Final Results

Preliminary statement of annual results

SkyePharma PLC (LSE: SKP), LONDON, ENGLAND, 23 March 2011

Summary of Results for the year ended 31 December 2010

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

Financial Summary

·; Trading in line with Board's expectations - revenues up 4% to £58.1m (2009: £55.9m), benefiting from non-recurring manufacturing revenues

·; Pre-exceptional operating profit up to £15.3m (2009: £15.1m)

·; Profit after tax of £6.3 million (2009: loss of £1.4 million)

·; Pre-exceptional EBITDA £18.6m (2009: £18.6m)

·; Sufficient cash generated to cover all operating and finance costs, with net cash and undrawn facilities of £29.7m at 31 December 2010 (2009: £29.3.m)

Operating Summary

·; Flutiform™ European Marketing Authorisation Application under review, preparations for potential 2011 launch progressing according to plan

·; Development of Flutiform™ in Japan on track with recruitment for Phase III studies underway; Kyorin aims to file Japanese NDA by end of March 2013

·; Lodotra® - launched in Italy in Q1 2011; Horizon intends to submit US NDA for Lodotra® in H2 2011

·; Primary endpoints met in Phase II study of SKP-1041 for sleep maintenance

·; Proof of concept study for SKP-1052 in diabetes care commenced in Q1 2011

·; Pacira Pharmaceuticals filed US NDA for EXPAREL™ Sept. 2010; PDUFA date 28 July 2011

·; Additional strenghtening of Business Development capacity to identify new drug delivery projects; several feasibility studies initiated funded by partners

·; Dr Axel Müller appointed CEO effective 23 August 2010

Commenting on the results, Dr. Axel Müller, Chief Executive Officer, said:

"SkyePharma had a solid financial performance during 2010, finishing the year with liquidity of £29.7 million, compared with £29.3 million at the end of 2009.

"Flutiform™ remains an important potential value driver for the business and we are working with our partner Mundipharma to prepare for its launch, subject to approval, in Europe later this year. Phase III studies are now underway in Japan, a large and under-served market in the treatment of asthma. We are seeing solid progress in the rest of our pipeline in significant areas including insomnia and diabetes and with external projects such as EXPAREL™, which could be approved in the US later this year. The quality of our drug delivery technology is being demonstrated every day in our broad portfolio of marketed products and we are accelerating our efforts to identify new partnerships, with a number of feasibility studies underway financed by partners."

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

For further information please contact:

About SkyePharma PLC

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

CHAIRMAN'S STATEMENT

Frank Condella

Overview

The full year results for 2010 were in line with the Board's expectations with revenues up 4 per cent. to £58.1 million, giving rise to a pre-exceptional operating profit of £15.3 million (2009: £15.1 million).

The Group finished the year with liquidity of £29.7 million compared with £29.3 million in 2009, after meeting scheduled financing commitments for interest and capital repayments totalling £22.0 million.

In the product pipeline, the review of the European Marketing Authorisation Application ("MAA") for Flutiform™ is progressing as expected and preparations continue for its potential launch in Europe in the second half of 2011. In Japan the development of Flutiform™ is making good progress with recruitment for the Phase III studies well underway.

The Group has increased its investment in business development with the aim of bringing further new products into its early stage pipeline and seeking additional partnership opportunities. Two new partner-funded feasibility projects have commenced in the last three months in undisclosed therapeutic areas.

Financial performance

Revenues in 2010 totalled £58.1 million, an increase of £2.2 million compared with 2009. This was primarily due to a substantial increase in manufacturing revenues related to price increases and additional non-recurring volumes to support regulatory and commercial activities. The increase was partly offset by an anticipated decrease in revenues from milestones and royalties.

Pre-exceptional operating profit was £15.3 million in 2010 (2009: £15.1 million).

After benefiting from exchange translation gains on borrowings of £5.6 million (2009: loss of £0.2 million), profit after tax for 2010 was £6.3 million (2009: loss of £1.4 million). Basic earnings per share were 26.3 pence (2009: loss of 6.0 pence).

Pre-exceptional earnings before interest, tax, depreciation and amortisation ("EBITDA") for the year totalled £18.6 million (2009: £18.6 million) or 32 per cent. of revenues. In 2010 the Group generated sufficient cash to cover all operating and finance costs, including scheduled debt payments.

Board

In September 2010 Dr Ken Cunningham stepped down as Chief Executive Officer to focus on a portfolio of non-executive appointments. The Board is grateful to Ken for his excellent stewardship of the Group over the past two years and for his previous services as Chief Operating Officer and wishes him success in his new endeavours.

The Group was pleased to welcome Dr. Axel Müller as Chief Executive Officer with effect from 23 August 2010. Axel Müller has more than 25 years of experience in the pharmaceutical industry, having been Chief Executive Officer of Acino Holding AG, President of Siegfried Generics, Managing Director and Vice President International of Aceto Holding GmbH, Head of Life Sciences practice at management consultants Arthur D. Little, and having held a number of R&D and marketing and sales roles at Novartis.

In June 2010, Dr Thomas Werner was appointed Chairman of the Remuneration Committee in place of Frank Condella.

Financial Advisers

The Company has appointed Jefferies International Limited to provide financial advice to the Board on the Group's capital structure.

Singer Capital Markets Limited was appointed as financial adviser and Corporate Broker to the Company in January 2011.

Outlook

2011 is expected to be an important year for SkyePharma with Flutiform™ currently under consideration by European regulators for the treatment of asthma and the launch, subject to approval, planned for the second half of the year. The Group may also receive important milestone payments and potential revenues if EXPAREL™, a long acting anaesthetic/analgesic, is approved in the United States.

If both Flutiform™ and EXPAREL™ are approved and launched successfully in their respective markets in 2011, total revenues for the year are expected to be higher than in 2010. Notwithstanding revenues from the supply of Flutiform™, total manufacturing revenues are expected to be lower than in 2010 due to the non-recurring revenues in 2010. Royalty revenues are also expected to be reduced due to generic competition affecting several products and the cessation of manufacturing of Pulmicort® pMDI. Costs are expected to be higher than 2010 due to expenditure related to the Flutiform™ supply chain. The Board anticipates that there will be substantial cash outflows during 2011 due to costs incurred on preparing for the launch of Flutiform™. These costs will not be offset by milestones arising from the initial launches of Flutiform™ in Europe as the Group is obliged to apply these milestones as pre-payments of secured debt.

The anticipated approval and launch of Flutiform™ in Europe in the second half of 2011 is pivotal to the value and cash generative potential of the Group. With the approval of Flutiform™ in Europe the Directors believe that the Group would have good growth prospects, and further potential to exploit SkyePharma's proven drug delivery capabilities and technologies.

Frank Condella

Non-Executive Chairman

BUSINESS REVIEW

Dr Axel Müller

CHIEF EXECUTIVE OFFICER'S REVIEW

2010 was a year of solid progress for SkyePharma, driven by the Group's portfolio of approved and marketed products and with further advances in the development pipeline. The Group had 12 approved products on the market in 2010 which generated £47.9 million of royalty and manufacturing revenues in 2010 (2009: £42.6 million).

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 a very important potential value driver for the Group. In Europe, the MAA for Flutiform™ is progressing in line with the Board's expectations, and preparations continue for its potential launch in the second half of 2011. Substantial investment is being made during 2011 in preparing the Flutiform™ supply chain and supplying product for the launch period. The development of Flutiform™ in Japan is making good progress, with the recruitment for two Phase III studies well underway, and the aim of filing the Japanese NDA by the end of March 2013.

The development programmes for other pipeline products are also moving forward. Top-line results showed that the primary endpoints were met in the Phase II study for the novel sleep therapeutic, SKP-1041, and a proof of concept study commenced in the first quarter of 2011 for SKP-1052, which is being developed to treat a particular aspect of diabetes care. The Group is seeking to further enhance its early-stage product pipeline and has embarked on several development projects for which it is charging partners on a time and materials basis.

The Group has rationalised operations in Muttenz, Switzerland, into two buildings, with the third building (net book value: £4.2 million) now for sale.

BUSINESS REVIEW - KEY PRODUCTS

MARKETED PRODUCTS

Xatral® OD

Xatral® OD (Uroxatral® in the United States) is a once-daily version of sanofi-aventis' Xatral® (alfuzosin hydrochloride), a treatment for the signs and symptoms of benign prostatic hypertrophy ("BPH"). In 2010, reported sales of all forms of Xatral® were €296 million (£253.5 million), similar to the total in 2009. In the United States sales of Uroxatral® were €155 million (£132.8 million), up 2.7 per cent. from 2009. Western European sales have continued to fall as a result of generic competition, with sales for 2010 of €66 million (£56.5 million), a reduction of 14.3 per cent. from the same period in 2009. Sales in other countries were €75 million (£64.2 million). The Group earns low single digit royalties on net sales of Xatral® OD (Uroxatral®).

Starting in August 2007, a series of Abbreviated New Drug Application ("ANDA") certifications relating to Uroxatral® in the United States were received. The actions were consolidated before the United States District Court, District of Delaware. The trial against Mylan (the only remaining defendant) involving a single patent belonging to sanofi-aventis took place in May 2010. The U.S. District Court in Delaware held that Mylan's generic alfuzosin hydrochloride would infringe the patent and that the prior art references failed to invalidate the patent. This ruling affirmed the validity of the patent, which, after a patent extension was granted, is due to expire in mid-2011.

Solaraze®

Solaraze® (diclofenac), a topical gel treatment for actinic keratosis, is marketed in the United States by Nycomed US, Inc ("Nycomed"). The distribution and marketing partner in Europe and certain other territories is Almirall, S.A. ("Almirall"). The Group earns a low teens royalty rate on net sales.

Net sales of Solaraze® in the United States in 2010 were U.S.$34.0 million (£22.0 million), 44 per cent. lower than reported in 2009. This decrease is primarily due to a change in the customer mix from 2009. Sales by Almirall increased to €25.7 million (£22.1 million) in 2010 from €24.3 million (£21.6 million) in 2009.

SkyePharma and its licensee, Nycomed, received an ANDA Paragraph IV notice relating to Solaraze® in the United States in April 2010. Nycomed and SkyePharma have filed suit against the ANDA filer and the proceedings are at an early stage.

Requip® Once-a-day

Requip® Once-a-day is a once-daily formulation for Parkinson's disease and was developed in collaboration with GlaxoSmithKline ("GSK"). The extended release Requip® uses the Group's patented Geomatrix™ technology and is designed to provide smoother delivery of ropinirole over 24 hours. It also provides for a convenient, once-daily dosing schedule compared with the immediate-release ropinirole, which is dosed three times a day.

The FDA approved Requip® XL™ extended release tablets in June 2008 and the product was launched in the United States in July 2008. In 2009, a number of ANDAs were filed with the FDA for generic versions of ropinirole extended release tablets. There is data exclusivity in respect of the product until June 2011, which may delay any potential generic product entry into the market.

The European brand names for Requip® Once-a-day are Requip-Modutab®, Requip PD, Requip® LP, Requip® XL, Requip Depot®, Requip Prolib™ and Requip® prolonged release tablets.

SkyePharma earns low mid single digit percentage royalties on net sales of Requip® Once-a-day. In 2010 sales of Requip® Once-a-day were a total of £148 million, an increase of 22 per cent. (at constant exchange rates) from 2009. £106 million was generated in Europe, a 23 per cent. increase from 2009 using constant exchange rates. £37 million arose in the United States, an increase of 16 per cent. at constant exchange rates. The remaining £5 million arose from emerging markets and Asia Pacific.

Sular®

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

Sales of Sular® continue to be affected by a declining market and competition including a generic version of the higher-dose formulation of Sular®.

In June 2010, URL Pharma, Inc. ("URL Pharma") launched an authorised generic version of the lower-dose formulations of Sular® in the United States pursuant to a sub-license agreement with Shionogi Pharma, which is covered by license and manufacturing agreements with SkyePharma.

Competitive generic versions of the lower-dose formulations of Sular® were approved in January 2011 in the United States and launched that month. This is likely to adversely impact sales of Sular® and the authorised generic version sold by URL Pharma. Should total net sales of the lower-dose formulations of Sular® be significantly reduced following entry of other generics, the Group's royalty rate would be reduced from a low mid single digit percentage to a low single digit percentage on net sales.

The Group manufactures the lower-dose formulations of Sular® including the URL Pharma authorised generic at the Group's plant in Lyon, France.

Paxil CR™

Paxil CR™ is an advanced formulation of the anti-depressant Paxil® (paroxetine) and was developed by the Group with GSK using the Group's Geomatrix™ technology In 2010 reported sales were $85.0 million (£54 million), compared with $77.0 million (£48 million) in 2009.

Triglide®

Triglide® (fenofibrate), an oral treatment for elevated blood lipid disorders, is marketed in the United States by Shionogi Pharma, and has been sold alongside Fenoglide®, a fenofibrate product in-licensed by Shionogi Pharma from LifeCycle Pharma AS ("LCP"). Triglide® was launched in 2005 and Fenoglide® was launched in February 2008. Triglide® total prescriptions have continued the decline seen in previous periods due to generic competition. The Group manufactures Triglide® in its factory in Lyon, France. It is entitled to receive royalties at a rate of 25 per cent. of Shionogi Pharma's net sales of Triglide® less the cost of manufacture. In 2010 Shionogi Pharma terminated the licence agreement for Fenoglide® in the United States, and has ceased selling the product.

ZYFLO CR® (zileuton) Extended-Release Tablets

The Group developed an extended release formulation of the oral asthma drug zileuton for Cornerstone Therapeutics Inc. ZYFLO CR® (zileuton) extended-release tablets, taken twice daily, utilise the Group's proprietary Geomatrix™ technology, and the product was approved by the FDA in May 2007 for the prophylaxis and chronic treatment of asthma in adults and children aged 12 years and older. ZYFLO CR® and ZYFLO® (zileuton tablets) are the only FDA-approved leukotriene synthesis inhibitors. The Group receives a high mid single digit percentage royalty on net sales of ZYFLO CR® and also manufactures the product at its facility in Lyon, France.

Lodotra®

In April 2010, Nitec Pharma AG (the Group's licensee for Lodotra®) announced that it had merged with Horizon Therapeutics, Inc. The combined entity is known as Horizon Pharma, Inc ("Horizon").

Lodotra®, the novel programmed release formulation of low dose prednisone, utilising SkyePharma's proprietary Geoclock™ technology and developed in collaboration with Horizon, was approved in Europe in March 2009 for the treatment of morning stiffness associated with rheumatoid arthritis, under the European decentralised procedure. The first launch was in Germany by Merck Serono (Horizon's licensee for Germany and Austria) in April 2009. The product is approved in an additional 12 European countries and was launched by Mundipharma (Horizon's distribution partner for the rest of Europe) in Italy in January 2011. The Group received a small share of the milestone payable on launch in Italy, and is entitled to receive a small share of any future milestones received by Horizon for Lodotra®.

In November 2010, Horizon announced it had signed an exclusive distribution and supply agreement with Mundipharma for the commercialisation of Lodotra® in Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, Philippines, Singapore, South Africa, Taiwan, Thailand and Vietnam. The Group is entitled to receive a small share of the signing milestone paid to Horizon.

Two pivotal Phase III studies were completed for Lodotra® in 2009. The first was a 12-week, randomised, double blind, controlled study against marketed immediate-release prednisone to support MAA approval in Europe. To support the submission of the NDA for the United States an additional 12-week, randomised, double blind, multicentre, placebo controlled study involving 350 patients was undertaken with patients in both treatment arms receiving a disease modifying anti-rheumatic drug ("DMARD"). Both studies met their primary endpoints. Horizon has advised that it intends to submit the NDA for Lodotra® in the United States in the second half of 2011.

The Group receives a mid single digit percentage royalty on net sales and is manufacturing the product at its plant in Lyon, France.

Pulmicort® pMDI

As announced on 7 March 2011, AstraZeneca discontinued the production of Pulmicort® (budesonide) 100 and 200 ug/dose HFA pMDI (pressurised metered dose inhaler) due to complex manufacturing issues related to technical aspects of the device. The issues only impact AstraZeneca's Pulmicort® pMDI device which is a unique combination of device components. Supplies already manufactured or in the supply chain are continuing to be distributed until exhausted. 

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

AstraZeneca has given notice to terminate the Group's agreements for Pulmicort® pMDI and certain rights for the product will revert or be licensed to SkyePharma. The Company will explore whether a sublicense of these rights may be of interest to other parties.

DEVELOPMENT PIPELINE

Flutiform™

Flutiform™ - Europe

Flutiform™ is licensed to Mundipharma in Europe and most other territories outside Japan and the Americas. The MAA was accepted for review in May 2010 and preparations continue for its potential launch in the second half of 2011.

Four Phase III clinical studies (including one high strength study) were carried out in support of the MAA covering approximately 1,200 patients, in addition to the patients enrolled in the studies to support the NDA. The primary endpoints were met in all of the clinical studies.

The development and marketing agreement with Mundipharma, as amended, includes milestones of up to €73.0 million (£62.5 million), of which €15.0 million (£10.1 million at that time) was paid upfront, €3.0 million (£2.9 million at that time) was paid on 31 December 2008, up to €15.0 million (£12.1 million) is due on launch and up to €40.0 million (£34.3 million) is sales-related.

Mundipharma is funding third party development costs of up to €19 million (£16.3 million) related to the development of a high strength version of Flutiform™. This cap was increased to €19 million (£16.3 million) from €15 million (£12.8 million) in an amendment signed in November 2010 in order to cover the third party costs of validating the manufacturing line for the high strength product. These costs are initially paid by Mundipharma, which is entitled to recover them out of partial reductions in royalties and sales-related milestones due to the Group for up to four years following commercial launch in one of Europe's five largest markets.

Under EU regulations there is a requirement to have an agreed Paediatric Investigation Plan ("PIP"). The Paediatric Committee has reviewed the plans for Flutiform™ and a double blind study in children aged 4-12 is required to be completed by December 2013. Under the agreements with Mundipharma the Group has an obligation to bear 50 per cent. of the costs of this study, up to a maximum of €3.5 million (£3.0 million).

Under the development and marketing agreement the Group is entitled to royalties as a percentage escalating upwards from 10 per cent. of net sales. The net royalties received are subject to the reductions noted above for the recovery of high strength development costs and also by a cap on the total percentage that cost of goods and royalties can represent of net sales of Flutiform™.

Flutiform™ - Japan

Flutiform™ is licensed to Kyorin Pharmaceutical Company Ltd ("Kyorin") in Japan. Under the agreement with Kyorin the Group has received an upfront milestone and certain development milestone payments. Further development and approval milestones worth several million pounds are payable to SkyePharma under the agreement and there is a high mid single digit percentage royalty on net sales. The development costs associated with obtaining approval for the Japanese market are largely being met by Kyorin, which is responsible for clinical studies and regulatory submissions. Recruitment for two Phase III studies is progressing well. The aim is to file the NDA for Japan by the end of March 2013 and, subject to receiving approval, launch by the end of March 2015.

Flutiform™ - United States

Following the Complete Response Letter from the FDA in January 2010 and subsequent interactions, the Group has carried out a specific amount of chemistry, manufacture and control work to address some of the queries raised by the FDA. Further discussions will be held with the FDA to seek to confirm the scope of work required to meet the FDA's requirements for approval and to provide a good understanding of the likely costs which would have to be met by any potential partner. The Group continues the process of seeking potential partners to finance the additional work required.

Flutiform™ - Other territories

The out-licensing of Flutiform™ in Latin America continues to be negotiated.

SKP-1041

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

A Phase II study was initiated in June 2010. Top-line results received in February 2011 show that the study met its primary endpoints. Somnus plan to present the results of the study at the Sleep Congress in Minneapolis, on 11-15 June 2011.

In February 2010, Somnus announced the completion of a U.S. $15.0 million series A financing agreement with CTI Life Sciences and Care Capital LLC.

Under the agreement with Somnus, the Group could receive up to U.S.$35.0 million (£22.6 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 (£6.6 million) is payable on product launch, and U.S.$20.0 million (£13.3 million) is sales-related.

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

SKP-1052

In 2009, the Group commenced formulation work on SKP-1052, an oral product for the treatment of a particular aspect of diabetes care, which the Group will seek to out-license following a positive proof of concept study. The project applies the Group's proprietary technology to a generic compound in an innovative approach to diabetes care. The proof of concept study commenced in the first quarter of 2011.

EXTERNAL PROGRAMMES

EXPAREL™

Under the terms of the sale of the Group's former Injectables Business to Pacira Pharmaceuticals, Inc. ("Pacira Pharmaceuticals") in 2007, the Group is entitled to receive a U.S.$10 million (£6.5 million) payment on the first commercial sale of EXPAREL™ in the United States, up to U.S.$52 million (£33.6 million) in other contingent milestone payments and three per cent. of net sales of EXPAREL™ in the United States, Japan, United Kingdom, France, Germany, Italy and Spain. EXPAREL™ is a long acting anaesthetic/analgesic for post-surgical pain management. Pacira Pharmaceuticals filed the NDA for EXPAREL™ with the FDA in September 2010. The target date for the completion of the review by the FDA (the PDUFA date) is 28 July 2011.

Licence fees

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

FEASIBILITY STUDIES AND TECHNOLOGY DEVELOPMENT

The Group continues to seek to strengthen the product pipeline through further early stage feasibility and technology development projects, mainly funded, at least in part, on a time and materials basis by partners.

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

MANUFACTURING

Lyon

The Group's manufacturing facility is in Lyon, France. At Lyon, the Group presently manufactures five Geomatrix™ based products, diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Sular® and Lodotra®, and one other oral product, Triglide®, based on its solubilisation technology. The manufacturing of a further product, Madopar DR®, is being transferred from the Group's R&D centre in Muttenz, Switzerland to Lyon. The Lyon factory has cGMP status, with approvals from the European Medicines Agency and United States FDA. During 2010 manufacturing revenues were significantly boosted by non-recurring volumes to support regulatory and commercial activities, which have led to a very significant contribution from products manufactured at Lyon. As much of this revenue is non-recurring and the facility in Lyon is substantially under-utilised, the Group continues to seek additional manufacturing opportunities for Lyon.

Flutiform™ Supply Chain

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

To establish the supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes, which has inherent risks. The Group has also committed to capital expenditure of £13.2 million, of which £12.5 million had been spent as at 31 December 2010. The Group expects to commit a further €1.6 million (£1.4 million) during 2011 for additional capital equipment. A former partner is funding £3.2 million of the expenditure of the Flutiform™ supply chain, of which £3.0 million had been funded as at 31 December 2010, and the Group is obliged to repay this funding by March 2013, or earlier if the supply chain is outsourced.

The Group is contractually committed to certain minimum volumes in respect of Flutiform™ from its suppliers from 2011 through to 2015, subject to termination rights if Flutiform™ is not launched by the end of 2011.

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

Axel Müller

Chief Executive Officer

FINANCIAL REVIEW

Peter Grant

Revenue

Revenues for 2010 were £58.1 million, an increase of £2.2 million (4 per cent.) on 2009 revenues.

Revenues from signing and milestone payments received in 2010 were £1.6 million compared with £4.0 million in 2009.

Contract research and development revenue reduced by 8 per cent. to £8.6 million in 2010 (2009: £9.3 million). This was primarily due to completion of chargeable work for the development of Flutiform™ for Europe, offset by an increase in revenues from the Japanese development of Flutiform™.

Royalty income in 2010 was £25.0 million, a decrease of £3.9 million (13 per cent.) from 2009, which included a one off catch up payment of £1.9 million from one partner. The key reasons for the remaining decrease were a reduction in royalties from Solaraze® in the United States due to a change in the customer mix and the anticipated reduction in Triglide® royalties.

Manufacturing and distribution revenue totalled £22.9 million, an increase of £9.2 million from 2009 revenues of £13.7 million. This increase was primarily due to the full year effect of price increases implemented in 2009 and non-recurring volumes produced to support specific regulatory and commercial activities in 2010.

Research and development expenses

Research and development expenses incurred in 2010 totalled £23.5 million (2009: £19.6 million). The Group's net investment in research and development (expenditure, net of contract development revenues) was £14.9 million compared with £10.3 million for 2009. This increase has arisen as the Group continues to incur expenditure related to the Flutiform™ supply chain and costs incurred on a number of early stage feasibility and technology development projects.

Corporate costs

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

Operating Result

The operating result before exceptional items was £15.3 million (2009: £15.1 million). Pre-exceptional EBITDA was £18.6 million (2009: £18.6 million), as shown below:

Finance costs and income

Finance costs - interest totalled £12.3 million (2009: £13.3 million) and consisted of £6.1 million (2009: £6.2 million) payable on the convertible bonds, £3.0 million (2009: £3.7 million) payable on the CRC finance, £2.8 million (2009: £3.0 million) of interest attributable to the Paul Capital finance and £0.4 million (2009: £0.4 million) on other bank borrowings.

Finance costs - revaluation consisted of a charge of £1.5 million arising from the revaluation of the carrying value of the Paul Capital finance (2009: charge of £1.4 million) resulting from revisions made to the forecast payments to be made by Pacira Pharmaceuticals to Paul Capital.

Finance income consists of £0.2 million (2009: £0.3 million) of bank interest.

Foreign exchange

Foreign exchange consists of net translation gains and losses on borrowings and cash denominated in a currency other than an entity's functional currency. In 2010 this amounted to a gain of £5.6 million (2009: charge of £0.2 million).

Result

The profit for 2010 after exceptional items and taxation was £6.3 million (2009: loss of £1.4 million).

Earnings per share

Basic earnings per share amounted to 26.3 pence (2009: loss of 6.0 pence) in 2010. Diluted earnings per share in 2010 was 15.3 pence. As at 31 December 2010 there were 23,943,162 Ordinary Shares in issue.

In addition there were outstanding as at 31 December 2010 a number of bond conversion rights and employee share schemes as follows:

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

More details of the convertible bonds and share scheme arrangements are set out in Note 11: Borrowings. At 22 March 2010, the Company's mid-market share price was 38 pence.

Cash flows

In 2010 the Group had a cash inflow from operating activities of £26.0 million compared with an inflow of £16.8 million in 2009.

The Group has purchased £4.2 million of property, plant and equipment, primarily capital expenditure on tooling for the Flutiform™ supply chain. Of this, £1.5 million was funded by a former partner as described in Note 12: Long term creditors.

Scheduled borrowing repayments of £10.3 million (2009: £7.0 million) were made during the year, primarily to CRC and Paul Capital. In addition the Group paid £11.7 million of interest in 2010 (2009: £12.6 million) principally relating to the convertible bonds, CRC and Paul Capital.

In February 2011, the mortgages totalling £8.6 million on land and buildings in Switzerland were renewed. One of the sites in Switzerland has now been vacated and is up for sale. This has a net book value of £4.2 million and a mortgage of £2.8 million which will be repayable out of any sale proceeds.

At the beginning of 2011 the Group had liquidity totalling £29.7 million. The Group is committed to certain minimum volumes in respect of Flutiform™ from its suppliers, and these costs, along with start-up costs and initial low volumes during the launch phase are expected to delay the profitability of the supply chain for Flutiform™ until it has been successfully established in most of the major European countries. Cash will also be used to meet scheduled debt and interest payments. The Group is obliged to apply milestones arising from the initial launches of Flutiform™ in Europe as pre-payments of secured debt but the cash outflows would be partially offset from a launch milestone of U.S.$10 million (£6.5 million) receivable if EXPAREL™ is approved and launched in the United States. As a result of these factors there are likely to be substantial cash outflows from normal trading during 2011.

Key performance indicators

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

Description of KPIs

Revenue excluding milestones

Revenue reflects the level of contract research and development work undertaken for third parties and manufacturing activities, as well as the growth in royalties earned as new products are launched. The £56.5 million for 2010 excludes milestone revenue of £1.6 million and is shown in Note 2: Revenue by income stream.

Signing and milestone payments received

The KPI shows amounts received with respect to pipeline products and product sales. £0.7 million represents the cash received in 2010. The amount is less than the prior year as no new development agreements were signed in 2010, and no significant progress milestones received.

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 2010 costs is shown in Note 4: Research and development. The increase in costs from 2009 is related to the Flutiform™ supply chain and costs incurred on a number of early stage feasibility and technology development projects.

Research and development expenditure net of contract research and development revenue

This KPI reflects the Group's expenditure on research and development expenses net of costs reimbursed by development partners. Expenditure is higher as the Group has spent more on self-funded projects, including costs related to the Flutiform™ supply chain.

Liquidity

This KPI measures the availability of finance to fund current and future activities and to meet debt servicing requirements. Liquidity consists of cash and cash equivalents of £29.0 million, as per the balance sheet and undrawn facilities of £0.7 million.

Balance sheet

At 31 December 2010, the Group balance sheet shows total shareholders' equity of £79.9 million deficit (2009: £79.6 million deficit).

Borrowings and liquidity

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

Total debt has decreased £6.8 million in the year. This is due to repayments of £10.3 million, offset by translation and revaluation effects.

Convertible bonds

The convertible bonds outstanding at 31 December 2010 comprise £63.0 million 6 per cent. convertible bonds due May 2024 (2009: £63.0 million) and £20.0 million 8 per cent. convertible bonds due June 2025 (2009: £20.0 million). The £63.0 million May 2024 bonds are convertible into Ordinary Shares at £3.71 per share and may be called for repayment by the bondholders at par in November 2013, November 2015, November 2017 and November 2020. The £20.0 million June 2025 bonds are convertible into Ordinary Shares at £3.82 per share and may be called for repayment by the bondholders at par in December 2014, December 2016, December 2018 and December 2021.

No convertible bonds were converted in 2010 (2009: conversions of £6.6 million of the 6 per cent. convertible bonds due 2024 were made).

Although shown in the balance sheet in accordance with IFRS at a value of £59.3 million (2009: £58.5 million), the convertible bonds have a face value totalling £83.0 million. The Group's total net debt with convertible bonds at face value is £122.0 million (2009: £131.6 million).

Paul Capital finance

The Group has a fixed amortisable note ("Note") of U.S.$92.5 million (£59.8 million) due to Paul Capital finance. The Note is repayable in accordance with an amortisation schedule through to 2015. At 31 December 2010 a cumulative total of U.S.$46.0 million (£29.7 million), has been paid against the Note. The principal outstanding at 31 December 2010 is U.S.$46.5 million (£30.2 million).

Pacira Pharmaceuticals (previously the Injectable Business) was sold in 2007 on the basis that it retained responsibility to Paul Capital for its existing obligations to make payments based on sales of DepoCyt® and DepoDur™ and, to the extent that payments are made in respect of these, the Group's liability under the Note will be reduced accordingly. The amount of the Group's liability therefore depends on estimates of the sales of DepoCyt® and DepoDur™ by Pacira Pharmaceuticals. At 31 December 2010 a cumulative total of U.S.$6.1 million (£3.9 million) of the Group's repayments of the Note had been made by Pacira Pharmaceuticals.

As at December 2010 the net present value of the Note (net of anticipated payments by Pacira Pharmaceuticals to Paul Capital) discounted at an annual rate of 11.2 per cent. is U.S.$34.1 million (£22.0 million) compared with the value of U.S.$39.3 million (£24.7 million) at 31 December 2009.

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

The above table:

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

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

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

CRC finance

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

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

The above table:

(i) Shows interest on a cash basis (no discounting is applied). The interest rates applicable at 31 December 2010 were 6.76 per cent. on the Euro component (plus an additional 5 per cent. on the first €7.5 million) and 6.07 per cent. on the U.S.$ component

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

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

Other borrowings

Other borrowings amounted to £10.1 million at 31 December 2010 (2009: £9.3 million), consisting principally of £8.6 million (2009: £8.0 million) of property mortgages secured on the assets of SkyePharma AG.

Liquidity

At 31 December 2010 SkyePharma had liquidity of £29.7 million (2009: £29.3 million), comprised as follows:

Commitments

To establish the Flutiform™ supply chain the Group has committed to substantial development and capital expenditure to scale up and validate the manufacturing processes, as detailed Note 14: Commitments to the Preliminary Statement.

Going concern

The Group's business activities together with the factors likely to affect is future development, performance and financial position are set out in the Business Review set out above. The financial position of the Group, its cash flows, liquidity position, and debt profile are described in the Finance Review set out above. The principal risks facing the Group's business will be set out in the Corporate Governance Report in the 2010 Annual Report and Accounts.

The Directors have made an assessment of the risks and uncertainties inherent in the business, as disclosed in this preliminary announcement, and of the working capital requirements of the Group for the next 12 months.

The anticipated approval and launch of Flutiform™ in Europe in the second half of 2011 is pivotal to the value and cash generative potential of the Group. Over the next two years, a large part of the Group's net cash of £28.9 million as at 31 December 2010 is earmarked to fund the Flutiform™ supply chain, including the validation of the manufacturing line, and to meet scheduled debt and interest payments to the extent not covered by cash generated from normal operations. The successful validation of the manufacturing line and anticipated approval and launch of Flutiform™ in 2011 will not significantly enhance liquidity in the next two years, as the Group is obliged to apply milestone receipts arising from the initial launches of Flutiform™ in Europe as pre-payments of secured debt. However, the approval and launch of Flutiform™ would underpin management's current operating strategy, including ongoing and expected contract R&D income from projects such as Flutiform™ product line extensions and the ability of the Group to address any working capital needs arising from the normal volatility of trading.

In its cash flow projections for the next twelve months, the Board has anticipated receipt of non-Flutiform™ milestones totalling £9.0 million, including a launch milestone of $10 million (£6.5 million) due from Pacira if EXPAREL™ is approved and launched in the United States. If these milestones are not received or their receipt is significantly delayed beyond 2011, the Board believes that there are a number of steps which could be taken to appropriately manage the resulting working capital position of the Group.

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

The Auditors' report on the financial statements for 2010 includes an emphasis of matter paragraph to draw attention to the disclosures made in the financial statements indicating material uncertainties about the Group's ability to continue as a going concern. These disclosures are included in Note 1 to this preliminary announcement. The auditors' opinion is not modified in this respect. The auditors' report for 2009 and the auditors' conclusion on the unaudited statements for the first half of 2010 did not contain any emphasis of matter paragraph and also included unmodified audit opinions.

Whilst not a material uncertainty affecting the Directors' assessment of going concern for the purpose of the financial statements, as set out in Note 11: Borrowings, the Group has in issue £63.0 million of bonds which may be converted into ordinary shares at £3.71 per share and may be called for repayment ("Put") on various dates, the earliest being November 2013, and £20.0 million of bonds which may be converted into ordinary shares at £3.82 per share and may be Put on various dates, the earliest being December 2014 (collectively "Convertible Bonds"). Even with the expected approval and launch of Flutiform™ in 2011 it is unlikely, based on current financing and licensing agreements, that the Group will generate sufficient cash from normal trading to meet the earliest possible bond Puts if the Convertible Bonds are not converted prior to those dates. However the Board believes that the approval of Flutiform™ should enable the Group's capital structure to be strengthened well ahead of the bonds' earliest Put dates. In anticipation of this the Board has appointed Jefferies International Limited to advise the Board on the Group's capital structure.

Foreign exchange - risks

Almost all the of the Group's operations are based overseas 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 Swiss Franc, Euro and U.S. Dollar. To minimise the impact of any fluctuations, the Group's policy has historically been to maintain natural hedges by relating the structure of borrowings to the underlying trading cash flows that generate them. Exchange translation gains and losses relating to funding (cash and debt) are included in foreign exchange gain or loss on net debt, other realised exchange gains and losses and exchange translation gains and losses are included within the revenue or expense line to which they most closely relate. Where subsidiaries are funded centrally, this is achieved by the use of capital injections or long-term intercompany loans. Where settlement of such intra-group loans is neither planned nor likely to occur in the foreseeable future, they are treated as part of the net investment and exchange differences are taken to reserves. No use has been made of currency options and forward currency contracts in 2010.

Forward looking statements

The foregoing discussions contain certain forward looking statements. Although SkyePharma believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance that these expectations will materialise. Because the expectations are subject to risks and uncertainties, actual results may vary significantly from those expressed or implied by the forward looking statements based upon a number of factors. Such forward looking statements include, but are not limited to, the timescales for approval, launch or regulatory filings for Flutiform™, the statements under "Outlook", the forecast sales of Flutiform™, the development of new products, risks related to obtaining and maintaining regulatory approval for existing, new or expanded indications of existing and new products, risks related to SkyePharma's ability 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, and risks related to SkyePharma's ability to manage growth. SkyePharma undertakes no obligation to revise or update any such forward statement to reflect events or circumstances after the date of this preliminary announcement.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2010

See Notes to the Preliminary Announcement

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(EXPENSE)

for the year ended 31 December 2010

See Notes to the Preliminary Announcement

CONSOLIDATED BALANCE SHEET

as at 31 December 2010

Approved by the Board of Directors on 22 March 2011 and signed on its behalf by:

See Notes to the Preliminary Announcement

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2010

See Notes to the Preliminary Announcement

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2009

See Notes to the Preliminary Announcement

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2010

See Notes to the Preliminary Announcement

NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Cash flow from operating activities

Notes to the preliminary announcement

The preliminary announcement for the year ended 31 December 2010 was approved by the Board on 22 March 2010.

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 2009, 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 2009 and 2010. The financial information for the years ended 31 December 2009 and 2010 has been extracted from the Group's audited consolidated accounts for the year ended 31 December 2010. 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 2009 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 profit and loss and available for sale financial instruments. The preliminary announcement is presented in Sterling and all values are rounded to the nearest £0.1 million.

Going concern

The Directors have made an assessment of the risks and uncertainties inherent in the business, as disclosed in this preliminary announcement, and of the working capital requirements of the Group for the next 12 months.

The anticipated approval and launch of Flutiform™ in Europe in the second half of 2011 is pivotal to the value and cash generative potential of the Group. Over the next two years, a large part of the Group's net cash of £28.9 million as at 31 December 2010 is earmarked to fund the Flutiform™ supply chain, including the validation of the manufacturing line, and to meet scheduled debt and interest payments to the extent not covered by cash generated from normal operations. The successful validation of the manufacturing line and anticipated approval and launch of Flutiform™ in 2011 will not significantly enhance liquidity in the next two years, as the Group is obliged to apply milestone receipts arising from the initial launches of Flutiform™ in Europe as pre-payments of secured debt. However, the approval and launch of Flutiform™ would underpin management's current operating strategy including ongoing and expected contract R&D income from projects such as Flutiform™ product line extensions and the ability of the Group to address any working capital needs arising from the normal volatility of trading.

In its cash flow projections for the next twelve months, the Board has anticipated receipt of non-Flutiform™ milestones totalling £9.0 million, including a launch milestone of $10 million (£6.5 million) due from Pacira if EXPAREL™ is approved and launched in the United States. If these milestones are not received or their receipt is significantly delayed beyond 2011, the Board believes that there are a number of steps which could be taken to appropriately manage the resulting working capital position of the Group.

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

Whilst not a material uncertainty affecting going concern for the purpose of these financial statements, as set out in Note 11: Borrowings, the Group has in issue £63.0 million of bonds which may be converted into ordinary shares at £3.71 per share and may be called for repayment ("Put") on various dates, the earliest being November 2013, and £20.0 million of bonds which may be converted into ordinary shares at £3.82 per share and may be Put on various dates, the earliest being December 2014 (collectively "Convertible Bonds"). Even with the expected approval and launch of Flutiform™ in 2011, it is unlikely, based on current financing and licensing agreements, that the Group will generate sufficient cash from normal trading to meet the earliest possible bond Puts if the Convertible Bonds are not converted prior to those dates. However the Board believes that the approval of Flutiform™ should enable the Group's capital structure to be strengthened well ahead of the bonds' earliest Put dates. In anticipation of this the Board has appointed Jefferies International Limited to advise the Board on the Group's capital structure.

Restatements

Restatement of 2009 research and development expenses

In 2010 the classification of costs within research and development was reviewed to better reflect the commercial reality and the 2009 classification has been restated as follows:

·; Clinical trials, supplies and other external costs directly recharged to development partners increased by £0.3 million to £3.4 million

·; Other external clinical trial and supply costs increased by £0.4 million to £1.1 million

·; Other research and development costs decreased by £0.7 million to £15.1 million

Restatement of 2009 other income

£0.3 million of rental income has been re-classified from corporate costs to other income for the year ended 31 December 2009.

Restatement of 2009 Group trade payables

2009 Group trade payables have been restated to re-classify £1.5 million of trade payables to long-term creditors. This relates to an amount payable to a former partner which has funded capital expenditure related to the Flutiform™ supply chain. This funding is repayable in March 2013 or earlier if the supply chain is outsourced.

2. Revenue by income stream

3. Cost of sales

4. Research and development

5. Exceptional items

(a) The exceptional credit of £0.2 million relates to the release of accruals no longer required at 31 December 2010 related to restructuring activities in Lyon, France.

(b) The exceptional charge of £0.2 million for 2010 primarily relates to costs incurred during restructuring activities undertaken within the Group.

(c) At 31 December 2010 the Group incurred a £0.8 million non-cash impairment charge primarily relating to a licence for Flutiform™ in North America. The Group believes the value of this licence is unlikely to be recovered before patent expiry and has therefore been fully written off.

6. Finance costs/(income)

7. Foreign exchange gain/(loss) on net debt

8. Earnings per share

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

For the calculation of diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume full conversion of all potential new ordinary shares which are regarded as dilutive for this purpose. The Group has two classes of dilutive potential ordinary shares:

·; those granted to employees

·; shares to be issued on conversion of the 2024 convertible bonds:

9. Cash and cash equivalents

10. Non-current assets classified as held for sale

As at 31 December 2010 the Group had land and buildings with a net book value of £4.2 million (2009: Nil) classified as held for sale. This represents a building and associated land in Switzerland which was put up for sale in January 2011, following a review of the space requirements in Switzerland. As disclosed in Note 11: Borrowings, the mortgage on this building (£2.8 million) will be fully repayable on its sale.

11. Borrowings

Bank overdraft and borrowings

At 31 December 2010 bank borrowings consist of a loan of £1.3 million (CHF 2.0 million) (2009: £1.2 million (CHF 2.0 million)) with the Basellandschaftliche Kantonalbank. This loan can be terminated on six weeks' notice by either party and bears interest at 6.5 per cent. per annum. This loan is secured on the assets of SkyePharma AG.

Convertible bonds

The Group holds £63.0 million (2009: £63.0 million) 6 per cent. convertible bonds due 2024, which are convertible into Ordinary Shares at a conversion price of £3.71. The bonds may be called for repayment in November 2013, November 2015, November 2017 and November 2020.

The Group also holds £20.0 million (2009: £20.0 million) 8 per cent. convertible bonds due 2025 which are convertible into Ordinary Shares at a conversion price of £3.82. The bonds may be called for repayment in December 2014, December 2016, December 2018 and December 2021.

In the year ended 31 December 2010 no bonds were converted into Ordinary Shares (2009: 6,587 of the 6 per cent. convertible bonds with a principal value of £6.6 million were converted into Ordinary Shares).

The bonds are included partly in non-current liabilities (2010: £59.3 million, 2009: £58.5 million) and partly in share premium (2010 and 2009: £28.5 million). The total face value of convertible bonds outstanding at 31 December 2010 is £83.0 million (2009: £83.0 million).

Property mortgages

At 31 December 2010, the Group had two mortgage facilities with the Basellandschaftliche Kantonalbank totalling £8.6 million (CHF 12.5 million) (2009: £8.0 million (CHF 13.1 million), both of which were secured on the assets of SkyePharma AG. Both bear interest at 3.875 per cent per annum and were fully repayable in February 2011 unless continued by mutual agreement.

In February 2011 the Group renewed both its mortgage agreements with the Basellandschaftliche Kantonalbank. The first is for £2.8 million (CHF 4.2 million), which bears interest at a variable rate (currently 3.875 per cent. per annum) and is repayable with three months' notice from either party. The second is for £5.8 million (CHF 8.3 million), which bears interest at 3.6 per cent. per annum and is fully repayable in 2016.

One of the sites in Switzerland has now been vacated and is up for sale. This has a net book value of £4.2 million and a mortgage of £2.8 million which will be repayable out of any sale proceeds.

Paul Capital finance

On 23 March 2007, SkyePharma PLC and its subsidiary, Jagotec AG (together "Jagotec") entered into an agreement with Paul Capital and a subsidiary (together "PCRF"). Pursuant to this agreement, PCRF assigned its existing interests in the royalties and certain milestones from Solaraze®, Xatral® OD, Triglide®, Pulmicort® HFA-MDI, Foradil® Certihaler® and Paxil CR™ ("PCRF Products") in exchange for a fixed amortisable senior note (the "Note") in the amount of U.S.$92.5 million issued by Jagotec. This would be increased to U.S.$105 million on or after 31 March 2011 if worldwide sales of Depodur™ reached certain thresholds prior to 31 December 2015. The Group does not believe that this threshold will be reached. The Note is repayable on a quarterly basis in accordance with an amortisation schedule beginning on 31 March 2007 through to 31 December 2015. The outstanding amount under the Note at 31 December 2010 is U.S.$46.5 million (£30.2 million) (2009: U.S.$72.3 million (£45.4 million)), excluding the additional U.S.$12.5 million.

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

The Note must be prepaid in certain circumstances, including 50 per cent. of any milestone payments for any Flutiform™ licence agreements or 50 per cent. of any signing fees with respect to Flutiform™ license agreements entered into with regard to any unlicensed territory, in each case received after 1 January 2009 in an amount up to U.S.$10 million. As at 31 December 2010 a total of $1.0 million has been repaid under this clause. Jagotec must also prepay the Note in an amount equal to 50 per cent. of the proceeds received upon the disposal of any of the intellectual property related to the PCRF Products. Jagotec has the option to prepay the Note by providing 10 days' prior written notice. Such prepayment amount will be calculated at a discount to the remaining scheduled amortisation payments due more than 12 months after the date of prepayment at a rate of U.S. Dollar LIBOR plus 75 basis points. Following any such prepayment the minimum amortisation schedule is amended.

The terms of the Note contain representations and warranties and covenants customary for agreements of this type. There is a also a covenant (negative pledge) not to grant security over Flutiform™ intellectual property, and the requirement for prior consent from PCRF for certain transactions that could affect PCRF's security and risk. The Note is secured by milestone payments and royalty receipts receivable by Jagotec under licence agreements related to the PCRF Products.

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

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

At 31 December 2010, the carrying value of the Note was £22.0 million (2009: £24.7 million).

CRC Finance

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

Key terms of the CRC finance are as follows:

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

(ii) interest is charged on a quarterly basis on the U.S. Dollar facility at the three month U.S. Dollar LIBOR rate plus a 5.85 per cent. margin and on the euro facility at the three month EURIBOR rate plus a 10.85 per cent. margin on the first €7.5 million of the euro facility and a 5.85 per cent. margin on the balance;

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

(iv) there is a comprehensive covenant package, including a negative pledge, so 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) the loan must be prepaid in certain circumstances, including 50 per cent. of any milestone payments for any Flutiform™ license agreements, or 50 per cent. of any signing fees with respect to Flutiform™ license agreements entered into with regard to any unlicensed territory, in each case received after 1 January 2009 in an amount up to U.S.$ 10.0 million. Such prepayments comprise a capital element and an amount based on a pre-agreed schedule to compensate CRC for loss of future interest. Following any such prepayment the minimum amortisation schedule is amended; and

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

Interest on the U.S.$ portion of the CRC finance is charged at three month U.S LIBOR + 5.85 per cent. As at 31 December 2010, U.S. LIBOR was 0.303 per cent. (2009: 0.2825 per cent.).

Interest on the first €7.5 million of the euro portion of the CRC finance is charged at 3 month EURIBOR + 10.85 per cent. Interest on the remainder of the facility is charged at 3 month EURIBOR + 5.85 per cent. As at 31 December 2010, EURIBOR was 1.01 per cent. (2009: 0.739 per cent.).

As at 31 December 2010 a total of U.S.$1.0 million out of the total of U.S$ 10 million has been repaid under clause (v) of the agreement.

The balance as at 31 December 2010 is £35.9 million (net of £0.7 million of costs) (2009: £42.4 million net of £0.8 million of costs).

Finance lease liabilities

Obligations under hire purchase and finance leases are secured upon the assets to which they relate and as at 31 December 2010 total £0.1 million (2009: £0.1 million).

12. Long-term creditors

The long term creditor of £3.0 million (2009 restated: £1.5 million) relates to an amount payable to a former partner which has funded capital expenditure related to the Flutiform™ supply chain. No interest is payable on the balance and the funding is repayable in March 2013 or earlier if the supply chain is outsourced.

13. Share Capital

14. Commitments

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

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

To establish the supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes. The Group has also committed to capital expenditure of £13.2 million, of which £12.5 million had been spent as at 31 December 2010. The Group expects to commit a further €1.6 million (£1.4 million) during 2011 for additional capital equipment. A former partner is funding £3.2 million of the expenditure of the Flutiform™ supply chain, of which £3.0 million had been funded as at 31 December 2010, and the Group is obliged to repay this funding by March 2013, or earlier if the supply chain is outsourced. The amount funded as at 31 December 2010 is included in long term creditors as disclosed in Note 12: Long term creditors.

The Group is contractually committed to certain minimum volumes in respect of Flutiform™ from its suppliers from 2011 to 2015, subject to termination rights if Flutiform™ is not launched by the end of 2011.

The Group is additionally committed to a further £0.3 million of capital expenditure primarily related to its facility in Lyon, France.

15. Post-balance sheet events

As disclosed in Note 11: Borrowings, in February 2011 the Group renewed its two new mortgage agreements with the Basellandschaftliche Kantonalbank. The first is for £2.8 million (CHF 4.2 million), which bears interest at a variable rate (currently 3.875 per cent. per annum) and is repayable with three months' notice from either party. The second is for £5.8 million (CHF 8.3 million), which bears interest at 3.6 per cent. per annum and is fully repayable in 2016.

As announced on 7 March 2011, AstraZeneca discontinued the production of Pulmicort® pMDI due to complex manufacturing issues related to technical aspects of the device. The issues only impact AstraZeneca's Pulmicort® pMDI device which is a unique combination of device components. Royalties from this product in 2010 comprised about 5 per cent. of SkyePharma's revenues.