to third parties to carry out the later stage commercialisation work.

Additional opportunities

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

Manufacturing and Supply

flutiform® supply chain - under the agreements with Mundipharma and Kyorin, the Group is responsible for arranging the manufacture and supply of flutiform®, and has contracted with Sanofi to manufacture and assemble the product at its factory in Holmes Chapel, Cheshire, UK. Sanofi is also licensed to manufacture flutiform® to supply directly to its group companies for Mexico, Central and South America using certain ingredients and components supplied by the Group. The Group has entered into agreements with a number of suppliers in order to obtain materials required and have them supplied to Sanofi to manufacture flutiform®.

To establish the flutiform® supply chain, the Group committed to substantial development and capital expenditure to scale-up and validate the manufacturing processes. By 31 December 2014 cumulative capital expenditure was £16.9 million of which £2.5 million was incurred in 2014 (2013: £0.2 million). In addition, in 2014 the Group incurred £2.8 million for product maintenance costs (2013: £3.3 million), which are included as part of cost of sales. The Group will continue to invest in:

· working capital to support growth in supply volumes of flutiform®. In addition, certain extended supplier payment terms to support the early development of the supply chain will return to normal terms during 2015 and the impact of this on working capital is approximately £4 million

· expenditure to maintain product supply (to be included in cost of sales) forecast to be approximately £2 million to £4 million per annum for 2015 and 2016; and

· capital expenditure to increase production capacity to meet anticipated growth in demand. Further details are given in the Outlook section below.

In 2011, Aenova leased the Group's manufacturing business and premises in Lyon (together "the Facility") at a rental of €2.0 million (£1.6 million) per annum until the lease arrangements expire in mid-2016. Aenova continues to manage and be responsible for the operational and financial performance of the Facility on a day-to-day basis, and during 2014 concluded consultations with the Works Council in respect of a site restructuring plan which was implemented in early 2015. Under the arrangements with Aenova, some of the costs of the restructuring will be reimbursed by Skyepharma and are shown as an exceptional charge in the 2014 results (as noted above). Aenova is sharing some of its savings with Skyepharma during the remainder of the lease period. The Group is reviewing options to add additional work into the Facility ahead of the manufacturing business reverting to Skyepharma when the lease terminates and is planning some capital investments which would improve operating efficiency or capabilities (expected to be approximately £1 million to £2 million in 2015 and approximately £1 million in 2016).

The Facility currently manufactures seven Skyepharma products. Five of these use the Geomatrix™ family of technologies: Diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Madopar DR® and lower-dose formulations of Sular®. LODOTRA®/RAYOS® uses the Group's Geoclock™ chronotechnology. The other oral product, Triglide®, uses some of Skyepharma's solubilisation technology. The Facility has current good manufacturing practice ("cGMP") status, with approvals, amongst others, from the European Medicines Agency, U.S. FDA, ANVISA (Brazil) and KFDA (South Korea).

Other Approved Products

Solaraze® - net sales of Solaraze® in the U.S. in 2014 were U.S.$28.9 million (£17.5 million), 39 per cent lower than reported in 2013. Net invoiced sales in 2014 by Almirall, the Group's partner in Europe and certain other territories, increased by 9 per cent to €39.0 million (£31.4 million).

Requip® Once-a-day - in 2014 net sales of Requip® as reported by GSK totalled £109 million, a decrease of 13 per cent from 2013 (£125 million). This includes sales of other formulations of Requip® on which the Group does not receive royalties. Of the total sales, £39 million was generated in Europe, a 25 per cent decrease from 2013 due to generic competition. £70 million of these sales arose in the rest of the world (including the U.S.), a decrease of 4 per cent.

Xatral® OD (Uroxatral® in the U.S.) - in 2014, net sales of Xatral® OD and Uroxatral were €80.7 million (£65.1 million), down 12 per cent on 2013 sales of €92.0 million (£78.2 million). In the U.S., net sales of Uroxatral® were €8.0 million (£6.4 million), down 44 per cent from 2013 due to generic competition. Western European and Rest of World net sales have continued to fall as a result of generic competition, with net sales for 2014 of €72.8 million (£58.7 million), a reduction of 6 per cent from 2013.

Paxil CR™ - in 2014, net sales outside of the U.S. were U.S.$106.6 million (£64.8 million), down 10 per cent compared with U.S.$112.2 million (£71.7 million) in 2013.

In the first half of 2013 net sales in the U.S. were U.S.$21.3 million (£13.6 million). Since the second half of 2013 GSK have not reported sales of Paxil CR™ in the U.S. to Skyepharma. GSK has stated that no royalties are due and are no longer paying royalties to Skyepharma due to the expiry of certain protections covering Paxil CR™ in the U.S. The Company is disputing this.

LODOTRA® (RAYOS® in the U.S.) - Horizon reported net sales of LODOTRA® of U.S.$6.5 million (£4.0 million) in 2014 compared with net sales of U.S.$8.2 million (£5.2 million) for 2013. Horizon recognises a significant portion of LODOTRA® sales at the time of delivery to its distribution partner, Mundipharma, and those deliveries are not linear or related to end-market sales in terms of timing and therefore can fluctuate from year to year. In addition, Horizon reported net sales of RAYOS® in 2014 of U.S.$19.0 million (£11.5 million) (2013: U.S.$5.8 million (£3.7 million)). The figures reported by Horizon are not the same as the net sales used in the calculation of the royalties paid to Skyepharma.

On 15 July, 2013, the Group and Horizon received a Paragraph IV Patent Certification from Watson Laboratories, Inc. - Florida ("WLF"), advising that WLF had filed an ANDA with the FDA for a generic version of RAYOS®. On August 26, 2013, a member of the Group together with Horizon, filed suit against Watson, Actavis Pharma, Inc., Andrx Corp., and Actavis, Inc., or collectively "WLF". The lawsuit alleges that WLF has infringed certain patents by filing an ANDA seeking approval from the FDA to market generic versions of RAYOS® containing 1 mg, 2 mg, and 5 mg of prednisone prior to the expiration of the patents. The subject patents are listed in the FDA's Orange Book. The commencement of the patent infringement lawsuit stays FDA approval of WLF's ANDA for 30 months or until an earlier district court decision that the subject patents are not infringed or invalid.

Strategy

Skyepharma's strategy is to meet the needs of patients through the application of its scientific know how and innovative inhalation and oral technologies. The Group aims to grow revenues from its extensive portfolio of approved products and ensure the success of its pipeline of product candidates. The Board is looking to leverage its growing underlying profitability by measured investment in developing new products and technologies through a mix of own-funded development projects, collaborations with partners and carefully targeted in-licensing transactions and acquisitions. These would be aimed at the global market for the treatment of asthma and/or COPD which is currently worth approximately U.S.$29 billion per annum (Company analysis based on: i) Chronic obstructive pulmonary disease. Forecast. Datamonitor, DMKC0047510, Publication Date: 03/10/2014 ii) Asthma. Forecast, DMKC0082148, Publication Date: 18/06/2014 iii) Extrapolation of main market sales to global sales numbers with a factor of 25%).

Typically, own-funded inhalation development projects, of which SKP-2075 is an example, would cost £10 million to £20 million over several years with the aim of making the product suitable for out-licensing. The Board believes that the Group currently has the financial and operating capacity to commence approximately one such project each year. Own-funded oral development projects are mainly focussed on developing novel oral drug delivery technologies, such as Soctec™, with a view to out-licensing the technologies for use in partner-funded developments. Such oral developments would typically cost £1 million to £2 million over several years and the Board believes that the Group could run a number of such developments in parallel. Oral products represent nearly half by value of prescription drug products (Company analysis based on Benchmarking the Pharmaceutical Market by Drug Delivery to 2014: R&D /Drug Delivery, Datamonitor, DMKC0062616, Publication Date 18/05/12). In this way, and subject to suitable project opportunities being available, the Board's intention is to create a development pipeline with a balance of own and partner-funded work.

Whilst continuing to grow overall revenues from approved and pipeline product candidates, the Group aims to strengthen its product pipeline by developing new products and technologies, through its own development, collaborations with partners and targeted in-licensing and acquisitions.

2015 objectives

The key objectives for 2015 are to:

· Grow overall revenue from approved products and pipeline product candidates;

· Continue to grow operating profit and generate cash from operations;

· Progress and commence the development of additional products and technologies, including seeking new opportunities;

· Progress further scale-up of flutiform® manufacturing capabilities;

· Progress the development of new oral drug delivery technology platforms and seek development and out-licensing opportunities; and

· Reduce finance costs by retiring debt, including the balance of the CRC Facility which was fully repaid in February 2015.

Outlook

The Board expects further substantial growth in revenues in 2015 compared with 2014 mainly from the products launched in the last three years, especially flutiform®, EXPAREL® and the GSK inhalation products.

The Directors believe that revenues from product supply are likely to continue to grow significantly to support increasing market penetration of flutiform®. A first sales milestone of €10 million (£7.8 million) is due from Mundipharma when its net sales of flutiform® reach €100 million (£78.3 million) in a calendar year. Were this to be achieved in 2015, a portion of the milestone would be recorded in revenues in the year, through release of deferred income, although it is not anticipated that any cash will be received as it will be used to satisfy a large part of the balance of Mundipharma's right to recover up to €25 million (£19.6 million) of previous development costs.

Based on current forecasts by analysts who follow Pacira, EXPAREL® could potentially achieve U.S.$250.0 million (£160.9 million) in annual net sales in 2015 (on a cash received basis), which would lead to receipt of a milestone of U.S.$8.0 million (£6.3 million), along with increased revenues from the Group's share of three per cent of net sales (on a cash received basis). The Directors believe that the growth of royalties from recently launched products is likely to more than offset the decline in royalties from products which are off-patent, such as Solaraze® (in the U.S.), or which are otherwise facing generic competition.

Self-funded net investment in research and development is anticipated to increase from £3.8 million in 2014 to around £10.0 million in 2015, depending on exchange rates during the year, as the Group advances its programmes to develop potential products and technologies with significant sales potential. This includes continuing investment in novel oral drug delivery platform technologies including SoctecTM and existing pipeline product candidates including increased investment, as planned, in SKP-2075, the novel potential anti-inflammatory treatment for COPD based on the novel inhaled therapy platform acquired from Pulmagen during 2014. In addition, the Group has embarked upon feasibility work for a novel inhalation product based on known chemical entities, with a view to partnering this early for further development.

flutiform® supply chain costs are likely to increase broadly in line with increased sales. Corporate, sales and marketing and share based payment charges are expected to grow modestly overall compared with 2014.

Based on recent increases in demand forecasts from customers and allowing for potential medium term plans for launching, if successfully filed and approved, the breath-actuated version of flutiform®, the Board has decided to increase investment to achieve a faster step up in planned flutiform® manufacturing capacity alongside existing continuous improvement activity and scale-up plans. These investments and any additional volumes are expected to improve economies of scale. As a result of the additional investment, capital expenditure on flutiform® in 2015 is expected to total approximately £7 million to £9 million, and total capital expenditure in 2015 is forecast to be approximately £10 million to £12 million, including investment in R&D activities, IT improvement projects and potential investment in the Lyon Facility to improve efficiency and expand capabilities prior to the Facility returning to Skyepharma's management during 2016.

The Board is confident that the Group has good prospects for growth from the 16 approved products already being marketed and is looking forward to adding further growth potential from Skyepharma's proven inhalation and oral drug development capabilities.

Financial Review

The results for 2014 reflect strong growth in revenues, primarily from milestone receipts, flutiform® royalties and product supply revenue, share of net sales of EXPAREL® and a full year of rental income in respect of the Lyon Facility.

The table below summarises the Group's results for the year ended 31 December 2014 and shows underlying performance excluding exceptional items, which are explained in detail in the following sections:

Revenue

Revenues in 2014 were £73.8 million (2013: £62.6 million) comprising signing and milestone receipts, contract research and development, royalties, product supply, share of sales of EXPAREL® and rental income from the Lyon Facility. The increase from 2013 is mainly due to a higher level of milestone receipts, growth in flutiform® supply and royalty revenues, increased revenue from a share of growing net sales of EXPAREL® as well as the first EXPAREL® sales milestone and a full year of rental income being recorded in respect of the Facility leased by Aenova following the lease renewal in December 2013.

Revenue recognised from signing and milestone payments was £9.1 million in 2014 (2013: £5.7 million), which included the first sales-related milestone of U.S.$8.0 million (£4.7 million) in respect of EXPAREL®, a milestone of €2.0 million (£1.7 million) in respect of the launch of flutiform® in Spain and €3.0 million (£2.5 million) following the launch of flutiform® in France. In 2013, signing and milestone revenues included a milestone of several million U.S. Dollars following regulatory approval of flutiform® in Japan, a milestone of €2.0 million (£1.7 million) in respect of the launch of flutiform®in Italy and a milestone from Sandoz following the U.S. launch by Tolmar, Inc. of a generic competitor to Solaraze®.

Contract research and development revenue decreased by 19 per cent to £8.3 million in 2014 (2013: £10.3 million) which reflects the conclusion of work on flutiform® for Kyorin in late 2013.

Royalty income was £17.2 million in 2014, £0.4 million higher than in 2013, representing an increase, at constant exchange rates of two per cent. The increase is due to the first full year of royalty receipts from flutiform® sales in Japan, further launches of flutiform® in France, Spain and a number of other countries and growth of sales in previously-launched markets. Royalties were also higher with the first full year of receipts from GSK's Relvar®/Breo® Ellipta® and Anoro® Ellipta®. The overall increase in royalties was partially offset by the cessation of ZYFLO CR® royalties following the expiration of certain protections in 2013. Royalty revenues were also reduced by a provision of £0.4 million in respect of deductions made by GSK to reclaim royalties previously paid in respect of Paxil CR™ in the U.S. This is being disputed by Skyepharma.

Product supply revenue totalled £34.2 million in 2014 (2013: £28.1 million), representing an increase of 29 per cent at constant exchange rates, reflecting supply of flutiform® throughout the year following the launch in Japan in November 2013, further launches during 2014 and growth in launched markets. Based on forecasts received from partners, the Board expects that revenues from the supply of flutiform® will be an increasing proportion of the Group's revenues in the next few years.

Other revenue of £5.0 million (2013: £1.7 million) comprises the Group's three per cent share of Pacira's cash receipts from net sales of EXPAREL® in the U.S. and rental income from the Lyon Facility. Rental income was not due in the period from 1 July 2013 until the lease was renewed, following the expert determination in the Group's favour, on 19 December 2013; rent then became due at an annual rate of €2.0 million (£1.6 million) until the end of June 2016.

Cost of sales

Cost of sales decreased slightly to £32.9 million (2013: £33.2 million) due to lower sales of Lyon products, a favourable change in flutiform® product supply mix, unit costs benefiting from economies of scale on raw materials and manufacturing costs, and lower product support costs in 2014. The flutiform® supply chain is becoming an increasingly important part of the Group's revenues. With higher orders for flutiform®, year-end inventories increased to £10.4 million (2013: £8.8 million), which includes £1.0 million of capitalised overheads (2013: £0.8 million). During 2014 the flutiform® supply chain recorded a gross profit of £3.0 million due to further growth in volumes above initial launch levels after having made a gross loss of £2.8 million in 2013.

As referred to previously, due to the complexity of a combination respiratory product like flutiform®, it is anticipated that there will be a long-term continuing requirement to support the product, both to scale-up and maintain manufacturing capacity and to deal with maintenance of the supply chain. In addition to anticipated capital costs described in the flutiform® supply chain section (under Manufacturing and Supply), this could cost £2 million to £4 million a year in 2015 and 2016, reported within cost of sales.

Research and development

Gross investment in research and development in 2014 increased to £12.1 million from £10.8 million incurred in 2013 whilst contract development revenues reduced to £8.3 million from £10.3 million in the prior year. As a result, net investment in research and development (expenses, net of contract development revenues) was £3.8 million, compared with £0.5 million in 2013. This reflects an increase in own-funded projects. Lower contract development revenues are due to reduced activity on partner-funded projects, as work was undertaken in 2013 to support Kyorin in launching flutiform® in Japan.

Pre-exceptional operating profit from continuing operations

Pre-exceptional operating profit and EBITDA from continuing operations was as follows:

Finance costs and income

Following the repayment of the 2024 Bonds in April 2014, the final payment against the Paul Capital Note in June 2014 and the repayment of the Euro portion of CRC Finance facility in October 2014, pre-exceptional financing costs were very substantially reduced in the year. On 27 February 2015, the Group repaid early the remainder of CRC Finance facility out of general cash resources.

Interest costs totalled £7.0 million (2013: £14.1 million) and consisted of £3.7 million (2013: £10.0 million) in respect of the Bonds, £2.8 million (2013: £3.1 million) in respect of CRC Finance facility (including a make-whole charge of £0.5 million on early repayment), nil (2013: £0.5 million) interest attributable to the Paul Capital Note, £0.1 million in respect of refinancing costs (2013: nil) and £0.4 million (2013: £0.5 million) on other bank borrowings.

Revaluation consisted of a gain of £0.4 million (2013: £0.1 million loss) arising from the revaluation of the carrying value of the Paul Capital Note as described in Note 12: Borrowings.

Finance income totalled £0.1 million during the year (2013: £0.1 million) due to near-zero interest rates on cash balances.

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 2014 this amounted to a gain of £0.5 million (2013: £0.5 million loss).

Operating profit after exceptional costs

Operating profit after exceptional costs in 2014 was £21.6 million (2013: £13.6 million). An exceptional operating cost of £1.1 million (2013: nil) was recognised in relation to the restructuring of the Facility in Lyon.

Loss before tax for 2014 was £9.9 million (2013: £1.0 million loss), reflecting the £25.5 million exceptional costs of the 2024 Bond repayment and Capital Raise.

Taxation

The Group continues to recognise a deferred tax asset of £2.0 million (2013: £2.0 million). This reflects a prudent assessment that a portion of the Swiss and U.S. tax losses will be utilised in 2015 given the improving outlook for future profitability. The remaining relevant Swiss tax losses are expected to expire at the start of 2016. Following this, the rate of tax on Swiss profits is expected to be in the low teens depending on the mix of revenue streams. Income in the U.S. (largely in relation to EXPAREL®) was largely offset by expiring tax losses and intercompany interest in 2014 and is expected to be taxed at around a 25 per cent effective rate in 2015 rising to around a 35 per cent effective rate through 2017 as the interest deduction reduces. These rates are subject to any changes in tax legislation in the relevant jurisdictions.

Net result

Loss for 2014 after exceptional items and taxation was £10.5 million (2013: £0.8 million profit).

Earnings per share

During 2014, earnings per share amounted to a loss of 12.3 pence per share for both basic and diluted earnings per share (2013: 1.8 pence profit per share for basic earnings per share, 1.7 pence profit per share for diluted earnings per share).

Pre-exceptional basic earnings per share was 18.8 pence (2013: 1.8 pence profit per share for basic earnings per share). Pre-exceptional diluted earnings per share was 18.5 pence (2013: 1.7 pence).

As at 31 December 2014 there were 104,812,259 Ordinary Shares in issue (2013: 46,127,645). In addition, as at 31 December 2014 the following potential obligations to issue Ordinary Shares were outstanding:

Of the above LTIP 2012 awards, only those subject to three-year relative total shareholder return performance targets are dilutive as at 31 December 2014 (1,624,779 shares).

The Directors believe that the options in respect of the deferred consideration relating to the acquisition of Krypton in 1998 are unlikely to be exercised as the exercise price is very substantially above the prevailing market price of shares in Skyepharma PLC and the exercise price increases by 10 per cent per annum.

Cash position and liquidity

As at 31 December 2014 the Group had cash and cash equivalents of £32.4 million (2013: £16.5 million). During 2014, the Group generated a cash inflow from operations of £30.2 million compared with an inflow of £14.4 million in 2013. During 2014, the Group's cash position benefited from the receipt of milestones of €5.0 million (£4.2 million at that time) from Mundipharma following the launches of flutiform® in France and Spain, the receipt from Pacira of the first EXPAREL® sales milestone of U.S.$8.0 million (£4.7 million at that time) and approximately £8.2 million of cash for general corporate purposes as a result of the Capital Raise.

In 2014 the Group's total cash outflow in respect of capital expenditure was £2.9 million (2013: £3.4 million) mainly comprising the continued investment in scale up of flutiform® manufacturing capacity, support for R&D activities and IT improvement projects.

In 2014, the Group paid financing commitments comprising the repayment of debt of £112.1 million (2013: £7.1 million), mainly relating to the 2024 Bonds, the Euro portion of CRC Finance facility, and the final amortisation payments in respect of the Paul Capital Note. The Group also paid net interest of £3.2 million (2013: £3.7 million) primarily relating to the CRC Finance facility and the Swiss mortgages.

Borrowings

In April 2014, the Group implemented a Capital Raise and bond repayment. The Group used the proceeds of the Capital Raise to repay its bond debt in full.

The Group's total net cash (2013: net debt), measured in accordance with IFRS, comprises:

Further details on the refinancing and interest rates can be found in Note 12 to this preliminary announcement.

Non-current borrowings amounted to £11.8 million at 31 December 2014 (2013: £90.9 million), consisting of two property mortgages secured on the land and buildings of Skyepharma AG and the remaining portion of the CRC Finance facility (which was repaid in February 2015).

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

Balance Sheet

At 31 December 2014, the consolidated balance sheet shows total shareholders' equity of £27.2 million (2013: £64.6 million deficit).

Deferred Income

Part of an initial upfront milestone of €15.0 million (£10.1 million at the time) and additional funding by Mundipharma in respect of the development of a high strength version of flutiform® has been recorded in deferred income in the Group's balance sheet and will be recognised in the Group's income statement as the recoverable costs are recovered by Mundipharma by deduction from royalties and sales-related milestones. As at 31 December 2014, this amounted to £8.4 million.

Non-current assets marketed for sale

One of the sites in Switzerland has been marketed for sale since January 2011. As at 31 December 2014, the net book value of the site was £3.9 million and was recorded in the Group's balance sheet under assets held for sale, of which £3.7 million relates to land and buildings and £0.2 million relates to laboratory and manufacturing equipment.

In October 2014, a substantial part of this property was leased to the Aenova Group for a period of 10 years and two months at an initial rental of CHF0.5 million (£0.3 million) per annum, which is subject to upwards-only review each year in line with the Swiss consumer price index. Management believes that the existence of a long-term lease will significantly improve the marketability of the facility to an investor as it brings the security of a long-term income stream from a reputable tenant. External agents have provided management with an indicative fair value in excess of the carrying value at year end for both 2013 and 2014 and accordingly during the years ended 31 December 2014 and 2013 there was no depreciation or impairment recorded against the carrying value of the site.

Commitments

The Group has certain minimum commitments to a supplier in respect of the flutiform® supply chain with a total value of approximately €11.0 million to €12.0 million (£8.6 million to £9.4 million) in 2015.

Going concern

At the time of approving the financial statements the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the Annual Report 2014.

Foreign exchange risks

Almost all of the Group's operations are based in continental Europe and milestones and licence royalty payments are typically denominated in various currencies, with sales-related payments based on underlying sales in local currencies. This gives rise to direct and indirect exposures to changes in foreign exchange rates, notably the U.S. Dollar, Euro and Swiss Franc. To minimise the impact of any fluctuations, the Group's policy is to maintain natural hedges by attempting, where possible, to match the currencies of income streams with those of the related costs and hold surplus cash in currencies where practical to cover anticipated net cash outflows. Exchange translation gains and losses relating to funding (cash and debt) are included in foreign exchange gain or loss on net debt, and other realised exchange gains and losses and exchange translation gains and losses are included within the revenue or expense line to which they most closely relate. Where subsidiaries are funded centrally, this may include the use of long-term intercompany loans. Where settlement of such intra-group loans is neither planned nor likely to occur in the foreseeable future, they are treated as part of the net investment and exchange differences are taken to reserves. No use was made of currency options and forward currency contracts during 2014 or 2013. Since the year end there has been significant currency market volatility affecting the Group's main currencies of operation. Using the closing exchange rates at 20 March 2015 and re-translating, the pro-forma impact on the Group's 2014 profit before tax is reduction of approximately £0.3 million.

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 new products, the statements under "Outlook", prospects and any forecast sales, the development of new products, risks related to obtaining and/or maintaining regulatory approval for existing, new or expanded indications of existing and new products, risks related to Skyepharma's ability or that of its sub-contractors and partners to manufacture products on a large scale or at all, risks related to Skyepharma's marketing partners' ability to market products on a large scale to maintain or expand market share in the face of changes in customer requirements, competition and regulatory and technological change, risks related to the ownership and use of intellectual property, and risks related to Skyepharma's ability to manage growth. Skyepharma undertakes no obligation to revise or update any forward-looking statement to reflect events or circumstances after the date of this Annual Report and Accounts.

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2014

See Notes to the preliminary announcement

All results are derived from continuing operations

CONSOLIDATED INCOME STATEMENT (CONTINUED)

For the year ended 31 December 2014

See Notes to the preliminary announcement

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE (EXPENSE)/INCOME

For the year ended 31 December 2014

See Notes to the preliminary announcement

CONSOLIDATED BALANCE SHEET

As at 31 December 2014

See Notes to the preliminary announcement

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For year ended 31 December 2014

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For year ended 31 December 2013

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2014

See Notes to the Consolidated Cash Flow Statement

NOTES TO THECONSOLIDATED CASH FLOW STATEMENT

(a) Cash generated by operations

NOTES TO THEPRELIMINARY ANNOUNCEMENT

The preliminary announcement for the year ended 31 December 2014 was approved by the Board on 23 March 2015.

1 Accounting policies

(a) Basis of preparation

The preliminary announcement has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") as they apply to the financial statements of the Group for the year ended 31 December 2014 and applied in accordance with the Companies Act 2006. 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 financial information within this preliminary announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 for the years 31 December 2013 and 31 December 2014. The financial information for the years ended 31 December 2013 and 31 December 2014 has been extracted from the Group's audited consolidated accounts for the year ended 31 December 2014. The auditors' opinion on those accounts was unmodified and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

The audited accounts for the year ended 31 December 2013 have been delivered to the Registrar of Companies.

The accounts have been prepared under the historic cost convention. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. 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 Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements.

2 Segmental reporting

For management purposes, the Group is treated as one reportable operating segment - the development and supply of pharmaceutical products.

Revenue from external customers

2013 figures have been restated to split Switzerland from the rest of Europe and Bermuda.

As required by IFRS, the geographical split of revenue is based on the location of the customer which is invoiced for the sales and does not reflect the country in which related products are sold.

Information about major customers

Revenue earned from the Group's largest customers and licensees is as follows: Customer 1 - £30.4 million (2013: £21.1 million), Customer 2 - £10.0 million (2013: £10.5 million) and Customer 3 - £4.1 million (2013: £4.3 million).

Non-current assets by location

Non-current assets consist of property, plant and equipment and intangible assets.

3 Revenue by income stream

During the year ended 31 December 2014, flutiform® generated £4.1 million in milestone payments (2013: £4.2 million), £3.5 million of contract development revenue (2013: £5.9 million), £3.9 million of royalties (2013: £1.1 million) and £29.0 million in product supply revenues (2013: £20.6 million).

Other revenue includes £3.3 million (2013: £1.3 million) from the Group's share of net sales of EXPAREL® in the United States and £1.6 million (2013: £0.4 million) in rental income in respect of the lease to the Aenova Group of the Group's manufacturing facility in Lyon, France.

4 Cost of sales

During the year ended 31 December 2014, cost of sales related to the supply of flutiform® totalled £26.0 million (2013: £23.4 million).

5 Research and development expenses

6 Exceptional costs

During 2014, the Aenova Group concluded consultations with the Works Council in respect of a site restructuring plan for the Facility in Lyon which was implemented in early 2015. Under the arrangements with Aenova, some of the costs of the restructuring will be reimbursed by Skyepharma and accordingly a £1.1 million exceptional operating cost has been recognised for the year.

The Capital Raise and bond repayment on 30 April 2014 resulted in a £25.5 million exceptional finance cost of which £25.1 million was non-cash. Refer to Note 12: Borrowings for more information.

The tax effect of the exceptional costs is as follows:

7 Finance costs and income

8 Foreign exchange on net debt

9 Taxation

The Finance Act 2014, which provides for a reduction in the main rate of corporation tax from 23% to 21% effective from 1 April 2014, was enacted on 3 July 2012. A further reduction from 21% to 20% by 1 April 2015 was enacted on 2 July 2013. The Group balance sheet as at 31 December 2014 included a tax payable liability of £0.8m.

Deferred tax

A deferred tax asset has been recognised as at 31 December 2014:

The movement in deferred income tax assets during the year is as follows:

Deferred income tax assets are recognised for tax loss carry-forwards to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Group did not recognise deferred income tax assets of £30.7 million (2013: £33.7 million) in respect of losses amounting to £198.3 million (2013: £230.2 million) that can be carried forward against future taxable income. Overall the Group tax losses are specific to various companies and businesses, and there can be no assurance that they can be utilised against profits which arise in the future, although the Directors have estimated likely use in respect of 2015 for the purpose of recording a deferred tax asset as at 31 December 2014.

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 2014 there was no differences between the basic and diluted loss per share amounts since the result was a loss and as a result, all potential shares from stock options, warrants and contingent issuance of shares are anti-dilutive.

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

Pre-exceptional earnings per share are as follows:

The number and type of potentially dilutive share options is set out within the Financial Review.

11 Cash and cash equivalents

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

At 31 December 2014, the Group had no undrawn borrowing facilities (2013: £0.8 million).

12 Borrowings

Total debt has decreased by £83.3 million in the year. This is due to scheduled repayment of debt and the early repayment of the 2024 Bonds and the Euro portion of the CRC finance facility.

Bank borrowings

At 31 December 2014 bank borrowings consist of a loan of CHF 1.7 million (£1.1 million) (2013: CHF 2.0 million (£1.4 million)) with the Basellandschaftliche Kantonalbank ("BLKB"). This loan can be terminated on six weeks' notice by either party and bears interest at 6.5 per cent per annum. This loan is secured on the assets of Skyepharma AG.

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

Bonds

On 31 March 2014, Skyepharma announced the Capital Raise and Bond Repayment, which were successfully concluded on 30 April 2014. As a result, the Group has used the proceeds of the Capital Raise to repay its bond debt in full at a cost of £95.6 million, representing a discount of £25.2 million compared with the total amount which would have been payable at the earliest normal redemption date of November 2017. After costs, the balance of the proceeds of the Capital Raise was approximately £8.2 million, and the Group's net debt as at 30 April 2014 was £4.8 million. The repayment of the bonds has reduced the Group's full year net finance cost in the consolidated income statement by £8.1 million in 2014 and by £13.3 million in 2015 compared with the costs forecast prior to the repayment.

The accounting for the bond repayment resulted in the de-recognition of the £60.8 million outstanding bonds. The bond repayment transaction costs of £0.4 million and the charge arising from the bond repayment of £25.1 million (being the difference between book value and the full payment amount) were recorded under Exceptional Items within the Income Statement as follows:

Property mortgages

In February 2011 the Group renewed its two mortgage agreements with the Basellandschaftliche Kantonalbank. One of the sites in Switzerland was leased to Aenova in October 2014. As at 31 December 2014, this site has a net book value of CHF 6.0 million (£3.9 million) and a mortgage of CHF 2.6 million (£1.7 million) which, together with the amortising loan above of CHF 1.7 million (£1.1 million) will be repayable on completion of any sale. This mortgage bears interest at a variable rate (currently 4.0 per cent per annum) and is repayable with three months' notice from either party.

As at 31 December 2014, the carrying value of the mortgage relating to the buildings which are in use by the business is CHF 7.5 million (£4.9 million), which bears interest at 3.6 per cent per annum and is fully repayable, if not extended, in 2016.

Paul Capital Note

In June 2014 the final scheduled amortisation payment was made on the Paul Capital Note and in December 2014 the Note agreement was terminated. At 31 December 2014 a cumulative total of U.S.$11.4 million (£7.3 million) of the Group's repayments of the Paul Capital Note had been made by Pacira. As Skyepharma's scheduled payments to Paul Capital have been made and the agreement terminated, the remaining contractual payments by Pacira are expected to pass to Skyepharma. As such, a receivable has been recognised on the Balance Sheet as at 31 December 2014, discounted at 11.2 per cent.

CRC finance

The facility was terminated in February 2015, following the repayment that month of the outstanding U.S. Dollar loan. The Euro portion of the loan was repaid in October 2014 at a cost of £10.6 million.

In October 2014 the Group repaid the entire outstanding Euro portion and consequently the principal outstanding on the CRC Facility was as follows:

The carrying value of the CRC facility of £9.7 million remains close to its fair value of £10.4 million, which was the total amount repaid on 27 February 2015.

Interest rates applicable on the facility have been as follows:

*As at 31 December 2014, U.S. LIBOR was 0.255 per cent (2013: 0.246 per cent).

**As at 31 December 2014, EURIBOR was 0.056 per cent (2013: 0.287 per cent).

The following amortisation schedule shows the interest payable and principal outstanding under the CRC Facility as at 31 December 2014:

*includes make-whole amount

The outstanding U.S.Dollar portion of the CRC Facility was repaid on 27 February 2015 and the entire facility terminated at that date.

There were no amendments made to the Facility during the year ended 31 December 2014. The Group complied with all covenants in place during the year.

13 Share capital

Issue of Shares

On 29 April 2014, a total of 58,684,614 Ordinary Shares of £1 each were allotted under the Company's Capital Raising, comprising a Firm Placing and Placing and Open Offer at an issue price of 191 pence per Ordinary Share, which raised a total of £104.2 million net of expenses.

14 Commitments

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

During the year ended 31 December 2014, the Group and the Company recognised an operating lease expense of £0.2 million (2013: £0.1 million) in its respective income statement.

The Group has committed to fund or partially fund certain clinical trials on behalf of its partners under development and licensing agreements. The Group is committed to make certain payments to a development partner contingent upon future events such as sales milestones and royalties received and reimbursed from amounts receivable from the partner.

To establish the flutiform® supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes, of which £10.0 million is outstanding as at 31 December 2014 (31 December 2013: £6.3 million). A former partner funded €3.0 million (£2.6 million at that time) of the capital expenditure of the flutiform® supply chain which the Group repaid in instalments during 2013.

The Group has certain minimum commitments to a supplier in respect of flutiform® which total approximately €11.0 million to €12.0 million (£8.6 million to £9.4 million) per annum in 2015.

15 Post balance sheet events

On 27 February 2015, the Group repaid the entire outstanding U.S. Dollar principal of the CRC Finance facility. This follows the early repayment of the outstanding Euro principal in October 2014 and resulted in the facility being fully repaid and terminated.