Half Yearly Report

Interim Results Statement

A transformational start to the year with growing momentum from a rejuvenated product base

LONDON, ENGLAND, 21 August 2014 - Skyepharma PLC (LSE: SKP), the expert oral and inhalation drug delivery company, today reports its interim results for the six months ended 30 June 2014.

Financial Highlights

· H1 revenues up 10% at £34.4m (H1 2013: £31.3m)

· Revenues from products launched since March 2012 comprised 62% of total revenues, up from 51% in H2 2013

· Operating profit up 187% at £13.2m (H1 2013: £4.6m)

· EBITDA up 121% at £14.6m (H1 2013: £6.6m)

· Successful completion of a £112m capital raise and full repayment of bond debt - exceptional financing charge of £25.5m

· Net debt at 30 June 2014 of £2.9m (31 December 2013: £84.2m), net of cash of £26.3m at 30 June 2014 (31 December 2013: £16.5m)

Operational Highlights

· Continued growth of flutiform®:

o In-market sales doubled compared with H2 2013

o Launched in a further 8 countries, including France in February, bringing to 23 the total countries where the product is available. Approvals in a further 4 countries including Spain in the period

· Revenue and profit-generation from recently-launched third-party products:

o Further strong growth of Pacira's EXPAREL® and recognition of the first sales milestone of U.S.$8.0m

o Further launches of GSK's new respiratory products utilising Skyepharma technology in Europe and the United States, and further approvals in Europe, Japan and the United States

Developments

· Supporting Mundipharma in the development of a breath-actuated version of flutiform®

· Continued development of novel oral drug delivery technology platforms

· Acquisition of global rights and intellectual property to respiratory therapy platform from Pulmagen and commencement of the development of the first new product candidate based on this platform, SKP-2075 for COPD

Outlook

· Prospects for the year remain in line with the Board's expectations. Revenues in H2 2014 are forecast to grow compared with H1 2014 driven by increasing momentum from products launched in the last 2½ years

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

"The transformation of Skyepharma continued in the first half of 2014. The successful capital raise and repayment of the bond debt considerably strengthened the balance sheet. We benefited from further revenue growth from the 7 new products launched in the previous two years and further launches in the first half of this year. With a strong financial position and momentum from a renewed revenue base, we are now in a position to invest further in new products, technologies and other corporate opportunities. The acquisition of the innovative respiratory therapy platform from Pulmagen and commencement of development of SKP-2075 for COPD announced earlier this month is a key step in strengthening the future pipeline to drive the next phase of growth."

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

- Ends -

For further information please contact:

About Skyepharma PLC

Skyepharma combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products. The Group is eligible for revenues from 16 approved products in the areas of inhalation, oral, topical and injectable drug delivery as well as generating income from the development of further products and technology licenses. The products developed by the Group are marketed throughout the world by big pharma as well as speciality pharmaceutical companies. For more information, visit www.skyepharma.com

BUSINESS REVIEW

SUMMARY

Overview

The first half of 2014 saw further significant progress, building additional positive momentum for the coming years. Results for H1 2014 are ahead of previous expectations due to the earlier achievement of the first $8.0 million milestone on EXPAREL® sales, and prospects for the year as a whole are in line with the Board's expectations at the time of the announcement of the annual results for 2013. Key events in the period included:

· Launch of flutiform® in France (in February, triggering a €3.0 million milestone) as well as in Bulgaria, Czech Republic, Iceland, Israel, Luxembourg, South Korea and Switzerland; flutiform® has now been launched in a total of 23 countries and approved in 31

· New approvals of flutiform® in 4 countries: Argentina, Singapore, Spain and Taiwan

· Continued strong performance of EXPAREL®, with Pacira Pharmaceuticals, Inc. ("Pacira") posting H1 2014 net sales of U.S.$79.3 million compared with U.S.$25.7 million in H1 2013. Worldwide annual net sales (on a cash received basis) to 30 June 2014 were above U.S.$100.0 million and the first sales milestone of U.S.$8.0 million has been recognised

· Further approvals and launches of GSK's products Relvar® Ellipta® and Anoro® Ellipta® in Europe and the United States respectively, and approvals granted for Incruse® in Europe, Canada and the United States

· Successful completion of the capital raise and bond repayment, saving £25.2 million in future bond repayments and transforming the Group's balance sheet and capacity to invest in the pipeline and future growth

· Final scheduled amortisation payment of the Paul Capital Note made in June 2014

Post-reporting period events included:

· GSK's Anoro® Ellipta® was approved in Australia and Japan for the treatment of COPD in July

· Skyepharma acquired the global rights and intellectual property to a novel respiratory therapy platform from Pulmagen Therapeutics (Synergy) Limited ("Pulmagen") in August and commenced development of the first new product candidate based on this platform, SKP-2075 for COPD

Financial highlights

Revenue in H1 2014 was £34.4 million, up 10 per cent. (H1 2013: £31.3 million), primarily due to the growth of EXPAREL® resulting in an increase in income from share of net sales and recognition of the first sales milestone of U.S.$8.0 million (£4.7 million at the time), partly offset by lower sales of Lyon products and H1 2013 including contract development work related to the launch of flutiform® in Japan. flutiform® supply revenues were similar to the prior year, which included substantial launch stocks in a number of markets.

Cost of sales in H1 2014 totalled £13.2 million, down from £19.1 million in H1 2013 (as restated) due to economies of scale with growing flutiform® production volumes, improved flutiform® sales mix and the lower volumes of Lyon products. Depreciation was also lower following a review of economic lives of the flutiform® production assets after the extension of certain supply agreements. Accordingly, gross profit was £21.2 million, up from £12.2 million in H1 2013.

Operating costs excluding exceptional items increased to £8.0 million in H1 2014 (H1 2013 restated: £7.6 million), with corporate costs reflecting further strengthening of the senior management team and a higher share-based payment charge with the new Long Term Incentive Plan implemented following the successful capital raise. As anticipated, net investment in research and development increased to £1.8 million (H1 2013: £0.4 million).

Pre-exceptional operating profit was £13.2 million, up 187 per cent. compared with £4.6 million in H1 2013.

On 30 April 2014 the Group concluded a capital raise, through the issue of 58,684,614 ordinary shares priced at 191p to raise a net £104.2 million after associated costs. The proceeds of the capital raise were used to settle the outstanding bonds at a discount of £25.2 million compared with the total amount which would have been payable at the earliest normal redemption date. The remaining £8.2 million of cash has been retained for general corporate purposes. An exceptional financing charge of £25.5 million was recorded, which consisted of a £25.1 million loss on settlement of the bonds, representing the difference between the £95.6 million to repay the bonds early and their book value of £70.5 million at 30 April, as well as £0.4 million of bond transaction costs. The reduction in bond debt has substantially reduced the Group's finance charges.

In anticipation of further profitable growth the Board expects additional utilisation of tax losses in the United States and Switzerland and this has resulted in recognition of additional deferred tax assets in the 2014 interim results. The net deferred tax credit of £0.6 million is based on a one-year look forward.

As a consequence of the exceptional financing charge, the loss after tax increased to £17.7 million (H1 2013: £1.7 million) and basic loss per share increased to 27.0 pence (H1 2013: 3.6 pence). The pre-exceptional basic profit per share was 11.8 pence (H1 2013: 3.6 pence loss).

The Group received revenues from 15 approved and marketed products during the first half of 2014, which together generated £22.5 million of revenues from royalties, product supply and share of sales (H1 2013: £23.6 million). In addition, flutiform® generated £3.8 million of milestones and contract development revenue in the first half of 2014 (H1 2013: £4.5 million), and EXPAREL® generated £4.7 million of milestones (H1 2013: nil). Total revenues from the seven key products launched since March 2012, including flutiform®, Pacira's EXPAREL® and the new GSK respiratory products, totalled £21.8 million (H1 2013: £15.1 million). Recurring revenues (being royalties, product supply and share of sales) comprised 65 per cent. of total revenues (H1 2013: 75 per cent.).

Cash flows benefited from £2.7 million in milestone receipts (H1 2013: £0.7 million).

Earnings before interest, taxation, depreciation and amortisation ("EBITDA") totalled £14.6 million (H1 2013: £6.6 million) or 42 per cent. of revenues (H1 2013: 21 per cent.).

Operational highlights

flutiform®, the fixed dose combination of fluticasone, an inhaled corticosteroid ("ICS"), and formoterol, a long-acting beta agonist ("LABA") in a pressurised metered dose inhaler ("pMDI"), continues to be an important value driver for the Group. As of 20 August 2014, flutiform® has been launched in 18 European countries as well as Japan, Australia, Hong Kong, Israel and South Korea.

Total in-market sales of flutiform® for the six months ended 30 June 2014 totalled €28.4 million (£23.3 million) (H1 2013: €5.2 million (£4.4 million)). In Q2 2014, total in-market sales of flutiform® were €16.3 million, up 34 per cent. from the €12.1 million achieved in Q1 2014 (in-market sales are internal calculations using IMS Health data, Q2 2014 - based on sales to pharmacies excluding Cyprus, Iceland and Belgium Hospital, and are not the same as sales to wholesalers on which royalties are payable to the Group).

In-market sales in the six months ended 30 June 2014 (included in the above sales) totalled €4.5 million (£3.7 million) in Japan, where the product was launched on 19 November 2013 in the initial 56-puff version required by Japanese regulations. Kyorin is planning the launch of the 120-puff version in December 2014.

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

Source: Internal Calculations using IMS Health Data Q2 2014, based on sales to pharmacies excluding Cyprus, Iceland and Belgium Hospital.

According to Mundipharma, market research shows that flutiform® messages and key data continue to be well received.

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

"We are delighted with the successful launch of flutiform for the treatment of bronchial asthma. In Europe, sales are growing in line with our expectations and we look forward to the further roll-out of flutiform and its continued growth."

Other major new sources of revenue

During H1 2014, GSK made further progress with its new inhalation products which use the Group's technology and which could generate total royalties of up to £9.0 million per annum. The European roll-out of Relvar® Ellipta® commenced with launches in the UK and Germany in January for the treatment of asthma and COPD. Anoro® Ellipta® was launched in the United States in April 2014 for the once-daily treatment of COPD. Marketing authorisation for Anoro® Ellipta® was granted in Europe in May 2014 and in Australia and Japan in July 2014 for the treatment of COPD. Another COPD treatment, Incruse®, was approved in Europe, Canada and the United States in April 2014. GSK reported sales of these royalty-generating products in H1 2014 totalling £19 million (H2 2013: nil).

EXPAREL®, a product of the Group's former Injectable Business, now Pacira, continued to grow strongly in the period with Pacira reporting sales of U.S.$79.3 million, more than treble the sales reported in H1 2013 and up 57 per cent. compared with H2 2013. The Group receives a 3 per cent. share of sales (on a cash received basis) and further potential milestones of up to U.S.$44 million over and above the sales-related milestone of U.S.$8.0 million recognised in the period. The Group expects to receive the cash relating to this milestone in H2 2014 and is in discussion with Pacira as to the exact timing.

Business Development and Strategy

As described at the time of the capital raise, whilst continuing to optimise revenues from approved and pipeline product candidates, the Board's strategy is to strengthen the Group's product pipeline by developing additional products and technologies. Opportunities for such developments may come from the Group's own ideas, collaborations with partners, targeted in-licensing and/or acquisition.

Inhalation

The majority of the Group's employees are focussed on inhalation product development and the Group seeks to leverage its proven expertise and technologies in this area by developing inhalation products through to value inflection points for subsequent licensing to development/marketing partners. The first such new development was announced earlier this month and comprised the acquisition (for no up-front consideration) of the global rights to a novel inhaled therapy platform from Pulmagen and the commencement of development of the first product to use this platform, SKP-2075, for COPD. The Group plans to develop SKP-2075 through to a Phase II efficacy and safety trial sized to produce clinically significant data and then seek to out-licence the product candidate to a pharmaceutical partner for further development and commercialisation. The Group anticipates spending approximately £14 million to develop SKP-2075 up to completion of the Phase II trial between now and 2017. Skyepharma plans to fund this development work from its own resources and cash generation. Further inhalation product development opportunities are being considered through an innovation and evaluation process which has been established within the Group.

The Group continues to provide RespiVert Ltd ("RespiVert"), a subsidiary of Janssen Biotech, Inc., with chemistry, manufacturing, and controls (CMC) development services to develop dry powder inhaler ("DPI") dosage forms of RespiVert's new chemical entities. The projects are aimed at the development of new inhaled therapies for patients with severe, chronic respiratory diseases including COPD and severe asthma. RespiVert has the option to use certain Skyepharma inhalation technologies in connection with these developments and, if this is exercised, small development milestones are payable and a low single digit royalty is payable on net sales during the life of any licensed patents.

Skyepharma is supporting Mundipharma in its development of a novel breath-actuated version of flutiform®, where the flutiform® pMDI press-and-breathe actuator is replaced with Mundipharma's breath-actuated device. Skyepharma is providing contract development support to Mundipharma for the CMC aspects of the device and will also support Mundipharma during the regulatory filing process. Skyepharma's license and manufacturing and supply agreements with Mundipharma for flutiform® also cover the breath-actuated version from which the Group will be eligible for revenues from royalties, milestones and semi-finished product supply.

Oral

To grow the oral drug delivery business, the Board plans to add to its basket of oral drug delivery technologies and leverage these through the Group's reputation and relationships. Three novel oral drug delivery technology platforms are under development and the results of the proof of concept on the first one is expected later this year. During the first half year a new commercial relationship has been established with a mid-sized pharmaceutical company and this has led to the initiation of a funded development project for an oral product.

Investment in research and development

The net investment in research and development in H1 2014 of £1.8 million is in line with the previous guidance for full year net investment of between £3 million and £6 million.

Strengthened management

In support of the strategy to grow both the Inhalation and Oral parts of the business, the Group continues to invest in its business development capability. We are pleased to announce the appointment of Christian Pangratz as Executive Vice President Business Development and Alliance Management, starting on 1 October 2014. Christian joins from Vectura GmbH where he was Vice President - Corporate Development and was formerly Chief Business Officer at Activaero.

Lyon manufacturing facility

Following an expert determination process, in December 2013 Skyepharma renewed the lease of its manufacturing business and premises in Lyon (together "the Facility") with Aenova France SAS ("Aenova") at a rental of €2.0 million (£1.6 million at current rates) per annum until the lease terminates on 30 June 2016.  Aenova continues to manage and be responsible for the financial performance of the Facility on a day-to-day basis, and has commenced negotiations with the works council in respect of a site restructuring plan. Under the agreements with Aenova some of the costs of any restructuring, if implemented, may be borne by Skyepharma. Having largely exhausted the process to identify third party interest in taking over the Facility, the Group is reviewing options to add additional work into the Facility ahead of the manufacturing business reverting to Skyepharma when the lease terminates. The Board is also considering investing in a number of capital investments which would improve operating efficiency or capabilities.

Outlook

Prospects for the year remain in line with the Board's expectations. Revenues in the second half of 2014 are forecast to grow compared with the first half year driven by increasing momentum from the products launched since March 2012, especially flutiform® and EXPAREL®.

The continued growth of EXPAREL®, as previously highlighted, is expected to drive an increase in income from the Group's share of net sales whilst the cash from the first U.S.$8.0 million milestone recognised in the period is anticipated to be received during the second half. The Directors believe that, for the full year, the growth of royalties from recently launched products is likely to more than offset the decline in royalties from products which are facing generic competition in some markets. Based on orders in hand, revenues from flutiform® product supply are expected to grow to support increasing market penetration and the launch of the 120-puff product in Japan. A milestone of €2.0 million will be due to the Group following launch of flutiform® in Spain, and this could be as early as the second half of the year. A full years' rental income relating to the Lyon Facility together with growing EXPAREL® sales as noted above are expected to increase "Other Revenue" substantially in 2014 compared with 2013.

The Group continues to experience strong utilisation of its research and development expertise. As a consequence, a small number of additional skilled technical staff are being recruited at the research and development facility in Muttenz, Switzerland. Net investment in research and development for the current financial year is expected to be within the £3 million to £6 million range guidance given at the time of the annual results' announcement in March 2014.  

In addition to the exceptional financing charge reported in the first half of 2014, the Group may incur an exceptional reorganisation cost in the second half year for its share of reorganisation at the Lyon Facility if this is implemented following appropriate consultation.

Full year earnings will reflect a very significant reduction in pre-exceptional finance costs, with eight months' benefit from the repayment of the bond debt at the end of April 2014, the final scheduled amortisation payment on the Paul Capital Note at the end of June 2014, and further reductions in the CRC finance.

The Board looks forward to building on recent successes to drive future growth and to further exploit the Group's proven inhalation product development and oral drug delivery technologies and expertise.

APPROVED PRODUCTS

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

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

As of 20 August 2014, flutiform® has been launched by Kyorin Pharmaceutical Co, Ltd. ("Kyorin") in Japan (in 56-puff versions), and by affiliates of Mundipharma International Corporation Limited ("Mundipharma") in Australia, Hong Kong, Israel, South Korea and 18 European countries: Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Slovakia, Sweden, Switzerland and the UK. National marketing authorisations have also been granted in Argentina, Austria, Poland, Portugal, Romania, Singapore, Spain and Taiwan.

Recent sales information for flutiform® is set out in the 'Operational highlights' section of the Business Review above.  

In September 2013, Mundipharma, the Group's development, marketing and distribution partner in Europe and most other territories outside Japan and the Americas, commenced a clinical trial into the use of flutiform® for the treatment of COPD. Mundipharma is also preparing to carry out clinical trials in China for flutiform® for asthma and COPD and hopes to launch the product as soon as possible within the next five years.

Given the positive progress of the product in other territories and the evolving regulatory requirements, renewed efforts are being made to find a partner for flutiform® in the United States.

Sanofi, the Group's licensee in Latin America, has received marketing approval for flutiform® in Argentina. This is the first approval for the product in the region. A new drug application is under review in Colombia and further applications are being prepared. The potential for launching in the region is under discussion with Sanofi as a joint review is undertaken into the impact of continued weakness of local currencies against Sterling and the Euro, the main currencies underpinning the production cost.

The Development and Marketing Agreement with Mundipharma entered into in 2006, and later amended ("DMA"), includes milestones of up to €73.0 million (£58.5 million), of which €31.0 million had been paid by the end of June 2014, a further €2.0 million (£1.6 million) is due when flutiform® is launched in Spain and up to €40.0 million (£32.0 million) is dependent on reaching certain levels of annual net sales.

Mundipharma has funded certain third party development costs, which can be recovered by Mundipharma, subject to a maximum of €25.0 million (£20.0 million), against 100 per cent. of sales-related milestones and 50 per cent. of royalties due to the Group in respect of net sales from 1 January 2014, increasing to 75 per cent. of such royalties in respect of net sales from 1 January 2016 until fully repaid.

Part of an initial upfront milestone of €15.0 million (£10.1 million at the time) and additional funding by Mundipharma in respect of the development of a high strength version of flutiform® has been recorded in deferred income in the Group's balance sheet and will be recognised in the Group's income statement as the recoverable costs are recovered by Mundipharma by deduction from royalties and sales-related milestones. As at 30 June 2014, this amounted to £10.5 million.

Under the DMA, the Group is entitled to royalties as a percentage escalating upwards from 10 per cent. of net sales. The net royalties received are subject to the deductions noted above for recoverable costs. Royalties are also subject to a cap which limits the aggregate amount of royalties and costs of product supplied to Mundipharma by the Group to a maximum of 35 per cent. of net sales, and the Board estimates that this has reduced the effective royalty rate in 2014 to a rate materially below 10 per cent.

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

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

In July 2014, Mundipharma entered into a co-marketing and distribution agreement with Zambon Italia srl ("Zambon") in Italy. The agreement grants Zambon the exclusive right in Italy to promote and distribute fixed combination fluticasone propionate/formoterol fumarate under the Abriff® trade mark. Mundipharma Italy retains the exclusive right in the territory to promote and distribute the same fixed combination product under the flutiformo® trade mark. Mundipharma and Zambon agreed that the commercial launch of Abriff® in Italy will be performed by the end of 2014.

Patents relating to flutiform® have been granted in the main markets, with expiry dates between August 2019 and October 2030. Patent extensions and supplementary protection certificates are being sought where available, which may provide additional periods of protection up to a maximum of five years. 

Relvar®/Breo® Ellipta® is an inhaled combination product developed by GSK for the treatment of asthma and COPD. Relvar®/Breo® Ellipta® combines the ICS fluticasone furoate with the LABA vilanterol and incorporates one of the Group's proprietary dry powder formulation technologies for inhalation products accessed under a licensing arrangement.

Breo® Ellipta® was launched in the United States in October 2013 where it is indicated for the treatment of COPD. Marketing authorisation for COPD was also granted in Canada in July 2013. Relvar® Ellipta® was launched in the UK in January 2014 following approval for the treatment of asthma and COPD in 31 European countries by the European Commission in November 2013. A further combination product, known as Anoro® Ellipta®, containing two bronchodilator molecules, umeclidinium and vilanterol inhalation powder, was launched in the United States in April 2014 for the once-daily treatment of COPD. Marketing authorisation for Anoro® Ellipta® was granted in Europe in May 2014 and in Australia and Japan in July 2014 for the treatment of COPD. Another COPD treatment, Incruse® (umeclidinium), was approved in Europe, Canada and the United States in April 2014.

As at 30 July 2014, Relvar®/Breo® Ellipta® had been approved in 46 countries for marketing and had been launched in 19 countries, including the United States, Canada, Japan and the UK. At the same date, Anoro®Ellipta® had been approved in 39 countries for marketing and had been launched in five countries, including the United States, Canada, the UK and Germany.

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

The Group is entitled to a low-single digit percentage royalty on net sales of products using the licensed technology, capped at a maximum amount of £3 million per annum for each GSK chemical entity for the life of the relevant patents. The two GSK combination medicines and Incruse® between them involve three chemical entities, with a total potential income to the Group of up to £9 million a year for the life of the relevant patents. The technology licensed to GSK is covered by granted patents with the earliest expiry date for one of the granted patents in major markets of November 2019.

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

Following the launch by Tolmar, Inc, of a competing product in the United States in November 2013, the royalty rate on net sales of Solaraze® by Fougera increased from a low-teens percentage to 20 per cent. and a milestone was paid. The increased royalty rate also applies to net sales by Fougera of its own authorised generic which was also launched in November 2013.  While some Solaraze® patents in the United States expired in Q2 2014, the remaining patents expire in Q3 2015 and after that, royalty rates will decrease from 20 per cent. to a low-teens percentage royalty.

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

Net sales of Solaraze® in the United States (in both branded and authorised generic form) in H1 2014 were U.S. $16.2 million (£9.7 million), 38 per cent. lower than reported in H1 2013. Net invoiced sales in H1 2014 in ROW by Almirall increased by 17 per cent. to €18.2 million (£14.8 million) compared with the same period of 2013.

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

Sales information for H1 2014 is not yet available.

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

Xatral® OD (Uroxatral®in the United States) is a once-daily version of Sanofi's Xatral® (alfuzosin hydrochloride), a treatment for the signs and symptoms of benign prostatic hypertrophy ("BPH"). The U.S. rights to Uroxatral® were sublicensed in March 2013 by Sanofi to Covis Pharmaceuticals. The Group earns low-single digit royalties on net sales of Xatral® OD and Uroxatral®. In H1 2014, net sales of Xatral® OD and Uroxatral®were €40.4 million (£33.2 million), down 13 per cent. on H1 2013 sales of €46.6 million (£39.6 million). In the United States, net sales of Uroxatral® were €4.0 million (£3.3 million), down 23 per cent. from H1 2013 due to generic competition. Western European and Rest of World net sales have continued to fall also as a result of generic competition, with net sales for H1 2014 of €36.4 million (£29.9 million), a reduction of 8 per cent. from H1 2013.

Paxil CR™ is an advanced formulation of the anti-depressant Paxil® (paroxetine) and was developed by the Group with GSK using the Group's proprietary Geomatrix™ technology. Sales information for H1 2014 is not yet available.

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

ZYFLO CR® is an extended-release formulation of the oral asthma drug zileuton developed for Cornerstone Therapeutics Inc., which in February 2014, became a wholly-owned subsidiary of Chiesi Farmaceutici S.p.A. ZYFLO CR® (zileuton) extended-release tablets, taken twice daily, utilise the Group's proprietary Geomatrix™ technology, and the product is approved for the prophylaxis and chronic treatment of asthma in adults and children aged 12 years and older. ZYFLO CR® and ZYFLO® (zileuton immediate release tablets) are the only FDA-approved leukotriene synthesis inhibitors. Following the expiry of certain protections covering ZYFLO CR® in the second half of 2013, no further royalties are expected and Cornerstone are no longer reporting ZYFLO CR® sales to the Group. In H1 2013, ZYFLO CR® net sales were U.S.$27.3 million (£17.7 million at that time). The product continues to be manufactured at the Lyon facility.

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

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

Horizon reported net sales of LODOTRA® of U.S.$2.6 million (£1.6 million) in H1 2014 compared with net sales of U.S.$4.6 million (£3.0 million at that time) for H1 2013. Horizon recognises a significant portion of LODOTRA® sales at the time of delivery to its distribution partner, Mundipharma, and those deliveries are not linear or related to end market sales in terms of timing and therefore sales can fluctuate from year to year. In addition, Horizon reported net sales of RAYOS® in H1 2014 of U.S.$7.2 million (£4.3 million) (H1 2013: $0.9 million (£0.6 million)), following the RAYOS® launch in December 2012. The figures reported by Horizon are not the same as the net sales used in the calculation of the royalties paid to the Group.

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

In March 2013, Horizon and the Group received purported notice letters indicating that a Paragraph IV Patent Certification had been filed by Alvogen Pine Brook Inc. ("Alvogen") and advising that Alvogen had filed an Abbreviated New Drug Application ("ANDA") with the FDA for a generic version of RAYOS® containing up to 5 mg of prednisone. In the notice letter, Alvogen did not indicate the timing or status of the FDA's review of its filing and the validity of the letters for ANDA notification purposes were challenged. Subsequently, Alvogen has agreed that if its ANDA is accepted by the FDA a notification letter will need to be served after such acceptance and that all time periods will run from the date of service of such letters. No such notification letter has been received as of 20 August 2014 (being the latest practicable date prior to publication of these interim financial statements).

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

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

Sales of Sular® were substantially reduced in prior years due to a declining market and competitive factors. During 2013 the rate of royalty paid was reduced from a low-mid single digit percentage to a low single digit percentage on net sales.

Triglide® (fenofibrate), an oral treatment for elevated blood lipid disorders, is marketed in the United States by Shionogi and was launched in 2005. The potential for Triglide® sales in the United States has been limited by competing therapies. The Group is entitled to receive royalties as a percentage of net sales of Triglide®, less the price of product supplied to Shionogi. The Group had not received royalty payments with respect to Triglide® since Q1 2010 because Shionogi had claimed that they had overpaid royalties with respect to periods prior to such date and were seeking to credit such overpayments against royalties which would otherwise have been payable after such date. A resolution has been reached with Shionogi Inc. on the application of the licence agreement for Triglide® and royalty payments have resumed.

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

The Group is also entitled to a milestone of U.S.$4.0 million (£2.3 million) on first commercial sale of EXPAREL® in a major EU country (UK, France, Germany, Italy or Spain) and milestones on Pacira first achieving certain targets for annual net sales (on a cash received basis) of EXPAREL® as follows: U.S.$8.0 million (£4.7 million) when worldwide annual net sales reach U.S.$100 million (recognised during the first half of 2014), a further U.S.$8.0 million (£4.7 million) when worldwide annual net sales reach U.S.$250 million and a further U.S.$32.0 million (£18.8 million) when worldwide annual net sales reach U.S.$500 million.

Pacira has reported that EXPAREL® net sales in H1 2014 totalled U.S.$79.3 million (£46.5 million) with quarter on quarter growth in Q2 2014 of 31 per cent. versus Q1 2014. Pacira has reported that it continues its steady expansion since launch, reporting 363 new accounts ordering EXPAREL® in the second quarter of 2014, averaging 28 new accounts per week.  With consistent quarter over quarter growth, an anticipated nerve block indication next year and expanded manufacturing capacity, Pacira management have stated that EXPAREL® is well positioned to become a blockbuster drug over the next several years.

Recent sales performance of EXPAREL® (based on net sales by Pacira to its distributors) is set out in the table below:

Research and Development 

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

Following the Phase II study which met its primary endpoints, Somnus has continued to seek a partner or other funding to continue further development of the product, and the development is not proceeding until it has the available funds.

SKP-1052 - this product concept was developed in-house and uses the Group's proprietary Geoclock™ chronotechnology to reduce the risk of severe nocturnal hypoglycaemia in insulin-treated patients with type 1 and 2 diabetes mellitus. There is currently no recognised medication to reduce the risk of this side-effect of insulin treatment.

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

Manufacturing and Supply 

flutiform® Supply Chain

Under the agreements with Mundipharma and Kyorin, the Group is responsible for arranging the manufacture and supply of flutiform®, and has contracted with Sanofi to manufacture and assemble the product at its factory in Holmes Chapel, Cheshire, UK. Sanofi is also licensed to manufacture flutiform® to supply directly to its group companies for Mexico, Central and South America using certain ingredients and components supplied by the Group.

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

To establish the flutiform® supply chain the Group committed to substantial development and capital expenditure to scale-up and validate the manufacturing processes. By 30 June 2014 cumulative capital expenditure has been £15.4 million of which £0.9 million was incurred in 2014. In addition, in H1 2014 the Group incurred £1.4 million for product maintenance costs (H1 2013 restated: £1.6 million), which are included as part of cost of sales. In addition to these costs, the Group will need to continue to invest in:

· working capital to support growth in supply volumes of flutiform®

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

· additional capital expenditure to further scale up the manufacturing capacity and re-validate the process as necessary for higher volume production in anticipation of growth in demand (expected to be approximately £0.7 million and £3.0 million per annum in capital expenditure for 2014 and 2015 respectively).

Lyon Manufacturing Facility 

As noted in the Operating Review, Skyepharma's manufacturing facility in Lyon, France, continues to be leased to the Aenova Group which manages the Facility on a day-to-day basis.

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

Additional opportunities 

The Group continues to seek to strengthen the product pipelinethrough further early stage feasibility and technology development projects funded, where appropriate, on a time and materials basis by partners. Notable projects in the first half of 2014 have included the continuing work for RespiVert and development for Mundipharma of the breath-actuated version of flutiform® as noted above.

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

FINANCIAL REVIEW

Revenue

Revenues in H1 2014 were £34.4 million (H1 2013: £31.3 million) comprising signing and milestone receipts, contract research and development, royalties, product supply, share of sales of EXPAREL® and rental income from the Lyon Facility. The increase over 2013 is primarily due to the growth of EXPAREL® resulting in the recognition of the first sales milestone of U.S.$8 million (£4.7 million at the time), partly offset by lower sales of Lyon products and H1 2013 including contract development work related to the launch of flutiform® in Japan. flutiform® supply revenues were similar to the prior year, which included substantial launch stocks in a number of markets.

Revenue recognised from signing and milestone payments was £7.5 million in H1 2014 (H1 2013: £2.4 million), mainly comprising a €3.0 million (£2.5 million at the time) milestone following the commercial launch of flutiform® in France in February and a U.S.$8.0 million (£4.7 million at the time) milestone following the achievement of U.S.$100 million of annual net sales of EXPAREL® in June.

Contract research and development revenue was £3.5 million in H1 2014 (H1 2013: £4.9 million) which included further work on the breath-actuated version of flutiform® for Mundipharma, and contract development services provided to RespiVert. The reduction against the prior year included contract development income in 2013 related to the launch of flutiform® in Japan.

Royalty income for the period at £8.4 million was below the prior year (H1 2013: £8.8 million) due to the expiry in H1 2013 of certain protections in relation to ZYFLO CR® and cessation by GSK of royalty payments for Paxil CR™ in the United States. The income relates to 15 approved and marketed products, including first time royalty receipts compared with H1 2013 from Anoro® Ellipta® in the United States, Relvar®/Breo® Ellipta®in the United States, Europe and Japan and flutiform® in Japan, France and a number of other countries.

Product supply revenue totalled £12.9 million in H1 2014, down on H1 2013 (£14.4 million) primarily due to lower revenues from supplying oral products manufactured in the Lyon Facility. flutiform® product supply revenues of £9.8 million were similar to H1 2013 (£10.0 million). Based on orders in hand, the Board expects that revenues from the supply of flutiform® will grow strongly in H2 2014 and will be an increasing proportion of the Group's revenues in the coming years.

Other revenue of £2.1 million (H1 2013: £0.8 million) comprises the Group's three per cent. share of Pacira's cash receipts from net sales of EXPAREL® in the United States and rental income from Lyon. Following the expert determination in the Group's favour, the lease of the manufacturing facility to Aenova was renewed on 19 December 2013 and rent then became due at an annual rental of €2.0 million (£1.6 million at current rates) until 30 June 2016.

Cost of sales

A review of the accounting policies relating to expenses was undertaken in late 2013 to better present the costs associated with both product supply activities and research and development activities, given the significant growth of the flutiform® supply chain. As a result, £1.3 million of project expenditure previously reported under research and development costs in H1 2013 has been included in cost of sales, and research and development costs in H1 2013 have reduced by a corresponding amount. For further details, please see Note 2(b) in the 2013 Annual Report and Accounts.

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

For H1 2014, cost of sales reduced to £13.2 million compared with £19.1 million in H1 2013 (as restated) due to lower Lyon manufacturing volumes and improving economies of scale in respect of flutiform® supply. With higher orders for flutiform®, period-end inventories increased to £11.1 million (31 December 2013: £8.8 million), which includes £1.7 million of capitalised overheads (31 December 2013: £0.8 million).

Research and development expenses

Gross research and development expenses incurred in H1 2014 were £5.3 million, in line with the prior year comparative period (as restated). Gross expenditure included activity on a number of projects on behalf of Mundipharma, contract development work for RespiVert and increased investment on internal development projects as expected following the capital raise. Whilst the majority of the Group's research and development resources has remained focused on partner-funded projects, the higher level of internal projects, and a partial contribution to Mundipharma's development of a breath-actuated version of flutiform®, has resulted in net investment in research and development (expenses, net of contract development revenues) of £1.8 million, compared with £0.4 million in H1 2013 (restated).

Earnings before interest, tax, depreciation and amortisation (EBITDA)

In H1 2014 EBITDA was up 121 per cent. on H1 2013 at £14.6 million (H1 2013: £6.6 million).

Exceptional items

Following the capital raise and bond repayment transactions which were concluded in April 2014, the Group recorded an exceptional financing charge of £25.5 million, of which £0.4 million related to the costs of the bond repayment and £25.1 million related to the loss on extinguishment of the bonds. The exceptional charge is described in further detail in Note 7: Exceptional items.

There were no exceptional items recorded during H1 2013.

Finance costs and income

Finance costs - interest totalled £5.3 million (H1 2013: £6.9 million) and consisted of £3.7 million (H1 2013: £4.8 million) in respect of the bonds, £1.4 million (H1 2013: £1.5 million) in respect of the CRC finance, £19,000 (H1 2013: £0.4 million) of interest attributable to the Paul Capital Note and £0.2 million (H1 2013: £0.2 million) on other bank borrowings.

Due to very low prevailing deposit rates, there was negligible finance income during the period (H1 2013: £0.1 million).

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 H1 2014 this amounted to a loss of £0.5 million (H1 2013: gain of £0.6 million) due to strengthening of Sterling.

Result

Pre-exceptional operating profit in H1 2014 was £13.2 million (H1 2013: £4.6 million).

Loss before tax for H1 2014 was £18.1 million (H1 2013: £1.6 million). Total net loss after tax in H1 2014 was £17.7 million (H1 2013: £1.7 million).

Earnings per share

Both basic loss per share and diluted loss per share for H1 2014 amounted to 27.0 pence (H1 2013: 3.6 pence loss).

As at 30 June 2014 there were 104,812,259 Ordinary Shares in issue (H1 2013: 46,127,645) following the issue of Ordinary Shares through the capital raise in April 2014.

In addition there were outstanding as at 30 June 2014 a number of potential issues of Ordinary Shares as follows:

At 20 August 2014, the Company's closing share price was 253.0 pence.

Cash position and liquidity

As at 30 June 2014 the Group had cash and cash equivalents of £26.3 million (31 December 2013: £16.5 million). During the H1 2014, the Group generated cash from operations of £8.8 million compared with £5.5 million in H1 2013.

The Group also met scheduled financing commitments comprising scheduled repayment of debt of £3.8 million, mainly to CRC finance (H1 2013: £3.1 million) and £1.6 million of net interest was paid (H1 2013: £0.5 million), primarily relating to the CRC finance, the Paul Capital Note and the property mortgages.

Of the net proceeds of the capital raise, which totalled £104.2 million, a total of £95.6 million was used to pay off the bonds and £0.4 million was used for expenses related to the early redemption of the bonds.

At 30 June 2014 Skyepharma had liquidity of £27.0 million (31 December 2013: £17.3 million), consisting of cash of £26.3 million and undrawn overdraft facilities of £0.7 million.

Key performance indicators

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

Product supply volume is no longer considered to be a relevant KPI because it does not provide meaningful information.

Description of KPIs

Revenue excluding milestones

Revenue excluding milestones reports revenues without the effect of signing and milestone payments which by their nature tend to be lumpy and vary from one year to the next. This KPI shows underlying revenue trends for royalties, contract research and development work and supply activities. Revenue excluding milestones in H1 2014 of £26.9 million is lower than H1 2013, as the growth of EXPAREL® resulting in an increase in income from share of net sales is partly offset by lower sales of Lyon products and H1 2013 including contract development work related to the launch of flutiform® in Japan. flutiform® supply revenues were similar to the prior year, which included substantial launch stocks in a number of markets.

Signing and milestone payments received

This shows amounts of cash received for milestones in respect of products and pipeline product candidates. The total cash received during H1 2014 of £2.7 million is higher than H1 2013, primarily due to the receipt in March of a €3.0 million (£2.5 million at the-then prevailing exchange rate) milestone payment from Mundipharma following the launch of flutiform® in France.

Total research and development expenditure

Research and development expenditure measures the costs, including direct and indirect overheads, of all research and development activities. A breakdown of the costs during H1 2014 is shown in Note 6: Research and development expenses. The expenditure in H1 2014 is in line with the prior year as additional flutiform® work for Mundipharma and on internal projects was offset by projects completed in the prior year, notably the work for Kyorin in preparation for the Japanese launch of flutiform®.

Net investment in research and development expenditure

This shows the Group's total research and development expenditure net of costs reimbursed by development partners. It shows that the Group's own investment in research and development (net of any contribution margin from contract research and development for third parties) increased to net expenditure of £1.8 million in H1 2014. This is higher than H1 2013 due to a higher level of internal project activity, and a partial contribution to Mundipharma's development of a breath-actuated version of flutiform®, in line with the guidance on full year net expenditure given at the time of the 2013 results announcement of £3 million to £6 million.

Liquidity

This measures the availability of cash resources for corporate purposes. Liquidity as at 30 June 2014 consisted of cash and cash equivalents of £26.3 million, as per the balance sheet, plus undrawn facilities of £0.7 million.

Number of approved and marketable revenue-generating products

This represents the number of products on which the Group does or expects to earn revenues and which were approved for marketing in at least one country at the end of the period. During 2014, the total increased to 16 following the approval of Incruse® in the European Union and the United States.

Balance sheet

At 30 June 2014, the Group's balance sheet shows total shareholders' equity of £22.6 million (31 December 2013: £64.6 million deficit).

Borrowings and liquidity

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

Total debt has decreased by £71.5 million during H1 2014, reflecting repayment of the bonds and the Paul Capital Note, and scheduled capital repayments in respect of CRC finance and other borrowings. For further details please see Note 13: Borrowings.

Non-current assets marketed for sale

One of the sites in Switzerland remains vacant and has been marketed for sale since January 2011. As at 30 June 2014, the net book value of the site is £4.0 million, recorded in the Group's balance sheet under property, plant and equipment, and comprises £3.8 million relating to land and buildings and £0.2 million relating to plant and machinery.

Commitments

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €10.0 million to €11.0 million (£8.0 million to £8.8 million) per annum through to 2015, subject to certain early termination rights.

Aenova lease of Lyon Facility

The Group extended the lease of its manufacturing business and premises in Lyon to Aenova until 30 June 2016 at a rental of €2.0 million (£1.6 million at current rates) per annum commencing on 19 December 2013. The rental income is included in "Other revenue" as set out in Note 4 to these Interim Financial Statements.

Going concern

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

Foreign exchange risks

Almost all of the Group's operations are based in Continental Europe and licence royalty payments are typically denominated in various currencies, with sales-related payments based on underlying sales in local currencies. This gives rise to direct and indirect exposures to changes in foreign exchange rates notably the U.S. Dollar, Euro and Swiss Franc. To minimise the impact of any fluctuations, the Group's policy is to maintain natural hedges by relating the structure of borrowings to the underlying trading cash flows that generate them. Exchange translation gains and losses relating to funding (cash and debt) are included in foreign exchange gain or loss on net debt, other realised exchange gains and losses and exchange translation gains and losses are included within the revenue or expense line to which they most closely relate. Where subsidiaries are funded centrally, this is achieved by the use of long-term intercompany loans. Where settlement of such intra-group loans is neither planned nor likely to occur in the foreseeable future, they are treated as part of the net investment and exchange differences are taken to reserves. No use was made of currency options and forward currency contracts during 2014 to date or in 2013.

Forward looking statements

The foregoing disclosures contain certain forward-looking statements. Although Skyepharma believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will materialise. Because the expectations are subject to risks and uncertainties, actual results may vary significantly from those expressed or implied by the forward-looking statements based upon a number of factors. Such forward-looking statements include, but are not limited to, the timescales for approval, launch or regulatory filings for flutiform® and other products, the statements under "Outlook", prospects and any forecast sales of flutiform® and other products, the development of new products, risks related to obtaining and/or maintaining regulatory approval for existing, new or expanded indications of existing and new products, risks related to Skyepharma's ability or that of its sub-contractors and partners to manufacture products on a large scale or at all, risks related to Skyepharma's and its marketing partners' ability to market products on a large scale to maintain or expand market share in the face of changes in customer requirements, competition and regulatory and technological change, risks related to the ownership and use of intellectual property, risks related to Skyepharma's ability to manage growth, and the risk of costs associated with the termination of the lease of the Lyon Facility in June 2016. Skyepharma undertakes no obligation to revise or update any forward statement to reflect events or circumstances after the date of this Interim Report.

RESPONSIBILITY STATEMENT 

The Directors of Skyepharma, as listed on pages 38 and 39 of the 2013 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; and

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 2013 Annual Report and Accounts.

By Order of the Board

Peter Grant

Chief Executive Officer

20 August 2014

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2014

See Notes to the Half Year Financial Statements

All results are derived from continuing operations.

Refer to Note 2(b) for explanation of the restatement of H1 2013 figures.

CONDENSED CONSOLIDATED INCOME STATEMENT (CONTINUED)

For the six months ended 30 June 2014

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (EXPENSE)/INCOME

For the six months ended 30 June 2014

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEET

As at 30 June 2014

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2014

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2013

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2013

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 June 2014

See Notes to the Half Year Financial Statements

NOTES TO THE CONDENSED CONSOLIDATED CASH FLOW STATEMENT

(a) Cash generated by operations

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1 General information

The Half Year Report of the Group for the six months ended 30 June 2014 ("Half Year Report 2014") was authorised for issue in accordance with a resolution of the Directors on 20 August 2014. The Half Year Report 2014 is unaudited but has been reviewed by the Auditors as set out in their report.

Skyepharma PLC (the "Company") and its subsidiaries (together the "Group") is a specialty pharmaceutical group which combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products.

The Company is incorporated and domiciled in the United Kingdom, with its registered office at 46-48 Grosvenor Gardens, London SW1W 0EB.

The financial information for the year ended 31 December 2013 does not constitute statutory financial statements within the meaning of section 435 of the Companies Act 2006. A copy of the audited financial statements for that year has been delivered to the Registrar of Companies. The Auditors' opinion on those financial statements was unqualified.

2 Accounting policies

(a) Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2014 have been prepared in accordance with IAS 34 Interim Financial Reporting.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2013.

The accounts have been prepared under the historic cost convention. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. All values are rounded to the nearest £0.1 million.

Going concern

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

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2 Accounting policies (continued)

(a) Basis of preparation (continued)

Significant accounting policies

The accounting policies, presentation and methods of computation are as applied in the Group's 2013 Annual Report and Accounts.

The following standards and interpretations, relevant to the Group, have been issued at the date of these accounts but are not yet effective:

· IFRS 9 Financial instruments - Classification and Measurement

· IAS 19 Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)

The Group plans to adopt IFRS 9 and IAS 19 (amended) for the year commencing 1 January 2015: the effect of adoption of these standards is expected to be immaterial for the Group.

The Group has adopted the following accounting policy during the period ended 30 June 2014:

· IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

· IAS 36 Impairment of Assets (Recoverable Amount Disclosures for Non-Financial Assets) 

Adoption of these standards did not have any effect on the financial position of the Group, or result in changes in accounting policy or additional disclosure.

(b) Changes in accounting policies and reclassification of H1 2013 income statement

Due to the growth in flutiform® supply during 2013, a review of the allocation of operating costs was undertaken to ensure appropriate presentation of the expenses associated with supply activities within the Group. As a result, operating costs which had been previously recorded under research and development costs, but which related to the support of the ongoing flutiform® commercial supply chain (including the manufacturing processes at the subcontractor, Sanofi), have now been included within cost of sales (manufacturing costs). This policy was applied as at 31 December 2013. All H1 2013 comparatives have been restated accordingly, the financial effect of this has been as follows:

- Cost of sales has increased by £1.3 million to £19.1 million

- Research and development expenses have decreased by £1.3 million to £5.3 million

The new classifications are outlined within note 2(b) to the 2013 Annual Report and Accounts.

(c) Changes in accounting estimates

i) Following the signing in December 2013 of an extended Master Service Agreement ("MSA") with Sanofi for the manufacture of flutiform®, a review of useful estimated lives of production line tangible fixed assets was undertaken. As a result of this review, the useful estimated lives of these assets was increased from 20 million units of production to 45 million units of production, being the revised production estimated based on the extended MSA. As a result of this change in estimate, depreciation expense for H1 2014 is approximately £0.5 million lower than under the previous basis.

ii) Management have reviewed the basis on which deferred tax is calculated, as a result of greater certainty over certain revenue flows for the Group. Deferred tax is now calculated using a

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2 Accounting policies (continued)

(c) Changes in accounting estimates (continued)

ii) one year look-forward period. The effect of this change in estimate is a credit of £0.6 million to the income statement as at 30 June 2014.

3 Segmental information

The Board has identified, based on information used internally by management to assess the performance of, and allocate resources to the business, that it has one operating segment being the development and supply of pharmaceutical products.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4 Revenue by income stream

During the six months ended 30 June 2014, flutiform® generated £1.5 million of royalty revenue (H1 2013: £0.5 million) and £1.3 million of contract development revenue (H1 2013: £2.7million), as well as £9.8 million in product supply (H1 2013: £10.0 million).

Other revenue comprises the Group's share of net sales of EXPAREL® in the United States and rental income in respect of the lease to the Aenova Group of the Group's manufacturing facility in Lyon, France.

5 Cost of sales

During the six months ended 30 June 2014, cost of sales related to the supply of flutiform® totalled £9.0 million (Restated H1 2013: £13.5 million).

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6 Research and development expenses

7 Exceptional items

The capital raise and bond repayment on 30 April 2014 resulted in a £25.5 million exceptional finance charge of which £25.1 million was non-cash. Refer to Note 13: Borrowings for more information.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8 Finance costs and income

9 Foreign exchange on net debt

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10 Earnings per share

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

For the six months ended 30 June 2014 and 30 June 2013, there were no differences between the basic and diluted loss per share amounts since the results were losses and as a result, all potential shares from stock options, warrants and contingent issuance of shares are anti-dilutive. 

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

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11 Property, plant and equipment

In the six months to 30 June 2014, the Group made additions totalling £0.3 million (H1 2013: £0.1 million).

12 Inventories

During H1 2014, certain inventory was written down to net realisable value resulting in a charge of £0.1 million (H1 2013: £1.0 million) to cost of sales.

13 Borrowings

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13 Borrowings (continued)

Total debt has decreased by £71.5 million in the period. This is due to the early repayment of the non-convertible bonds of £66.8 million (£70.5 million book value at 30 April 2014), together with the final scheduled amortisation payment of the Paul Capital Note made in June 2014 and capital repayments in respect of CRC finance and the property mortgages.

Bank borrowings

At 30 June 2014 bank borrowings consist of a loan of CHF 2.0 million (£1.3 million) (2013: CHF 2.0 million (£1.4 million)) with the Basellandschaftliche Kantonalbank ("BLKB"). This loan can be terminated on six weeks' notice by either party and bears interest at 6.5 per cent. per annum. This loan is secured on the assets of Skyepharma AG.

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

Bonds

On 31 March 2014, Skyepharma announced the capital raise and bond repayment, which were successfully concluded in on 30 April 2014. As a result, the Group has used the proceeds of the capital raise (refer to Note 15) to repay its bond debt in full at a cost of £95.6 million, representing a discount of £25.2 million compared with the total amount which would have been payable at the earliest normal redemption date of November 2017. After costs, the balance of the proceeds of the capital raise was approximately £8.2 million, and the Group's net debt as at 30 April 2014 was £4.8 million. The repayment of the bonds has reduced the Group's full year net finance cost in the consolidated income statement by £8.1 million in 2014 and by £13.3 million in 2015 compared with the costs forecast prior to the repayment.

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

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13 Borrowings (continued)

Property mortgages

In February 2011 the Group renewed its two mortgage agreements with the Basellandschaftliche Kantonalbank. One of the sites in Switzerland has been vacated and is being marketed for sale and for lease (which could be to multiple occupants). As at 30 June 2014, this site has a net book value of CHF 6.0 million (£4.0 million) and a mortgage of CHF 2.8 million (£1.9 million) which, together with the amortising loan above of CHF 2.0 million (£1.3 million) will be repayable on completion of any sale. This mortgage bears interest at a variable rate (currently 4.0 per cent. per annum) and is repayable with three months' notice from either party.

As at 30 June 2014, the carrying value of the mortgage relating to the buildings which are in use by the business is CHF 7.6 million (£5.0 million), which bears interest at 3.6 per cent. per annum and is fully repayable, if not extended, in 2016.

Paul Capital Note

In June 2014 the final scheduled amortisation payment was made on the Paul Capital Note. At 30 June 2014 a cumulative total of U.S.$10.7 million (£6.3 million) of the Group's repayments of the Paul Capital Note had been made by Pacira. As Skyepharma's scheduled payments to Paul Capital have been made, the remaining contractual payments by Pacira are expected to pass to Skyepharma and will be recorded as a reduction against finance costs. As such, a receivable has been recognised on the Balance Sheet as at 30 June 2014, discounted at 11.2 per cent.

There was no revaluation in the six months to 30 June 2014 or six months to 30 June 2013.

CRC finance

On 22 December 2006, Skyepharma and various of its subsidiaries entered into an agreement ‎with a specialised lending entity ("CRC"), advised by Christofferson, Robb & Company LLC, for a 10 ‎year secured amortising loan facility (the "CRC Facility"). This facility was amended on 23 March 2007 and with effect from 1 July 2011 and 1 July 2012. The last amendment ("2012 Amendment"), announced on 28 September 2012, was made at the same time as the Bond Restructuring in order to enhance the Group's short-term liquidity position.

The key terms of the CRC Facility (as amended) are set out within the 2013 Annual Report and Accounts.

The principal outstanding on the CRC Facility is as follows:

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13 Borrowings (continued)

The carrying value of the CRC facility of £21.0 million remains approximate to its fair value of £21.0 million.

Interest rates applicable on the facility have been as follows:

*As at 30 June 2014, U.S. LIBOR was 0.231 per cent. (2013: 0.246 per cent.).

**As at 30 June 2014, EURIBOR was 0.207 per cent. (2013: 0.287 per cent.).

The following amortisation schedule shows the interest payable and principal outstanding under the CRC Facility as at 30 June 2014:

There were no further amendments made to the Facility during the six months ended 30 June 2014.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14 Provisions

An amount totalling £4.0 million (H1 2013: £5.2 million) of the provisions balance relates to the Group's retirement commitments under its pension scheme in respect of its employees in Switzerland and the Group's leaving indemnity commitments under French law. The latter relates to former employees transferred to Aenova under the management lease agreement in France who are not expected to retire during the initial lease period and could return to the Group's employment on expiry of the lease.

The other provisions of £0.1 million (H1 2013: nil) primarily consists of provisions for future legal actions relating to potential intellectual property infringements.

a) Pensions

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15 Share capital

On 30 April 2014, the Group undertook a capital raise which resulted in the recognition of 58.7 million £1 ordinary shares issued at a premium of 91p. The difference between the face value of the shares issued and the premium at which they were issued was recorded in the share premium account, along with the associated costs (being a net £45.5 million).

Full details of the Deferred 'B' Shares and Deferred 'C' Shares are set out in Note 28 of Notes to the 2013 Annual Report and Accounts.

16 Commitments

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

To establish the flutiform® supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes, of which £6.7 million is outstanding as at 30 June 2014 (31 December 2013: £6.3 million). A former partner funded €3.0 million (£2.6 million) of the expenditure of the flutiform® supply chain which the Group repaid in instalments during 2013.

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €10.0 million to €11.0 million (£8.0 million to £8.8 million) per annum through to 2015, subject to certain early termination rights.

17 Related party transactions

Group

Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

17 Related party transactions (continued)

During the period, a significant intercompany balance between the parent company and one of its subsidiaries was eliminated through the bond repayment, in April 2014.

Company

The Company has issued share options to employees of subsidiary undertakings and in accordance with IFRS 2 made a charge of £0.3 million during H1 2014 (H1 2013: £0.1 million).

The Company has charged £0.7 million (2013: £0.6 million) to its subsidiary undertakings and the Company was charged nil (2013: nil) by its subsidiary undertakings for corporate services provided.

The Company has intercompany loans and accounts with its subsidiary undertakings, details of which are set out in the 2013 Annual Report and Accounts. Current intercompany balances are normally settled on a monthly basis, including any interest charged on non-current intercompany loans.

18 Post balance sheet events

On 13th August 2014, the Group acquired the global rights and related intellectual property (including granted patents and patent applications) to a novel inhaled therapy platform from Pulmagen Therapeutics (Synergy) Limited ("Pulmagen"). Skyepharma will apply its proven expertise in inhaled drug development to develop a first product (SKP-2075) for chronic obstructive pulmonary disease (COPD) through to the completion of a Phase II efficacy and safety trial sized to produce statistically significant results. It will then seek to out-licence SKP-2075 to a pharmaceutical partner for late-stage development and commercialisation. 

By way of consideration, Pulmagen will receive certain launch milestones and a share of Skyepharma's potential future revenues from the successful exploitation of the acquired rights.

INDEPENDENT REVIEW REPORT TO THE MEMBERS OF SKYEPHARMA PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 which comprises Condensed Consolidated Income Statement, Condensed Consolidated Statement of Comprehensive income/(Expense), Condensed Consolidated Balance Sheet, Condensed Consolidated statement of changes in Equity, Condensed Consolidated Cash Flow Statement, and the related notes 1 to 18. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP,

Reading

20 August 2014