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Half Yearly Report

19th Aug 2010 07:00

RNS Number : 3024R

Skyepharma PLC

19 August 2010

SkyePharma PLC (LSE: SKP), LONDON, ENGLAND, 19 August 2010

Summary of unaudited results for the six months ended 30 June 2010

	H1 2010	H1 2009
	£m	£m
Results
Revenue	29.3	25.5
Research and development expenses	(10.0)	(10.3)
Operating profit	8.6	5.4
Net profit/(loss) after tax (post exceptional)	0.9	(6.1)

	30 June 2010	31 December 2009
Net debt and liquidity	£m	£m
Net debt (total debt less cash *)	104.0	107.1
Liquidity - cash and cash equivalents plus undrawn facilities	28.4	29.3

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

Financial Highlights

·; Revenues up 15% to £29.3m (H1 2009: £25.5m) driven by manufacturing price and volume increases related to non-recurring regulatory and commercial activities

·; Operating profit up 59% to £8.6m (H1 2009: £5.4m), resulting from increased revenues and focus on controlling costs

·; Net profit after tax of £0.9m (H1 2009: loss £6.1m)

·; Cash and undrawn facilities of £28.4m at 30 June 2010 (31 December 2009: £29.3m)

Operating Highlights

·; Flutiform™ European Marketing Authorisation Application accepted in May 2010, preparations for potential 2011 launch underway

·; Development of Flutiform™ in Japan on track with Phase III studies expected to commence by March 2011

·; Flutiform™ US - meeting held with FDA in June to discuss Complete Response Letter; Investigating whether there is a viable way forward in the United States

·; Lodotra® - further European launches expected in H2 2010

·; Horizon intends to submit US NDA for Lodotra® in Q4 2010

·; SKP-1041 began Phase II study in sleep maintenance in June, data expected early 2011

·; Formulation work continues on SKP-1052 for diabetes care, early stage clinical study planned H1 2011

·; Dr Axel Müller appointed CEO effective 23 August 2010; Dr Ken Cunnningham to step down from the Board 30 September 2010.

Commenting on the results, Ken Cunningham, Chief Executive Officer, said:

"Trading has been good in the first half of the year, with revenues up 15% and operating profits up 59% compared with the first half of 2009, as we benefited from increased prices and volumes and the long-term impact of careful cost management. Based on this performance, the Board is confident that we are on track to post an increase in revenues for the year as a whole, compared with 2009.

"Flutiform™ has been filed in Europe for the treatment of asthma by our partner Mundipharma, Phase III studies are anticipated to begin in Japan by March 2011 and we are negotiating a partnership in Latin America. We also continue to investigate whether there is a viable way forward in the United States. The rest of the pipeline also made progress, with further European launches planned for Lodotra® in H2 2010, a Phase II study underway on SKP-1041 and formulation work for SKP-1052 for diabetes care continuing."

For further information please contact:

SkyePharma PLC
Ken Cunningham, Chief Executive Officer	+44 207 491 1777
Peter Grant, Chief Financial Officer

Financial Dynamics
Jonathan Birt/Susan Quigley	44 207 831 3113

About SkyePharma PLC

Using its proprietary drug delivery technologies, SkyePharma develops new formulations of known molecules to provide a clinical advantage and life-cycle extension. 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

Trading results in the first half of 2010 were substantially improved on the first half of 2009 and were in line with the Board's expectations, leading to a substantial rise in operating profits to £8.6 million (H1 2009: £5.4 million) and a profit after tax of £0.9 million (H1 2009: loss of £6.1 million).

The European Marketing Authorisation Application ("EMAA") for Flutiform™ was filed in March 2010 by the Group's partner, Mundipharma International Corporation Limited ("Mundipharma"), and accepted for review in May 2010 and preparations continue to be made for its potential launch in Europe in 2011. In Japan the development of Flutiform™ continues to progress, with Phase III studies expected to commence by March 2011. In the United States a meeting has been held with the Food & Drug Administration ("FDA") to discuss the Complete Response Letter, as detailed in the Product Review section. The Group continues to investigate whether there is a viable way forward for Flutiform™ in the United States.

Horizon Pharma, Inc ("Horizon"), the Group's licensee for Lodotra®, has completed two pivotal Phase III studies for the United States which met their primary endpoints. Horizon intends to file the New Drug Application ("NDA") with the FDA in Q4 2010.

Financial highlights

Revenues in the first half of the year at £29.3 million were up 15 per cent. compared with the first half of 2009 (H1 2009: £25.5 million). This is 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 improvement in operating profit to £8.6 million from £5.4 million for the six months to 30 June 2010 was driven by the increase in revenues and the Group's continued focus on controlling costs.

Profit before tax for the first half of 2010 was £1.2 million (H1 2009: loss of £5.8 million), profit after tax was £0.9 million (H1 2009: loss of £6.1 million) and basic earnings per share were 3.8 pence (H1 2009: loss of 26.7 pence).

At 30 June 2010 the Group had cash of £27.6 million, compared with £27.0 million at 31 December 2009.

Board

In May 2010 Dr Ken Cunningham informed the Board that he intended to step down from the Board to focus on a portfolio of non-executive appointments. As announced on 17 August Dr. Axel Müller has been appointed 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. The Board is grateful to Ken Cunningham for his excellent stewardship of the Group over the past two years and wishes him continuing success in his new endeavours. Dr. Cunningham will remain a Director of the Company until 30 September 2010 to ensure a smooth transition to Dr. Müller.

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

Outlook

Revenues in the second half of 2010 are expected to be higher than in the second half of 2009, although to a significantly lower degree than the increase in the first half of the year. Contract R&D revenues are forecast to increase, although this will not contribute to operating profit because these revenues will largely be offset by a corresponding increase in external R&D expenses. As a result, the Board now anticipates that revenues for the year as a whole will show growth compared with 2009.

Notwithstanding the increase in revenues the pre-exceptional operating result for 2010 is expected to be slightly lower than in 2009, due to costs relating to the Flutiform™ supply chain.

The Directors remain confident in the future prospects for the business, with Flutiform™ under review in Europe and making continued progress in Japan and further progress with other pipeline products.

Frank Condella

Non-Executive Chairman

BUSINESS REVIEW

Dr Ken Cunningham

CHIEF EXECUTIVE OFFICER'S REVIEW

The Group currently has 12 approved products which generated £25.2 million of royalty and manufacturing revenues in the first half of 2010 (H1 2009: £18.9 million).

In the late stage development pipeline, the EMAA for Flutiform™ was accepted for review in May 2010, and preparations continue to be made for its launch in Europe in 2011. The development of Flutiform™ in Japan continues in line with the project plan, and following a meeting held with the Pharmaceuticals and Medical Devices Agency ("PMDA") preparation is underway for Phase III studies to commence by March 2011.

Progress has been made on the feasibility project SKP-1052, an oral product for diabetes care utilising the Group's proprietary technology, with an early stage clinical study planned for the first half of 2011. The Group continues to work on enhancing its early stage product pipeline and is currently working on several additional internal feasibility projects with a view to out-licensing following proof of principle.

The Group continues to focus on managing its costs and improving efficiency including in Muttenz, Switzerland where it is on track to rationalise operations, expected to be completed later this year and enabling a building (net book value at 30 June 2010: £3.9 million) to be put up for sale.

BUSINESS REVIEW - PRODUCTS

INHALATION PRODUCTS

Flutiform™

Flutiform™ is licensed to Mundipharma in Europe and other territories outside Japan and the Americas, to Kyorin Pharmaceutical Company Ltd ("Kyorin") in Japan and to Abbott Respiratory LLC ("Abbott") in the United States.

Flutiform™ - Europe

As previously announced, all clinical work required for filing the EMAA was completed during 2009 and the application for all three strengths of Flutiform™ was filed in March 2010. The file was accepted for review in May 2010 and the potential launch of the product is being planned for 2011.

Four Phase III clinical studies (including one higher dose strength study) were carried out for Europe 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 licensing agreement with Mundipharma includes milestones of up to €73.0 million (£62.5 million at the prevailing exchange rate), of which €15.0 million (£10.1 million at that time) was paid upfront, €3.0 million (£2.9 million) was paid on 31 December 2008, up to €15.0 million (£12.1 million) is due on launch and up to €40.0 million (£32.4 million) is sales-related. In addition, the Group is entitled to royalties as a percentage escalating upwards from 10 per cent. of net sales. Some of the development costs funded by Mundipharma are reimbursable by the Group through reductions in future royalties and sales related milestones for a limited period of time.

Under the 2006 EU regulations (Regulation (EC) 1901/2006, as amended by Regulation (EC) 1902/2006), which came into force in 2008, 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. The Group is obliged to reimburse Mundipharma for half of the cost of this work, up to €3.5 million (£2.8 million). The study has not yet commenced.

Flutiform™ - Japan

Under the agreement with Kyorin for Japan 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 will largely be met by Kyorin, which is responsible for clinical studies and regulatory submissions. The two Phase II clinical studies have been completed and preparation is underway for the initiation of Phase III studies, which are expected to commence by March 2011.

Flutiform™ - United States

As announced in June 2010, the Group has held a meeting with the FDA to discuss the Complete Response Letter received in January 2010 in respect of the New Drug Application ("NDA") for Flutiform™. At the meeting the FDA reiterated that it could not approve the NDA in its present form and it became clear that the FDA's requirements for approving Flutiform™ have changed materially during the course of the development program. Meeting these requirements would involve significant additional work including generating additional data on dose ranging and a large post-approval safety study. The Group continues to investigate whether there is a viable way forward for Flutiform™ in the United States. The NDA has been transferred back to the Group following the receipt of the Complete Response Letter.

The NDA included the results of one long-term safety study and four efficacy studies, covering in total nearly 2,300 patients. The primary end points were met in all cases.

Flutiform™ - Other territories

The out-licensing of Flutiform™ in Latin America continues to be negotiated. Discussions relating to out-licensing in Canada with one potential partner have ceased.

Supply of Flutiform™

Under the agreements with Mundipharma, Kyorin and Abbott, the Group is responsible for arranging the manufacture and supply of Flutiform™ and has committed to capital expenditure totalling €10.0 million (£8.1 million), of which €8.2 million (£6.6 million) has been spent to 30 June 2010 on tooling at two subcontractors. In addition, the Group has committed to capital expenditure of €3.2 million (£2.6 million), which is being funded by a partner (which has a right to claim this amount back no later than March 2013 or, if earlier, if the supply chain is outsourced). Of this, €2.4 million (£1.9 million) has been spent to date.

The Group has also made certain minimum purchase commitments in respect of the Flutiform™ supply chain, totalling €7.5 million (£6.1 million) to be met by 31 December 2010, as well as further minimum commitments for the years 2011 to 2015. The Group is currently working on preparing the supply chain for a potential launch of Flutiform™ in Europe. The Group is also working on optimising the Flutiform™ supply chain in discussion with its supply chain partners.

Pulmicort® HFA-MDI

This HFA-MDI containing AstraZeneca's inhaled corticosteroid Pulmicort® (budesonide) was developed for territories outside the United States for the treatment of asthma to replace the CFC MDI formulation of Pulmicort®. The product is approved in over 35 countries worldwide. The Group earns a mid teens royalty on AstraZeneca's net sales of Pulmicort® HFA-MDI.

Licence fees

In 2009, a development milestone was received in respect of a previously announced 2003 agreement with GlaxoSmithKline ("GSK") to provide access to one of SkyePharma's proprietary formulation technologies for application to the delivery of respiratory drugs either by breath-actuated dry-powder inhaler or metered-dose aerosol inhaler. The agreement was signed at the end of 2003 and GSK made an initial payment to SkyePharma on signature. If the patented formulation technology is subsequently incorporated into current and future products by GSK, SkyePharma will also be entitled to an additional payment for each such product and a royalty on eventual sales.

ORAL AND TOPICAL 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 the first half of 2010, reported sales of all forms of Xatral® were €153 million (£123.9 million), similar to the total in the first half of 2009. In the United States sales of Uroxatral® were €82 million (£66.4 million), up 12.2 per cent. from the first half of 2009. Western European sales have continued to fall as a result of generic competition, with sales for the first half of 2010 of €35 million (£28.3 million), a reduction of 14.6 per cent. from the same period in 2009. Sales in other countries were €36.0 million (£29.1 million).

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 affirms the validity of the patent, which is subject to a term extension and expires in early 2011. The Group has no further information but it is possible the decision may be appealed.

The Group earns low single digit royalties on net sales of Xatral® OD (Uroxatral®).

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"). Net sales of Solaraze® in the first half of 2010 were lower than reported in the first half of 2009 in the United States due to the recording of an unusually high level of customer rebates. Sales by Almirall increased €1.1 million (£0.9 million) to €11.8 million (£9.6 million) from €10.7 million (£8.7 million) in the first half of 2009 for the same period in 2010. The Group earns a low teens royalty rate on net sales.

SkyePharma and its licensee, Nycomed, received an ANDA Paragraph IV notice letter relating to Solaraze® in the United States in April 2010. After analyzing the claims of non-infringement relating to the applicable patent portfolio, and the refusal to allow access to portions of the ANDA, SkyePharma and Nycomed filed suit against the ANDA filer. The suit contains claims directed to the infringement of the patent portfolio.

Requip® Once-a-day

Requip® Once-a-day is a once daily formulation for Parkinson's disease and was developed in collaboration with GSK. The extended release Requip® uses the Group's patented Geomatrix™ technology and is designed to provide smoother delivery of ropinirole over 24 hours. In addition, the once-daily formulation offers physicians and patients a simple titration schedule and direct conversion from immediate-release ropinirole. 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.

SkyePharma earns low mid single digit percentage royalties on net sales of Requip® Once-a-day. In the first half of 2010 sales of Requip® XL™ were a total of £72.0 million, an increase of £20.0 million on the first half of 2009. £54.0 million was generated in Europe, £17.0 million in the United States and the remaining £1.0 million arose from the rest of the world.

Sular®

Working in collaboration with Shionogi Pharma, Inc. ("Shionogi Pharma"), the Group developed a new lower-dose formulation of Sular® (nisoldipine), a calcium channel blocker antihypertensive agent, using the Group's proprietary Geomatrix™ drug delivery system. The product was launched in March 2008.

Sales of Sular® continue to be affected by competition including a generic version of the old formulation of Sular®.

In 2009 paragraph IV certifications were filed in the United States for all four strengths of Sular® by a generic manufacturer. No patent infringement suit was filed within 45 days of receiving notification of the paragraph IV certifications and, therefore, the approval of the ANDA will not be subject to any automatic stay. In June 2010, URL Pharma, Inc. ("URL Pharma") launched a generic version of the new formulation of Sular® in the United States pursuant to a sub-license agreement with Shionogi, which is covered by the same license and manufacturing terms as the new formulation of Sular®. Currently no other generic versions have been launched. Should total net sales of the new formulation 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 is manufacturing the new formulation of Sular® and the URL Pharma generic at its plant in Lyon, France.

Paxil CR™

Paxil CR™ is an advanced formulation of the anti-depressant Paxil® and was developed by the Group with GSK using the Group's Geomatrix™ technology. Sales of Paxil CR™ continued to be affected by generic competition. In the first 6 months of 2010 sales were £25 million, a reduction of 28 per cent. (using constant exchange rates) from the same period in 2009.

Triglide®

Triglide® (fenofibrate), an oral treatment for elevated blood lipid disorders, is marketed in the United States by Shionogi Pharma, and is being sold alongside Fenoglide®, a fenofibrate product in-licensed by Shionogi Pharma. 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 is entitled to receive 25 per cent. of Shionogi Pharma's net sales of Triglide®. Under an agreement amendment signed in June 2010, Shionogi Pharma agreed to extend the period for which it shares part of its net sales of Fenoglide® with the Group to the end of 2011. From the beginning of 2010 the Group will receive a low single digit percentage on net sales of Fenoglide®.

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 night-time 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 further launches by Mundipharma (Horizon's distribution partner for the rest of Europe) are expected in the second half of 2010.

Two pivotal Phase III studies have been completed for Lodotra®. The first was a 12-week, randomised, double blind, placebo controlled study 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. Both studies met their primary endpoints. Horizon intends to submit the NDA for Lodotra® in the United States in Q4, 2010.

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

SKP-1041

Somnus Therapeutics, Inc ("Somnus") has successfully completed two additional Phase I studies 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.

The Investigational New Drug Application for SKP-1041 was filed with the FDA in Q1 2009 and a Phase II study was initiated in June 2010. Data from the Phase II study is anticipated to be disclosed in early 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. The additional infusion of capital is intended to fund the Phase II clinical studies.

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. Up to a further U.S.$10.0 million (£6.6 million) is payable on product approval, 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 diabetes, which is expected to be out-licensed following a positive proof of principle clinical study. The project applies the Group's proprietary technology to a generic compound in an innovative approach to diabetes care. An early stage clinical study is planned for the first half of 2011.

Feasibility studies and technology development

The Group continues to seek to strengthen the product pipeline through further out-licensing activities and early stage feasibility and technology development projects.

SkyePharma continues to seek other applications for its proprietary SkyeHaler™ Dry Powder Inhaler ("DPI"). This is one of only a few DPI devices which have been incorporated in products 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.

Potential share of sales from the former Injectable Business

The terms of the sale of Pacira Pharmaceuticals, Inc. ("Pacira Pharmaceuticals") in 2007 included up to U.S.$62 million (£41.1 million) in contingent milestone payments and a percentage of sales of certain future products for a fixed period of time. The milestones depend on approval of the products and the achievement of certain launch and various substantial sales targets of EXPAREL™ (formerly DepoBupivacaine™), including a U.S.$10 million payment on the launch of EXPAREL™ in the United States. In addition, subject to the successful development and launch, the Group will receive three per cent. of net sales worldwide of EXPAREL™. Pacira Pharmaceuticals expects to file the NDA for EXPAREL™ with the FDA in 2010.

MANUFACTURING

Manufacturing operations take place in Europe, principally at the Group's Lyon facility in France. At Lyon, the Group presently manufactures five Geomatrix™ products, diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Sular® and Lodotra®, and one other oral product, Triglide®, based on its solubilisation technology. The Lyon factory has cGMP status, with approvals from the European Medicines Agency and United States FDA. During 2009 a social plan was implemented to reduce the workforce at Lyon by approximately one third and, in addition to these cost reductions, price increases were negotiated. During the first half of 2010 revenues were further boosted by non-recurring volumes to support regulatory and commercial activities, which have led to a very significant turn around in the contribution from products manufactured at Lyon. As some of these volumes are non-recurring Lyon remains vulnerable to future fluctuations in demand and additional manufacturing opportunities continue to be sought for Lyon.

Ken Cunningham

Chief Executive Officer

FINANCIAL REVIEW

Revenue

Revenues for the first six months of 2010 were up 15 per cent at £29.3 million (H1 2009: £25.5 million).

Signing and milestone payments received were £1.0 million in the first half of 2010 (H1 2009: £1.8 million).

Contract research and development revenue decreased to £3.1 million for the first six months of 2010, from £4.8 million for the same period in 2009 due to the completion of the work required for the filing of Flutiform™ in Europe. This has been partly offset by an increase in revenues relating to the development of Flutiform™ for Japan.

Royalty income showed a decrease of £1.0 million to £11.8 million in the first half of 2010. At constant exchange rates, royalty income declined by 16 per cent. The continued increase in sales of Requip® has been more than offset by reductions in royalties received from Xatral® and Triglide®.

Manufacturing and distribution revenue totalled £13.4 million for the first six months of 2010, an increase of £7.3 million compared with £6.1 million earned during the first six months of 2009. A large part of this increase is non-recurring as it relates to non-recurring volumes to support regulatory and commercial activities. The Group also continues to benefit from price increases agreed in 2009.

Research and development expenses

Research and development expenses incurred in the first six months of 2010 slightly decreased to £10.0 million (H1 2009: £10.3 million). The Group's net investment in research and development (expenses, net of contract development revenues) was £6.9 million compared with £5.5 million for the first six months of 2009 as the Group continues to incur expenditure in preparing the Flutiform™ supply chain for commercial launch in Europe and focuses on a number of early stage feasibility and technology development projects.

Finance costs and income

Finance costs - interest totalled £6.3 million (H1 2009: £6.9 million) and consists of £3.1 million (H1 2009: £3.1 million) payable on the convertible bonds, £1.6 million (H1 2009: £2.1 million) payable on the CRC finance, £1.4 million (H1 2009: £1.5 million) of interest attributable to the Paul Capital finance and £0.2 million (H1 2009: £0.2 million) on other bank borrowings.

Finance costs - revaluation consists of a charge of £1.7 million arising from the revaluation of the carrying value of the Paul Capital finance (H1 2009: charge of £2.0 million) resulting from revisions made of the forecast payments to be made by Pacira Pharmaceuticals to Paul Capital.

Finance income consists of £0.1 million (H1 2009: £0.2 million) of bank interest.

Foreign exchange

Foreign exchange consists of net translation gains and losses on borrowings and cash denominated in a currency other than the entity's functional currency. In the first half of 2010 this totalled a credit of £0.5 million (H1 2009: charge of £2.5 million).

Result

The profit for the first half of 2010 after exceptional items and taxation was £0.9 million (H1 2009: loss of £6.1 million).

The basic earnings per share amounted to 3.8 pence (H1 2009: loss of 26.7 pence).

Cash flows

In the first half of 2010 the Group had a cash inflow from operating activities of £14.0 million compared with an outflow of £0.1 million in the first half of 2009.

The Group has purchased £1.9 million of property, plant and equipment, primarily capital expenditure on tooling for the Flutiform™ supply chain.

Borrowings of £5.0 million have been repaid during the period, mainly to CRC and Paul Capital, in addition £5.9 million of net interest was paid (H1 2009: £6.2 million) primarily relating to the convertible bonds.

Borrowings and liquidity

Total debt has decreased £2.5 million in the period. This is due to repayments of £5.0 million, offset by translation and revaluation effects.

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

	30 June 2010 £m	31 December 2009 £m
Convertible bonds	58.9	58.5
Paul Capital finance	25.2	24.7
CRC finance	38.3	41.6
Property mortgage	7.9	8.0
Bank borrowings and overdraft	1.2	1.2
Finance lease liabilities	0.1	0.1
Total debt	131.6	134.1
Less cash and cash equivalents	(27.6)	(27.0)
Net debt	104.0	107.1
Net debt (convertible bonds at face value)	128.1	131.6

As at 30 June 2010 the Group had £27.6 million of cash and cash equivalents (31 December 2009: £27.0 million) and additional available facilities of £0.8 million (31 December 2009: £2.3 million).

Commitments

In 2010 the Group is contractually committed to certain minimum expenditure in respect of Flutiform™ from its suppliers totalling €7.5 million and there are further escalating commitments for 2011 through to 2015, subject to termination rights if Flutiform™ is not launched by the end of 2011.

At set out in Note 16: Commitments to the Half Yearly Financial Statements, the Group is committed to purchasing €1.8 million (£1.5 million) of fixed assets related to the Flutiform™ supply chain, not contractually funded by partners. In addition one of the licensees for Flutiform™ is funding the purchase of a further €3.2 million (£2.6 million) of fixed assets relating to the Flutiform™ supply chain, of which €0.8 million (£0.6 million) remains outstanding at 30 June 2010. The Group is committed to repaying this funding no later than March 2013.

Going concern

The Directors have made an assessment of the working capital requirements of the Group for the next 12 months, taking account of revenue projections, operating costs, finance costs, debt repayment obligations, obligations in respect of the Flutiform™ supply chain and supporting the regulatory filings, proposed cost reduction actions and the risks inherent in such forecasts.

After making appropriate enquiries, the Directors have reasonable expectations that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly they continued to adopt the going concern basis in preparing the half year report.

Whilst not a significant uncertainty affecting the Directors' current assessment of going concern, the approval of Flutiform™ in Europe is pivotal for the medium term prospects of the Group. Having regard to these prospects and the Group's longer term debt obligations the Board's strategy remains to build value by strengthening the product pipeline whilst otherwise conserving resources.

Principal risks

The Directors consider that the key risks which may have a material impact on the Group's performance in the second half of 2010 remain as disclosed under the headings below on pages 37-39 of the 2009 Annual Report and Accounts.

§ Risks that Flutiform™ will not achieve commercial success

§ Risks that manufacturing and R&D operations and related royalty revenues will be disrupted

§ Risks that cash balances and inflows will be insufficient to pay off long term debt obligations

§ Risks that competition and technological change will damage prospects for the business

§ Risks arising from current difficult global economic conditions and adequacy of financial resources

Brokers

Following a review, the Company's corporate broking arrangements have been rationalised with Piper Jaffray continuing as sole corporate broker.

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 the first six months of 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 revised or update any such forward statement to reflect events or circumstances after the date of these Half Yearly Financial Statements.

RESPONSIBILITY STATEMENT

The Directors of SkyePharma, as listed on pages 22 and 23 of the 2009 Annual Report and Accounts, confirm that to the best of their knowledge:

1. The condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";

2. The interim management report includes a fair review of the information required by the Disclosure and Transparency Rules ("DTR") 4.2.7 - an indication of important events which have occurred during the first six months of the year, and a description of the principal risks and uncertainties for the remaining six months of the year;

3. The interim management report includes a fair review of the information required by DTR 4.2.8 - the disclosure of related party transactions occurring during the first six months of the year, and any changes in related party transactions disclosed in the 2009 Annual Report and Accounts.

By Order of the Board

K Cunningham

Chief Executive Officer

P Grant

Chief Financial Officer

CONDENSED CONSOLIDATED INCOME STATEMENT

for the six months ended 30 June 2010

		Unaudited 6 months ended 30 June 2010	Unaudited 6 months ended 30 June 2009	Audited Year ended 31 December 2009
Continuing operations	Notes	£m	£m	£m
Revenue	4	29.3	25.5	55.9
Cost of sales	5	(7.5)	(7.0)	(15.0)
Gross profit		21.8	18.5	40.9
Selling, marketing and distribution expenses		(1.2)	(1.1)	(1.9)
Research and development expenses	6	(10.0)	(10.3)	(19.6)
Corporate costs		(1.7)	(1.7)	(3.2)
Amortisation of intangible assets		(0.3)	(0.3)	(0.6)
Share based payment charge		(0.3)	(0.4)	(0.8)
Other income	2	0.3	0.2	0.3
Pre-exceptional operating profit		8.6	4.9	15.1
Exceptional credits	7	-	5.0	9.8
Exceptional charges	7	-	(4.5)	(11.2)
Operating profit		8.6	5.4	13.7
Finance costs:
Interest	8	(6.3)	(6.9)	(13.3)
Revaluation	8	(1.7)	(2.0)	(1.4)
Finance income	8	0.1	0.2	0.3
Foreign exchange gain/(loss) on net debt	9	0.5	(2.5)	(0.2)
Profit/(loss) before tax		1.2	(5.8)	(0.9)
Taxation		(0.3)	(0.3)	(0.5)
Profit/(loss) for continuing operations attributable to the parent		0.9	(6.1)	(1.4)

Basic earnings per share	10	3.8p	(26.7)p	(6.0)p
Diluted earnings per share	10	3.7p	(26.7)p	(6.0)p