Half Yearly Report

SkyePharma PLC (LSE: SKP), LONDON, ENGLAND, 23 August 2012

Summary of unaudited results for the six months ended 30 June 2012

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

Financial Highlights

·; Revenues in line with Board expectations at £19.8m, down 10% compared with H1 2011 (£22.1m) primarily due to lower milestones and royalties recorded in H1 2012

·; Pre-exceptional operating profit also in line with expectations at £3.7m (H1 2011: £2.7m), up 37%, reflecting reduced investment in R&D and cost savings partially offset by a reduction in gross profit

·; Pre-exceptional EBITDA from continuing operations £4.9m (H1 2011: £4.2m)

·; Total net profit after tax from continuing operations and discontinued operations of £3.6m (H1 2011: £0.4m)

·; Cash and cash equivalents of £11.0m at 30 June 2012 (2011: £15.2m)

Operating Highlights

·; Positive outcome for flutiform® in Europe at the Committee for Medicinal Products for Human Use ("CHMP") in May 2012 led to:

o EC decision in July 2012 in favour of granting of marketing authorisations/approvals for flutiform®. Decision is legally binding on the 21 member states in the decentralised procedure ("DCP")

o Subsequent approval of flutiform® in Germany, the UK, Cyprus, the Netherlands and the Slovak Republic.

·; Development of flutiform® in Japan making good progress with the successful completion of the Phase III clinical studies for the Japanese development programme for KRP-108 (flutiform®)

o Regulatory filing with the Japanese authorities on track for Kyorin's fiscal year ending in March 2013

·; Milestone received of U.S.$10 million (£6.2 million) following launch of EXPAREL® (postsurgical analgesia), in the United States by Pacira Pharmaceuticals, Inc

·; Two additional agreements entered with RespiVert to conduct feasibility studies to develop DPI dosage forms on RespiVert compounds

·; Reorganisation of Swiss operations in January 2012 to improve SkyePharma's competitiveness and reduce cost base by approximately £1.6m in 2012 and £1.8m per annum thereafter

·; Peter Grant appointed Chief Executive Officer in January 2012

Post Reporting Period Highlights

·; Agreement has been reached with a significant majority of bondholders, which have signed deeds of undertaking, to support a consent solicitation process, announced today, to approve proposals ("Bond Proposals") to restructure the Group's £83.0 million Convertible Bonds. Under the Bond Proposals:

o £22.2m of the Convertible Bonds will be converted into equity (approximately 48% of the equity in issue following the transaction) at £1.00 per share (compared with closing share price of £0.94 on 22 August 2012), and

o £60.8m balance will remain outstanding as non-convertible bonds on amended terms.

Once implemented, the Bond Proposals will significantly reduce potential liquidity demands on the Group over the next 24 months by deferring interest payments and by extending the earliest date at which the bonds can ordinarily be redeemed by the bondholders to be more than five years away.

·; RAYOS® (known as LODOTRA® in Europe) approved in the U.S. by the Food and Drug Administration ("FDA") in July 2012 with launch for rheumatologic diseases expected in Q4 2012. LODOTRA® also approved in Australia.

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

"The Group has reported progress across a number of fronts during the period and, most importantly, gained European regulatory approval for flutiform. This is significant validation of the Group's proprietary respiratory technology and expertise in a complex treatment area. The product is also on track for regulatory submission in Japan following the successful completion of two Phase III studies confirming the efficacy and tolerability of KRP-108/flutiform. SkyePharma received a $10 million milestone payment from Pacira following the launch of EXPAREL in the U.S. and is eligible for substantial additional milestone payments and 3% of net sales in the U.S.

"Post-period end, the approval of RAYOS in the U.S. is another milestone for the Company. RAYOS/LODOTRA utilises SkyePharma's novel Geoclock™ Chronotechnology. We are also pleased to have reached agreements with a significant majority of bondholders to reorganise the Group's capital structure. The Bond Proposals are designed to alleviate short-term liquidity demands, better align repayment obligations with the Group's cash generative potential, and leaves approximately 52 per cent. of the equity in the ownership of existing shareholders. The Board believes the Bond Proposals will provide the most appropriate, cost-effective and timely method of refinancing the Group. We look forward to reporting continued development of the business in the second half of 2012."

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

For further information please contact:

About SkyePharma PLC

Using its multiple drug delivery technologies and expertise, SkyePharma creates enhanced versions of pharmaceutical products. The Group receives revenues from thirteen approved products in the areas of inhalation, oral, topical and injectable delivery as well as generating income from the development of further products and technology licenses. 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

Revenue in the first half of 2012 was £19.8 million (H1 2011: £22.1 million), slightly lower than H1 2011 primarily due to expected lower milestones and royalties. Pre-exceptional operating profit increased 37 per cent. to £3.7 million in H1 2012 (H1 2011: £2.7 million). Total profit after tax during H1 2012 was £3.6 million (H1 2011: £0.4 million).

A number of key strategic objectives (described in more detail in the Chief Executive Officer's Review) have been achieved in the year to date:

- Approval of flutiform® in a number of European countries, with launches expected later this year triggering potential milestone receipts of €8.0 million (£6.4 million) from Mundipharma

- Successful completion of two Phase III trials for flutiform® in Japan

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

- Approval of RAYOS® in the United States with launch expected later this year

- Approval and launch by GlaxoSmithKline ("GSK") of Paxil CR™ and approval of Requip® Once-a-day in Japan

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

Refinancing

On the financing front, significant progress has also been made towards re-balancing the Group's financing obligations to align with its forecast cash generation. An agreement has been reached with a significant majority of bondholders, which have signed deeds of undertaking, to support a consent solicitation process, announced today, to approve restructuring proposals ("Bond Proposals") described in more detail below. 

In March 2011, SkyePharma announced that it had appointed Jefferies International Limited to provide financial advice to the board of SkyePharma on the Group's capital structure. With the announcement of the 2011 results in March 2012, the Board stated that "even with the expected launch of EXPAREL® and approval and initial launch of flutiform®, it is considered unlikely, based on current financing and licensing agreements, that the Group would generate sufficient cash from normal trading to meet the earliest possible bond Puts if the bonds are not converted prior to those dates". It was also announced that SkyePharma (Jersey) Limited would seek to commence a dialogue with bondholders to seek a consensual solution to rebalance the Group's financing obligations to be in line with forecast cash generation and that this may involve substantial dilution to shareholders. Subsequently it was reported that those discussions had commenced with the continuing support of Jefferies International Limited. The Bond Proposals are the negotiated outcome of those discussions.

Once implemented, the Bond Proposals will significantly reduce potential liquidity demands on the Group over the next 24 months by deferring interest payments and by extending the earliest date at which the bonds can ordinarily be redeemed ("Put") by the bondholders to be more than five years away. Under the Bond Proposals, an aggregate principal amount of £22.2 million of the existing £83.0 million Convertible Bonds (£17.0 million of the 2024 Bonds and £5.2 million of the 2025 Bonds) will be converted into 22.2 million Ordinary Shares, leaving £60.8 million outstanding as non-convertible bonds on the following amended terms:

- Ordinary interest of 6.5 per cent. per annum, with an option, which the Group intends to exercise, for the Group to defer payment of the next four semi-annual payments (totalling up to £7.9 million) until up to 4 November 2017, subject to the right to further deferrals ceasing on certain change of control events and a significant cash equity issuance. Deferred interest will become payable earlier out of proceeds, subject to certain restrictions, of certain cash equity issuances as well as on early redemption of the bonds.

- Additional interest of 3 per cent. per annum to 4 November 2017 (up to £9.3 million) and a redemption premium of 47.3 per cent. (£28.8 million), both payable on redemption.

- The earliest date when the bondholders may ordinarily redeem the bonds is 4 November 2017.

The Bond Proposals involve an exchange of £14.8 million newly issued 2024 bonds ("New 2024 Bonds") for the balance of the £20.0 million 2025 Bonds which will be outstanding following the mandatory conversion of £5.2 million of the 2025 Bonds into equity. The Group has undertaken to issue a debt prospectus and to seek the listing of the New 2024 Bonds on the London Stock Exchange, subject to certain conditions, by the end of 2012.

On implementation, the Bond Proposals will result in a substantial exceptional charge in the income statement of the Group and the Company. The normal financing cost in the income statement will also be higher than the historical charges under the existing Convertible Bonds, due to the additional interest charge, the redemption premium, and accounting for the liability to fall due in just over five years' time rather than through to the final maturity dates of 2024 and 2025.

The Board expects that, following a meeting of holders of the 2024 Bonds and written resolution of holders of the 2025 Bonds, the Bond Proposals will be approved by the end of September 2012. The Bond Proposals already have the agreement of approximately 86 per cent. of the holders of the £63.0 million 2024 bonds and all of the holders of the £20.0 million 2025 bonds, which have signed deeds of undertaking, and do not require consent from shareholders or secured lenders.

The 22.2 million additional Ordinary Shares to be issued to bondholders at £1.00 per share (compared with closing share price of £0.94 on 22 August 2012) will represent approximately 48 per cent. of the enlarged share capital, and is almost the same number of shares which would have been issued if the bondholders had converted on existing conversion terms. Whilst the remaining £60.8 million non-convertible bonds will carry substantial additional interest and a redemption premium compared with the existing Convertible Bonds, most of these returns will not ordinarily be payable for over five years. The Bond Proposals, therefore, aim to alleviate short-term liquidity demands on the Group, better align repayment obligations with the Group's cash generative potential, and leave approximately 52 per cent. of the equity in the ownership of existing shareholders. The Board of SkyePharma, which has been advised by Jefferies International Limited, has carefully considered the Bond Proposals and believes that they provide the most appropriate, cost-effective and timely method of refinancing the Group.

Financial highlights

Revenues in H1 2012 totalled £19.8 million, down 10 per cent. compared with H1 2011 (£22.1 million) primarily due to lower milestones and royalties. In contrast, cost of sales in H1 2012 totalled £8.0 million, up 23 per cent. compared with £6.5 million in H1 2011, due to costs related to the manufacturing of commercial batches of flutiform® in anticipation of launches later this year. As a result gross profit was reduced to £11.8 million (H1 2011: £15.6 million).

Pre-exceptional operating profit from continuing operations at £3.7 million is higher than the £2.7 million in H1 2011 reflecting reduced investment in R&D and cost savings partially offset, by the reduction in gross profit.

Loss before tax from continuing operations for H1 2012 was £2.5 million (H1 2011: £0.6 million profit), loss after tax from continuing operations was £2.6 million (H1 2011: £0.4 million profit) and basic earnings per share from continuing operations were a loss of 10.5 pence (H1 2011: 1.7 pence gain). Profit after tax from continuing and discontinued operations for H1 2012 were £3.6 million (H1 2011: £0.4 million).

Pre-exceptional earnings before interest, tax, depreciation and amortisation ("EBITDA") from continuing operations totalled £4.9 million (H1 2011: £4.2 million) or 25 per cent. of revenues (H1 2011: 19 per cent. of revenues) in addition to the U.S.$10 million (£6.2 million) milestone received from Pacira following the launch of EXPAREL® in the United States. 

As at 30 June 2012 the Group had cash and cash equivalents of £11.0 million (2011: £15.2 million) after the receipt of the U.S.$10 million (£6.2 million) milestone from Pacira following the first commercial sale of EXPAREL® in the United States and meeting scheduled financing commitments for interest and capital repayments totalling £11.6 million (H1 2010: £10.9 million).

Outlook

Once the Bond Proposals are implemented, the Group will turn its focus to supporting the effective execution of the revenue-generating opportunities from recent approvals and activities as well as seeking incremental growth, mainly through partnering, by exploiting the Group's proven drug delivery capabilities and technologies. 

The approval of flutiform® in 21 European countries and the anticipated launch later this year is expected to contribute to the short-term performance as well as the longer-term prospects of the Group. Revenues will benefit from two milestones of €4.0 million (£3.2 million) each when flutiform® is launched in Germany and the UK.

Total contract R&D revenues for the year are expected to show further growth compared with 2011 and there is likely to be a substantial year on year reduction in net investment in research and development as more work is funded by customers. Royalties are expected to continue to be lower in 2012 compared with 2011 due to generic competition affecting certain products, partially offset by initial contributions from EXPAREL® and flutiform®. Manufacturing revenues are expected to be lower in 2012 compared with 2011 as H2 2011 included substantial revenues from manufacturing launch stock for flutiform® in anticipation of approval at that time and 2012 sales are likely to be lower due to certain Lyon products being affected by generic competition. Manufacturing costs are not expected to be lower than in 2011 due to costs related to the flutiform® supply chain.

Total overhead costs (which exclude rechargeable third party research and development costs) are expected to be substantially lower in 2012 compared with 2011 due to the reorganisation of the Muttenz R&D operations announced in January 2012 and other cost conservation measures.

During the remainder of 2012, the Board expects that the Group's cash position will benefit from the receipt of €8.0 million (£6.4 million) of initial launch milestones when flutiform® is launched in Germany and UK, although 50 per cent. of these amounts will be applied as prepayments of the Paul Capital Note. Liquidity is also expected to benefit from the deferral of interest under the Bond Proposals, saving a £2.7 million payment over the remainder of 2012.

Having achieved the key strategic objectives of obtaining the approval of flutiform® in Europe and reaching a consensual agreement with a significant majority of the bondholders to rebalance the Group's financing obligations, the remaining key strategic objectives for H2 2012 are to support a successful launch of flutiform®by Mundipharma and to support Kyorin in preparing to file the NDA for flutiform® in Japan. The Directors believe that the significant product approvals and launches achieved already this year provide a platform for future growth and further potential to exploit the Group's proven drug delivery capabilities and technologies.

Frank Condella

Non-Executive Chairman

BUSINESS REVIEW

CHIEF EXECUTIVE OFFICER'S REVIEW

During H1 2012 the Group benefited from revenues from 12 approved and marketed products which together generated £14.5 million of royalty and manufacturing revenues (H1 2011: £16.5 million). In addition flutiform® generated £2.7 million of contract development revenue in H1 2012 (H1 2011: £2.4 million). Cash flows benefited from £6.2 million of milestone receipts (H1 2011: £1.7 million).

flutiform®, the fixed dose combination of fluticasone, an inhaled corticosteroid ("ICS"), and formoterol, a long-acting beta agonist ("LABA") in a Metered Dose Inhaler ("MDI"), continues to be an important value driver for the Group. As announced on 3 July 2012, the European Commission ("EC") adopted a legally binding decision in favour of granting of marketing authorisations for flutiform®. This decision followed the positive opinion of the Committee for Medicinal Products for Human Use ("CHMP") of the European Medicines Agency ("EMA") announced on 20 April 2012. The EC decision is binding on the 21 member states in the decentralised procedure ("DCP"). To date, marketing authorisations of flutiform® have been granted in Germany, the UK, Cyprus, the Netherlands and the Slovak Republic. Launches are expected to commence later this year.

Good progress has also been made on flutiform® in Japan. On 22 June 2012, the Group announced the successful completion of two Phase III clinical trials studies, with both studies (A301 and A302) meeting their primary end points. This enables the Group's licensee, Kyorin Pharmaceutical Company Ltd ("Kyorin") to file the Japanese New Drug Application ("NDA") as planned during Kyorin's fiscal year ending March 2013 and, subject to receiving approval, launch during Kyorin's fiscal year ending March 2015.

According to IMS1 the preventative asthma/COPD market sizes in 2010 were estimated at U.S.$8.6 billion (£5.6 billion) in Europe, U.S.$2.1 billion (£1.4 billion) in Japan and U.S.$0.5 billion (£0.3 billion) in Mexico, Central and South America, with four-year compound annual growth rates of 6.6%, 11% and 16% respectively. The asthma segments, where flutiform® will compete once launched, is typically over half these total markets, which comprise anti-leukotrienes, ICS, ICS/LABAs, LAMAs and PDE-4 inhibitors.

The Group also has the potential for significant income following the launch of EXPAREL® on 9 April 2012 in the United States. Net sales of EXPAREL® in the launch quarter totalled $2.3 million from which the Group is entitled to a 3 per cent. share.

On 27 July 2012, the Group announced that its partner, Horizon Pharma, Inc. ("Horizon"), received approval of the NDA for RAYOS® (LODOTRA®) by the United States Food and Drug Administration ("FDA"). Launch in the United States is anticipated in Q4 2012. The Group is entitled to a low-mid single digit percentage royalty on net sales of RAYOS® in North America. LODOTRA® has also recently been approved in Australia. 

During 2012, the Group has signed two additional agreements to conduct feasibility studies with RespiVert Ltd ("RespiVert"), a small molecule drug discovery company, a subsidiary of Janssen Biotech, Inc., which is focused on new treatments for severe respiratory diseases. The new agreements follow a similar work programme which commenced in 2011 on another RespiVert compound. All three projects are aimed at the development of new inhaled therapies for patients with severe, chronic respiratory diseases including chronic obstructive pulmonary disease ("COPD") and severe asthma.

As announced on 10 January 2012, the Group entered into agreements with Aenova France SAS ("Aenova") to sub-let part of its laboratory space in Muttenz and sell some of its surplus laboratory equipment to Aenova. Aenova plans to use the space to expand its own non-competing oral product development activities. The changes do not affect relationships with existing or potential customers and the Group continues to provide its full existing range of innovative oral and inhalation drug delivery solutions.

Strategic positioning

The key strategic objectives for H2 2012 are to support a successful launch by Mundipharma for flutiform®in Europe, and to support Kyorin in preparing to file the NDA for flutiform® in Japan.

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

Over the past 15 years the Group has been involved in the development of 13 oral products, which have obtained approvals in most countries of the world, and which, over the last five years, have generated approximately U.S.$4.3 billion of sales for the Group's partners. The lease of the Lyon oral manufacturing business to Aenova and subsequent establishment by Aenova of an oral drug development team in rented space in the Group's Muttenz premises employing most of the former oral formulation and oral analytical development team, has improved the competitiveness and flexibility of the Group's oral drug delivery offering. The Group is continuing to offer a full range of innovative oral drug delivery solutions to its customers through its business development team, but on a more competitive basis due to lower fixed costs, providing greater flexibility for new business and its own R&D activities.

1 Source: IMS data for 2010. Europe comprises the EU plus Switzerland, Norway and Croatia. Preventative market defined as: anti-leukotrienes, ICS, ICS/LABAs, LABAs, LAMAs and PDE-4 inhibitors (where available). Definition does not include hospital formulations e.g. IV or nebulised forms, or sustained-release theophylline. Where sales data is limited (e.g. retail only, or none available) appropriate scaling approaches are used. CAGR = Compound Annual Growth Rate. LAMA = Long-acting Muscarinic Antagonist. PDE-4 = Phosphodiesterase 4 inhibitor

BUSINESS REVIEW - KEY PRODUCTS

APPROVED PRODUCTS

flutiform®- Europe

flutiform® is licensed to Mundipharma in Europe and most other territories outside Japan and the Americas. The MAA for flutiform® in Europe was accepted for review in May 2010. As announced on 3 July 2012, the EC adopted a legally binding decision in favour of granting of marketing authorisations and this decision is binding on the 21 member states in the DCP. To date, national approvals have been granted in Germany, the UK, Cyprus, the Netherlands and the Slovak Republic. Launches are expected to commence later this year.

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

The development and marketing agreement with Mundipharma, as amended, includes milestones of up to €73.0 million (£58.9 million), of which €15.0 million (£10.1 million at that time) was paid up front, €3.0 million (£2.9 million at that time) was paid on 31 December 2008, up to €15.0 million (£12.1 million) is due in instalments as launches occur in major markets in Europe and up to €40.0 million (£32.3 million) is sales-related. 

Mundipharma has funded third party development costs, capped at €19.0 million (£15.3 million) principally related to the development of a high strength version of flutiform®.  These costs are initially paid by Mundipharma, which is entitled to recover them out of sales-related milestones and partial, but substantial reductions in royalties due to the Group for up to four years following commercial launch in one of Europe's five largest markets. 

Mundipharma has commenced a double blind study of flutiform® in children aged 5-12, required under the agreed Paediatric Investigation Plan ("PIP") for Europe. Under the agreements with Mundipharma the Group has certain obligations to contribute to the costs of this study, once it has been completed, up to a maximum of €3.5 million (£2.8 million).

Under the development and marketing agreement with Mundipharma the Group is entitled to royalties as a percentage escalating upwards from 10 per cent. of net sales. The net royalties received are subject to the reductions noted above for the recovery of high strength development costs. Royalties are also subject to a cap which limits the aggregate amount of royalties and costs of product supplied to Mundipharma by the Group to a maximum of 35 per cent. of net sales. The payment of royalties continues whilst the agreement with Mundipharma is in force, which is the period until the later of 15 years from the date of the first commercial delivery of flutiform® in a major country and the expiration of the last of the Group's relevant patents utilised in the territory.

Solaraze®

Solaraze® (diclofenac), a topical gel treatment for actinic keratosis, is marketed in the United States by Fougera Pharmaceuticals Inc. ("Fougera"), recently acquired by Sandoz. Almirall, S.A. ("Almirall"), the distribution and marketing partner in Europe and certain other territories, announced the launch of Solaraze® in Spain in December 2011 following success in several countries including Germany and the United Kingdom. The Group earns a low-teens royalty rate on net sales. Certain protections for Solaraze® in Europe and certain other territories excluding the United States expire in 2013, and following this, the royalty due from Almirall will reduce to a low-mid single digit royalty on net sales.

Net sales of Solaraze® in the United States in the first half of 2012 were U.S.$29.8 million (£19.2 million), 76 per cent. higher than reported in H1 2011, largely due to lower Medicaid rebates in H1 2012 compared with H1 2011. Sales in the first half of 2012 by Almirall increased to €15.4 million (£12.5 million) from €11.9 million (£10.8 million) in H1 2011, an increase of 29 per cent. Almirall is continuing to expand the market for the product.

SkyePharma and its licensee, Fougera, received an Abbreviated New Drug Application ("ANDA") Paragraph IV notice relating to a potential generic to Solaraze® in the United States in April 2010. Fougera and SkyePharma filed suit against the ANDA filer, Tolmar, Inc. Discussions with Fougera are currently being held regarding the position of the suit and terms of the licence and manufacturing agreement. If the ANDA results in a generic product being approved, and that product is sold, this could have a significant adverse effect on sales of Solaraze® in the United States and the Group's royalties receivable on sales.

Requip® Once-a-day

Requip® Once-a-day, marketed under various brand names, is a once-daily formulation for Parkinson's disease and was developed in collaboration with GSK. The extended release Requip® Once-a-day uses the Group's proprietary Geomatrix™ technology and is designed to provide smooth delivery of ropinirole over 24 hours. On 29 June 2012, the Requip® Once-a-day extended release tablets obtained marketing authorisation for the indication of Parkinson's disease in Japan.

Requip® Once-a-day extended release tablets were 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. Starting from May 2012 onwards, a number of generic versions have been approved and launched in the United States.

In the first half of 2012, sales of Requip® Once-a-day decreased compared with H1 2011 due to generic competition. Emerging markets and Asia Pacific, following the approval in Japan in June 2012, are expected to be increasingly important.

SkyePharma earns low-mid single digit percentage royalties on net sales of Requip® Once-a-day. On a country by country basis, the royalty may reduce following patent expiry to low-single digit or zero (and the basis of calculation may change from net sales to gross margin) upon the launch of competitive products containing ropinirole and/or the occurrence of substantial competition from ropinirole containing products in that country.

Xatral® OD

Xatral® OD (Uroxatral® in the United States) is a once-daily version of Sanofi's Xatral® (alfuzosin hydrochloride), a treatment for the signs and symptoms of benign prostatic hypertrophy ("BPH"). In first half of 2012, reported sales of all forms of Xatral® were €69 million (£55.6 million), down on H1 2011 sales of €129 million (£115.2 million). In the United States, sales of Uroxatral® were €12 million (£9.7 million), down 83 per cent. from H1 2011 due to the generic launches in Q3 2011. Western European sales have continued to fall as a result of generic competition, with sales for H1 2012 of €25 million (£20.2 million), a reduction of 19 per cent. from H1 2011. Sales in other countries were €32 million (£25.8 million). The Group earns low single digit royalties on net sales of Xatral® OD.

Paxil CR™

Paxil CR™ is an advanced formulation of the anti-depressant Paxil® (paroxetine) and was developed by the Group with GSK using the Group's proprietary Geomatrix™ technology. In the first half of 2012, reported sales were $52.6 million (£33.3 million), up 19 per cent. compared with $44.1 million (£28.0 million) in H1 2011. Sales in the United States and certain other territories continue to be affected by generic competition. However, growth in sales in Asia and emerging markets, boosted by launch in Japan in June 2012, outpaced the decline in the United States and this trend is expected to continue.

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 immediate release tablets) are the only FDA-approved leukotriene synthesis inhibitors. ZYFLO CR® recorded sales of $23.2 million (£14.9 million) in the first half of 2012, an increase of 66 per cent. (at constant exchange rates) compared with H1 2011. The product is manufactured at the Lyon Manufacturing Facility leased by the Group to Aenova. The Group receives a high-mid single digit percentage royalty on net sales of ZYFLO CR®. Certain protections covering ZYFLO CR® expire in H2 2013 and no royalties may be payable from that time.

LODOTRA®

LODOTRA®, a novel delayed-release formulation of low dose prednisone, utilising the Group's proprietary Geoclock™ Chronotechnology and developed in collaboration with Horizon, was approved in Europe in March 2009 for the treatment of moderate to severe active rheumatoid arthritis in adults particularly when accompanied by related morning stiffness, under the European decentralised procedure. The product is approved for marketing in 16 European countries, Israel, and, very recently, in the United States (as RAYOS®) and Australia. LODOTRA® was launched in Germany in April 2009 and in Italy in January 2011. 

In April 2011, Mundipharma, which has distribution rights in Europe, also acquired the distribution rights for the product in Germany and re-launched in this important market with a significantly larger sales force. 

In November 2010, Horizon signed an exclusive distribution and supply agreement with Mundipharma for the commercialisation of LODOTRA® in Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, Philippines, Singapore, South Africa, Taiwan, Thailand and Vietnam and this was extended, in March 2012, to include Mexico, Brazil, Argentina, Colombia, Venezuela, Peru, Chile, Ecuador, Dominican Republic, Guatemala, Costa Rica, Uruguay, Bolivia, Panama, Nicaragua, El Salvador and Honduras. 

Two pivotal Phase III studies were carried out for LODOTRA® (known as RAYOS® in the United States). The first was a 12-week, randomised, double blind, controlled study against marketed immediate-release prednisone to support the MAA approval in Europe. To support the submission of the NDA for the United States a second 12-week, randomised, double blind, multicentre, placebo controlled study involving 350 patients was conducted with patients in both treatment arms receiving a disease modifying anti-rheumatic drug ("DMARD"). Both studies met their primary end points. The NDA submitted to the United States FDA by Horizon for RAYOS® was approved on 26 July 2012 for the treatment of a broad range of diseases including rheumatoid arthritis. Initial launch in the United States is anticipated in Q4 2012.

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 LODOTRA®/RAYOS® in North America and a mid single digit percentage royalty elsewhere. LODOTRA® is manufactured at the Lyon Manufacturing Facility leased by the Group to Aenova.

Sular®

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

Sales of Sular® continue to be under pressure from a declining market and increasing competition. Competitive generic versions of the original formulations of Sular® were launched in 2008 and competitive generic versions of the lower-dose formulations of Sular® were approved and launched in January 2011 in the United States. 

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

Should total net sales of the lower-dose formulations of Sular® be significantly reduced following entry of additional 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.

Triglide®

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

DEVELOPMENT PIPELINE

flutiform®

flutiform®- Japan

flutiform® is licensed to Kyorin in Japan. Under the agreement with Kyorin the Group has received an upfront milestone and certain development milestone payments, including a final pre-approval milestone received in 2011. An approval milestone worth several million U.S. dollars is payable to SkyePharma under the agreement and there is a high-mid single digit percentage royalty on net sales payable for the later of 10 years from the date of first commercial sale in Japan and the expiration of the last of the Group's patents in the territory. The development costs associated with obtaining approval for the Japanese market are largely being met by Kyorin, which is responsible for clinical studies and regulatory submissions. Good progress continues to be made with the successful completion of two Phase III clinical trials of flutiform® in Japan. Both studies met their primary end points, enabling Kyorin to remain on track to file the Japanese NDA during Kyorin's fiscal year ending March 2013 and, subject to receiving approval, launch during Kyorin's fiscal year ending March 2015.

flutiform®- Mexico, Central and South America

On 28 July 2011, SkyePharma entered into an exclusive Development, License and Marketing Agreement with Sanofi in Mexico, Central and South America for flutiform®. Under the agreement, SkyePharma is eligible for initial, approval and sales milestones potentially worth several million U.S. dollars and a high single digit percentage royalty on net sales for the life of the agreement which has a normal term of at least 15 years. 

Under the agreement, Sanofi aims to pursue marketing authorisation applications for flutiform® throughout the region, including in Mexico, Brazil, Argentina, Venezuela and Colombia. The applications will be based on data included in the European MAA for flutiform®.

Sanofi currently manufactures flutiform® under contract to SkyePharma at its factory in Holmes Chapel, UK. In 2011 this arrangement was extended to allow Sanofi to manufacture flutiform® and supply it directly to its group companies for Mexico, Central and South America using certain ingredients and components supplied by SkyePharma.

flutiform®- United States

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

SKP-1041

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

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

Under the agreement with Somnus, the Group could receive up to U.S.$35.0 million (£22.5 million) in milestone payments, of which U.S.$4.0 million (£2.0 million at that time) was received on signing and U.S.$1.0 million (£0.7 million at that time) was received on completion of the initial Phase I study. A further U.S.$10.0 million (£6.4 million) is payable on product launch, and U.S.$20.0 million (£12.9 million) is sales-related.

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

SKP-1052

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

EXTERNAL PROGRAMMES

EXPAREL®

In April 2012 the United States FDA approved the NDA for EXPAREL® (bupivacaine liposome injectable suspension) 1.3% for administration into the surgical site to produce postsurgical analgesia. Under the terms of the sale of the Group's former Injectable Business, now called Pacira, the Group received a milestone payment of U.S.$10 million (£6.2 million) following the first commercial sale of EXPAREL® in the United States. Longer-term the Group is entitled to receive further contingent milestone payments up to an aggregate of U.S.$52 million (£33.5 million) from Pacira, depending on the following events occurring: (i) U.S.$4 million (£2.6 million) on first commercial sale in a major EU country (UK, France, Germany, Italy or Spain); (ii) U.S.$8 million (£5.1 million) if worldwide annual net sales reach $100 million; (iii) a further U.S.$8 million (£5.1 million) if worldwide annual net sales reach $250 million and (iii) a further $32 million (£20.6 million) if worldwide annual net sales reach $500 million.

During Q2 2012, EXPAREL® recorded sales of U.S.$2.3 million (£1.5 million). The Group is entitled to three per cent. of net sales of EXPAREL® in the United States, and a similar share of net sales if approved and launched in Japan, the UK, France, Germany, Italy and Spain.

Licencing

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

FEASIBILITY STUDIES AND TECHNOLOGY DEVELOPMENT

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

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

MANUFACTURING

Lyon

On 1 August 2011 SkyePharma announced that it had agreed terms to enter into an alliance (the "Alliance") with the Aenova Group to increase utilisation of SkyePharma's manufacturing facility in Saint Quentin-Fallavier, Lyon, France. 

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

The Alliance provides Aenova with access to an FDA-registered pharmaceutical manufacturing plant with significant capacity available which Aenova aims to utilise. The Alliance also enhances the Group's liquidity through rental income, reduced working capital and lower capital expenditure requirements. 

The Alliance agreements came into effect on 16 August 2011, at which point the Manufacturing Business was transferred to Aenova as a going concern, including all employees, raw materials and work in progress, and, from that date, Aenova has managed and run the Facility. Notwithstanding the effective date of the agreements, the financial implications of the agreements were effective from 1 July 2011. SkyePharma retained all its existing contractual arrangements with its partners and Aenova is continuing to manufacture all SkyePharma products then manufactured at the Facility and supply them to SkyePharma. SkyePharma continues to work with Aenova to utilise the Facility to manufacture oral products in development by SkyePharma. 

It has recently been announced that funds advised by BC Partners have agreed to acquire the Aenova Group from its majority shareholder, Bridgepoint, subject to anti-trust clearance. The Directors understand that existing Aenova management will stay in place and do not anticipate that the change in ownership will affect Aenova's strategy for Lyon.

The Lyon Facility manufactures six products which use the Geomatrix™ family of technologies: Diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Sular®, LODOTRA® and Madopar DR®. The Lyon Facility also manufactures 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.

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

flutiform®Supply Chain

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

To establish the supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes. The manufacturing process was validated during 2011 and initial stocks of product are being produced to support initial launches later this year.

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €9.0 million to €11.0 million (£7.2 million to £8.9 million) per annum through to 2015, subject to certain early termination rights.

These minimum commitments, along with start-up costs and initial low volumes during the launch phase are expected to delay the profitability of the supply chain arrangement for flutiform® until the product has been successfully established in a number of major countries. In addition to these costs the Group will also need to invest working capital to support the launch of flutiform®.

Peter Grant

Chief Executive Officer

FINANCIAL REVIEW

Revenue

Revenue in the first half of 2012 was £19.8 million (H1 2011: £22.1 million); slightly lower than in H1 2011 due to lower milestones and royalties recorded in H1 2012.

Revenue recognised from signing and milestone payments was £0.9 million in the first half of 2012 compared with £2.0 million in H1 2011, which benefited from a £1.5 million milestone from GSK. A milestone of U.S.$10 million (£6.2 million) received from Pacira following the launch of EXPAREL® in the United States has been recorded under exceptional income from discontinued operations and not within revenue.

Contract research and development revenue increased by 14 per cent. to £4.1 million in the first half of 2012 (H1 2011: £3.6 million) and included further work on flutiform® and contract development services provided to RespiVert.

Royalty income was £8.8 million in the first half of 2012, £2.1 million lower than in the first half of 2011, representing a reduction, at constant exchange rates of 19 per cent. The decline is mostly due to the expected reduction in sales across a number of products as a result of generic competition, especially Xatral® OD, partially offset by an increase in royalties from Solaraze® due to increased net sales.

Manufacturing and distribution revenue totalled £5.7 million in the first half of 2012 (H1 2011: £5.6 million), representing an increase of 2 per cent. at constant exchange rates.

Research and development expenses

Research and development expenses incurred in the first half of 2012 were reduced to £6.3 million (H1 2011: £10.1 million). The Group's net investment in research and development (expenses, net of contract development revenues) was £2.2 million, a reduction in net investment of £4.3 million compared with H1 2011, as the Group carried out less internally funded development projects as well as the completion of preparing the flutiform® supply chain. The net expenditure during the first half of 2012 is primarily on the development of flutiform®.

Operating Result from continuing operations

The operating result before exceptional items from continuing operations was £3.7 million (H1 2011: £2.7 million). Pre-exceptional EBITDA from continuing operations was £4.9 million (H1 2011: £4.2 million), as shown below:

Finance costs and income

Finance costs - interest totalled £5.7 million (H1 2011: £5.8 million) and consisted of £3.2 million (H1 2011: £3.1 million) payable on the Convertible Bonds, £1.4 million (H1 2011: £1.3 million) payable on the CRC finance, £0.8 million (H1 2011: £1.2 million) of interest attributable to the Paul Capital Note and £0.3 million (H1 2011: £0.2 million) on other bank borrowings.

Finance costs - revaluation consisted of a loss of £0.1 million (H1 2011: nil) arising from the revaluation of the carrying value of the Paul Capital Note as described in Note 15: Borrowings.

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 2012 there was no foreign exchange gain or loss on net debt (H1 2011: gain of £3.7 million). Although the Group benefited from the foreign exchange movements on borrowings during H1 2011, the exceptional strength of the Swiss Franc negatively affected the operating profit in H1 2011.

Result

Operating profit from continuing operations after exceptional items in the first half of 2012 was £3.3 million (H1 2011: £2.7 million).

The loss for the first half of 2012 from continuing operations after exceptional items and taxation was £2.6 million (H1 2011: £0.4 million profit). Profit for the period from discontinued operations during the first half of 2012 was £6.2 million, representing the milestone received from Pacira following the launch of EXPAREL® in the United States. This gives a total net profit from both continuing and discontinued operations in the first half of 2012 of £3.6 million (H1 2011: £0.4 million).

Earnings per share

From continuing and discontinued operations during the first half of 2012, basic earnings per share amounted to 15.6 pence (H1 2011: 1.7 pence) and diluted earnings per share amounted to 15.6 pence (H1 2011: 1.6 pence). 

From continuing operations during the first half of 2012, basic loss per share amounted to 10.5 pence (H1 2011: 1.7 pence earnings) and diluted loss per share amounted to 10.5 pence (H1 2011: 1.6 pence earnings). 

As at 30 June 2012 there were 23,943,162 Ordinary Shares in issue.

In addition there were outstanding as at 30 June 2012 a number of bond conversion rights and employee share schemes as follows:

*When the Bond Proposals described in Note 20: Post-Balance sheet events, are implemented an aggregate of 22,184,483 Ordinary Shares will be issued on the mandatory conversion at £1.00 per share of £22.2 million of the Convertible Bonds.

More details of the Convertible Bonds and share scheme arrangements are set out in Note 15: Borrowings. At 22 August 2012, the Company's closing share price was £0.94.

Cash flows

The Group generated cash from operations of £1.8 million in first half of 2012 compared with an inflow of £3.8 million in H1 2011.

In the first half of 2012 the Group received U.S.$10 million (£6.2 million) in milestone payments from Pacira following the first commercial sale of EXPAREL® in the United States.

Borrowings of £6.5 million have been repaid during the period, mainly to CRC and Paul Capital (H1 2011: £5.6 million). In addition £5.1 million of net interest was paid (H1 2011: £5.3 million) primarily relating to the Convertible Bonds, CRC finance and Paul Capital Note.

The carrying value of two mortgages on land and buildings in Switzerland total CHF 11.6 million (£7.8 million) as at 30 June 2012. One of the sites in Switzerland remains vacant and is being marketed for sale. This has a net book value of CHF 6.1 million (£4.1 million) and a mortgage of CHF 3.6 million (£2.4 million) which together with a loan of CHF 2.0 million (£1.4 million), will be repayable on completion of any sale. The Directors have been advised that the market value of the property for sale is higher than the net book value.

Key performance indicators

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

Description of KPIs

Revenue excluding milestones

Revenue excluding milestones reflects the level of contract research and development work undertaken for third parties and manufacturing activities, as well as the contribution from royalties earned from products. Revenue in first half of 2012 of £18.9 million is lower than in the first half of 2011 due to lower royalties, as shown in Note 4: Revenue by income stream.

Signing and milestone payments received

This shows amounts received with respect to pipeline products and product sales. The total of £6.2 million represents the cash received during the first half of 2012, being the milestone received from Pacira of U.S.$10 million (£6.2 million) following the first commercial sale of EXPAREL® in the United States as shown in Note 10: Discontinued operations.

Research and development expenditure

Research and development expenditure reflects the costs, including direct and indirect overheads, of all research and development activities. A breakdown of the costs in the first half of 2012 is shown in Note 6: Research and development expenses. The decrease compared with the first half of 2011 is due to the Group carrying out less internally funded development projects including less work required on flutiform®.

Research and development expenditure net of contract research and development revenue

This reflects the Group's expenditure on research and development expenses net of costs reimbursed by development partners. The net expenditure is lower in the first half of 2012 compared with the first half of 2011 as the Group carried out less internally funded development projects and less unfunded work was required on flutiform®.

Liquidity

This measures the availability of finance to fund current and future activities and to meet debt servicing requirements. Liquidity as at 30 June 2012 consisted of cash and cash equivalents of £11.0 million, as per the balance sheet, plus undrawn facilities of £0.8 million.

Approved and marketable revenue-generating products

This represents the number of products on which the Group does or expects to earn revenues and which were approved for marketing in at least one country at the end of the period. As at 30 June 2012 the total of 12 does not include flutiform®as the first marketing approvals were received after that date.

Manufacturing output

This represents the number of units of product manufactured by or on behalf of the Group and invoiced to customers during the year, including oral products (tablets) and inhaled products (flutiform®). Higher manufacturing output of 70 million units in the first half of 2012 compared with the first half of 2011 is mainly due to increased output at the Lyon facility.

Balance sheet

At 30 June 2012, the Group's balance sheet shows total shareholders' equity of £77.5 million deficit (2011: £81.7 million deficit). 

Borrowings and liquidity

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

Total debt has decreased £7.0 million during the first half year. This is due to repayments of £6.5 million, adjusted by translation and revaluation effects.

Convertible Bonds

The Convertible Bonds outstanding at 30 June 2012 comprise £63.0 million 6 per cent. Convertible Bonds due May 2024 (2011: £63.0 million) and £20.0 million 8 per cent. Convertible Bonds due June 2025 (2011: £20.0 million). The £63.0 million May 2024 bonds are convertible into Ordinary Shares at £3.71 per share and may be called for repayment by the bondholders at par in November 2013, November 2015, November 2017 and November 2020. The £20.0 million June 2025 bonds are convertible into Ordinary Shares at £3.82 per share and may be called for repayment by the bondholders at par in December 2014, December 2016, December 2018 and December 2021. No Convertible Bonds were converted in H1 2012 and 2011.

Although shown in the balance sheet in accordance with IFRS at a value of £60.6 million (2011: £60.1 million), the Convertible Bonds had a face value as at 30 June 2012 totalling £83.0 million. The Group's total net debt with Convertible Bonds at face value as at 30 June 2012 is £118.6 million (2011: £121.9 million).

As described more fully in Note 20: Post-Balance sheet events, an agreement has been reached with a significant majority of bondholders, which have signed deeds of undertaking, to support a consent solicitation process, announced today, to approve Bond Proposals which aim to alleviate short-term liquidity demands on the Group over the next 24 months by deferring interest payments and by extending the earliest date at which the bonds can be ordinarily redeemed by the bondholders to be more than five years away.

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

Notes:

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

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

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

Paul Capital Note

The Group has a fixed amortisable note ("Note") of U.S.$92.5 million (£59.2 million) due to Paul Capital. The Note is repayable in accordance with an amortisation schedule through to 2015. At 30 June 2012 a cumulative total of U.S.$66.9 million (£42.8 million), has been paid against the Note. The principal outstanding at 30 June 2012 is U.S.$25.6 million (£16.4 million).

Pacira Pharmaceuticals (previously the Injectable Business) was sold in 2007 on the basis that it retained responsibility to Paul Capital for its existing obligations to make payments based on sales of DepoCyt® and DepoDur™ and, to the extent that payments are made in respect of these, the Group's liability under the Note will be reduced accordingly. The amount of the Group's liability therefore depends on estimates of the sales of DepoCyt® and DepoDur™ by Pacira Pharmaceuticals. At 30 June 2012 a cumulative total of U.S.$8.4 million (£5.4 million) of the Group's repayments of the Note had been made by Pacira Pharmaceuticals. On 8 June 2012, Pacira Pharmaceuticals' licensing, distribution and marketing and associate supply agreements for DepoDur™ were terminated in the United States. It is expected that the royalty revenue from DepoDur™ will decrease in the future as Pacira Pharmaceuticals does not expect to re-license the rights to DepoDur™. In July 2012, Pacira received an inspection letter from Medicines and Healthcare product Regulatory Agency ("MHRA"), noting certain critical and major deficiencies in the DepoCyt®manufacturing line, located in a separate building from the EXPAREL® manufacturing site. Pacira has stated that it is committed to completing a remediation plan by 31 October 2012. Pacira has also stated that the MHRA may require additional rectification measures or take further action. If this occurs, this could adversely affect sales of DepoCyt®, which would reduce payments by Pacira to Paul Capital and increase costs to the Group of the Paul Capital Note. The Group's estimate of prepayments to be made by Pacira is set out in the table below.

As at 30 June 2012 the net present value of the Note (net of anticipated payments by Pacira Pharmaceuticals to Paul Capital) discounted at an annual rate of 11.2 per cent. is U.S.$19.8 million (£12.7 million) compared with the value of U.S.$23.9 million (£15.5 million) at 31 December 2011.

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

The above table:

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

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

(iii) Includes prepayments of the Note to an aggregate amount of U.S.$10 million out of 50 per cent. of certain milestones and signing fees received and forecast to be received in respect of flutiform® of which U.S.$2.9 million had been paid as at 30 June 2012.

CRC finance

The CRC finance was taken out in 2006 and is a 10 year secured amortising loan facility which, at inception, totalled approximately £35.0 million at the exchange rates prevailing at that time. The facility comprises initial commitments of U.S.$35.0 million and €26.5 million repayable over ten years based on a minimum amortisation schedule. The principal outstanding at 30 June 2012 is U.S.$19.6 million (£12.6 million) and €15.2 million (£12.2 million). The CRC agreement specifies make whole percentages, which decline over time to the end of the loan, for optional pre-payments of the loan, and which are designed to compensate CRC for lost future interest margin.

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

The above table:

(i) Shows interest on a cash basis (no discounting is applied). The interest rates applicable at 30 June 2012 were 8.50 per cent. on the Euro component (plus an additional 5 per cent. on the first €7.5 million) and 8.31 per cent. on the U.S.$ component.

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

(iii) Excludes prepayments of the debt to an aggregate amount of U.S.$9.0 million out of 50 per cent. of milestones and signing fees forecast to be received in respect of flutiform® on the assumption that an obligation to pay these amounts is waived because the Bond Proposals are implemented before 4 September 2013.

Other borrowings

Other borrowings amounted to £9.2 million at 30 June 2012 (2010: £9.6 million), consisting principally of £7.8 million (2011: £8.2 million) of property mortgages secured on the assets of SkyePharma AG.

Liquidity

At 30 June 2012 SkyePharma had liquidity of £11.8 million (2011: £16.0 million), comprised as follows:

Commitments

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €9.0 million to €11.0 million (£7.2 million to £8.9 million) per annum through to 2015, subject to certain early termination rights.

At set out in Note 19: Commitments to the Preliminary Statement, the Group has a further commitment of £0.3 million outstanding relating to capital expenditure of the flutiform® supply chain. A former partner has funded €3.0 million (£2.4 million) of the expenditure of the flutiform® supply chain, and the Group is obliged to repay this funding by March 2013 or earlier if the supply chain is outsourced.

Aenova lease

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

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

Aenova supplies products and services to SkyePharma initially on a pass-through basis. SkyePharma has the opportunity to earn a margin on the sales of these products and services, in the first two years based on the level of net revenues to Aenova from SkyePharma products and services and after that time based on total revenues of Aenova at the Facility.

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

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

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

Post-Balance sheet events

Post-Balance sheet events are described in Note 20 of the preliminary announcement.

Going concern

The Directors have made an assessment of the working capital requirements of the Group for the next twelve months from the date of issue of this Half Year Report 2012. In carrying out its assessment, the Directors have prepared cash flow forecasts for the period to 30 June 2014 and have considered events that may occur in that time and that might have a material impact on the Group. These events are principally the implementation of the Bond Proposals and the timing of the launch of flutiform®. 

As set out in Note 20: Post-Balance sheet events, the Group has reached an agreement with a significant majority of bondholders, which have signed deeds of undertaking, in respect of the £83.0 million (at nominal value) of Convertible Bonds outstanding at 30 June 2012, to support the Bond Proposals which are aimed at rebalancing the Group's financing obligations to be in line with its forecast cash generation. The Directors expect that the Bond Proposals will be implemented by the end of September 2012. Once implemented, the Bond Proposals will significantly reduce potential liquidity demands on the Group over the next 24 months by deferring interest payments and by extending the earliest date at which the bonds can be ordinarily redeemed by the bondholders to be more than five years away. 

The Board has reasonable expectations that it can also identify and implement additional steps to improve the liquidity of the Group, should it consider this to be appropriate.

Based on the above considerations, and 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, the Board continues to adopt the going concern basis in preparing the Half Year Report 2012.

The Auditor's report on accounts for 2011 included an emphasis of matter paragraph to draw attention to the disclosures made in the financial statements indicating material uncertainties about the Group's ability to continue as a going concern. The Auditors' opinion was not modified in this respect.  The Auditors' report on this Half Year Report 2012 contains no emphasis of matter paragraph. 

Foreign exchange risks

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

The Board continued to monitor the risks related to a potential Eurozone crisis and its impact on the Group's transactions and funding. The Corporate Governance section of the 2011 Annual Report contains further details of the Group's exposure to a potential Eurozone crisis.

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

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2012

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED INCOME STATEMENT (CONTINUED)

For the six months ended 30 June 2012

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(EXPENSE)

For the six months ended 30 June 2012

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEET

As at 30 June 2012

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2012

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2011

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2011

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 June 2012

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 2012 ("Half Year Report 2012") was authorised for issue in accordance with a resolution of the Directors on 23 August 2012. The Half Year Report 2012 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 speciality pharmaceutical group which uses its multiple drug delivery technologies and expertise to create enhanced versions of 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 2011 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 drew attention to going concern uncertainties by way of an emphasis of matter paragraph; however it was unqualified and contained no statement under section 498(2) or section 498(3) of the Companies Act 2006.

2 Accounting policies

(a) Basis of preparation

The accounts have been prepared in accordance with International Financial Reporting Standards ("IFRS") adopted by the European Union ("EU"). All IFRSs issued by the International Accounting Standards Board ("IASB") that were effective at the time of preparing the accounts and adopted by the European Commission for use inside the EU were applied by the Group.

These Group accounts have been prepared in accordance with IFRS and the interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The condensed financial statements in the Half Year Report 2012 have been prepared in accordance with IAS 34 Interim Financial Reporting.

The accounts have been prepared under the historic cost convention, as modified by the revaluation to fair values of financial instruments at fair value through profit and loss and available for sale financial instruments. All values are rounded to the nearest £0.1 million.

Going concern

The Directors have made an assessment of the working capital requirements of the Group for the next twelve months from the date of issue of this Half Year Report 2012. In carrying out its assessment, the Directors have prepared cash flow forecasts for the period to 30 June 2014 and have considered events that may occur in that time and that might have a material impact on the Group. These events are principally the implementation of the Bond Proposals and the timing of the launch of flutiform®. 

As set out in Note 20: Post-Balance sheet events, the Group has reached an agreement with a significant majority of bondholders, which have signed deeds of undertaking, in respect of the £83.0 million (at nominal value) of Convertible Bonds outstanding at 30 June 2012, to support the Bond Proposals which are aimed at rebalancing the Group's financing obligations to be in line with its forecast cash generation. The Directors expect that the Bond Proposals will be implemented by the end of September 2012. Once implemented, the Bond Proposals will significantly reduce potential liquidity demands on the Group over the next 24 months by deferring interest payments and by extending the earliest date at which the bonds can be ordinarily redeemed by the bondholders to be more than five years away. 

The Board has reasonable expectations that it can also identify and implement additional steps to improve the liquidity of the Group, should it consider this to be appropriate.

Based on the above considerations, and 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, the Board continues to adopt the going concern basis in preparing the Half Year Report 2012.

Significant accounting policies

The accounting policies, presentation and methods of computation are as applied in the Group's 2011 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 1 - First time adoption of International Financial Reporting Standards - replacement of fixed dates for certain exceptions with the date of transition to IFRS

·; IFRS 1 - First time adoption of International Financial Reporting Standards - additional exemption for entities ceasing to suffer from severe hyperinflation

·; IFRS 9 - Financial instruments - classification and measurement

·; IAS 12 - Income taxes - deferred tax for investment properties

·; IAS 19 Employment benefits

The Group plans to adopt IFRS 9 and IAS 19 for the year commencing 1 January 2013: this will impact both the measurement and disclosure of financial instruments.

The Group has adopted the following accounting policy during the period ended 30 June 2012:

The Group is entitled to certain milestones and share of net sales of EXPAREL® under the terms of sale of its former Injectable Business, Pacira. The accounting policy for these receipts is as follows:

Milestones received following commercial launches of EXPAREL® in the United States and Europe are recognised in the income statement in the period of commercial launch. Due to the nature of the milestones, as contingent proceeds related to the disposal of the Injectable Business by the Group to Pacira, such launch milestones are treated as exceptional income from discontinued operations.

Milestones contingent on EXPAREL® achieving certain annual net sales thresholds are recognised in the income statement in the period in which the Group is notified that these net sales thresholds have been achieved. Although such milestones are contingent proceeds related to the disposal of the Injectable Business by the Group to Pacira, as the receipts are connected to the continuing operations following commercial launch, milestones contingent on EXPAREL® achieving certain net sales thresholds are treated as exceptional income from continuing operations.

Receipts of the Group's share of net sales from EXPAREL® are recognised in the income statement on an accruals basis. Although the share of net sales from EXPAREL® are contingent proceeds related to the disposal of the Injectable Business by the Group to Pacira, as the receipts are connected to the continuing operations following commercial launch, share of net sales from EXPAREL® are treated as other revenue from continuing operations.

3 Segmental information

The Group is treated as one reportable operating segment - the development and manufacture of pharmaceutical products.

4 Revenue by income stream

Effective from 1 July 2011, the Group leased the entire manufacturing business and the premises in Lyon to Aenova France SAS for an initial period of two years, extendible for a further three years, subject to certain early termination rights which are described in more detail in the Finance Review. Rental income of £0.3 million in respect of the lease was recognised under 'other revenue' during the six months ended 30 June 2012 (£0.3 million during the six months ended 31 December 2011).

5 Cost of sales

6 Research and development expenses

7 Exceptional items

(a) During the six months ended 30 June 2012, the Group recorded £0.4 million in restructuring charges for costs incurred during the reorganisation of the facility in Muttenz, Switzerland.

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

(c) During the six months ended 30 June 2012, the Group received a milestone payment of U.S.$10 million (£6.2 million) from Pacira, following the launch of EXPAREL® in the United States. This has been treated as exceptional income arising from discontinued operations as the milestone received was in accordance with the terms of sale of the Injectable Business by the Group to Pacira. Refer to Note 10: Discontinued operations and Note 2: Accounting Policies.

8 Finance costs and income

9 Foreign exchange gain on net debt

10 Discontinued operations

On 23 March 2007, the Group disposed of the Injectable Business to Pacira. Under the terms of the sale, the Group received a milestone payment of U.S.$10 million (£6.2 million) in April 2012 following the launch of EXPAREL® in the United States, and is entitled to further contingent milestone payments of up to U.S.$52.0 million (£33.3 million) and 3% of net sales of EXPAREL® in the United States, Japan, United Kingdom, France, Germany, Italy and Spain.

a) Financial effects of discontinued operations

Apart from the financial implications under the terms of sale, the financial effects of the operations in respect of the Injectable Business have not been included in the consolidated results of the Group since the completion of sale to Pacira on 23 March 2007.

During the six months ended 30 June 2012, no income tax expense is recorded in respect of the above exceptional income from discontinued operations as the income will be offset against carried forward losses. Deferred tax assets have not been recognised on the Group's balance sheet due to uncertainty of future recoverability.

11 Earnings per share

Earnings per share are 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 2012 and for the year ended 31 December 2011, there were no differences between the basic and diluted loss per share amounts since the results from continuing operations were losses and as a result, all potential shares from Convertible Bonds, stock options, warrants and contingent issuance of shares are anti-dilutive. For the six months ended 30 June 2011, potential shares from stock options were dilutive whilst all other potential shares were anti-dilutive.

From continuing and discontinued operations

In order to calculate earnings per share amounts for the discontinued operations (see Note 10), the weighted average number of Ordinary Shares for both basic and diluted amounts is as per the table above. The following table provides the profit amount used:

12 Goodwill

Goodwill was assessed for indicators of impairment at 31 December 2011. The impairment charge of £2.1 million during the year ended 31 December 2011 resulted from the re-assessment of future cash flows from the Triglide® product manufactured by the Lyon pharmaceutical manufacturing business which was leased to Aenova with effect from 1 July 2011. Following the lease of that business the cash flows related to Triglide® primarily accrue to Aenova rather than to the Group and this led to a full impairment of the remaining IDD® goodwill carrying value. This was treated as an exceptional item in view of its magnitude and non-recurring nature as disclosed in Note 7: Exceptional items. Impairment losses relating to goodwill cannot be reversed in future periods.

13 Property, plant and equipment

In the six months to 30 June 2012, the Group made additions totalling £0.3 million (H1 2011: £1.8 million).

14 Inventories

15 Borrowings

15 Borrowings (continued)

Total debt has decreased £7.0 million in the period. This is due to capital repayments of £6.5 million, plus translation and revaluation effects.

Convertible Bonds

The Group has in issue £63.0 million (2011: £63.0 million) 6 per cent. Convertible Bonds due 2024, which are convertible into Ordinary Shares at a conversion price of £3.71. The bonds may be called for repayment in November 2013, November 2015, November 2017 and November 2020.

The Group also has in issue £20.0 million (2011: £20.0 million) 8 per cent. Convertible Bonds due 2025 which are convertible into Ordinary Shares at a conversion price of £3.82. The bonds may be called for repayment in December 2014, December 2016, December 2018 and December 2021.

In the six months ended 30 June 2012 no bonds were converted into Ordinary Shares (2011: Nil).

Although the total face value of Convertible Bonds outstanding at 30 June 2012 is £83.0 million (2011: £83.0 million), the carrying value of the debt as measured in accordance with IFRS is £60.6 million as at 30 June 2012 (2011: £60.1 million) and is included in non-current liabilities. Refer to Note 20: Post-Balance sheet events for further details in respect of restructuring proposals relating to the Convertible Bonds.

Property mortgages

In February 2011 the Group renewed its two mortgage agreements with the Basellandschaftliche Kantonalbank. The first is for CHF 3.6 million (£2.4 million), which bears interest at a variable rate (currently 4 per cent. per annum) and is repayable with three months' notice from either party. The second is for CHF 8.0 million (£5.4 million), which bears interest at 3.6 per cent. per annum and is fully repayable in 2016.

One of the sites in Switzerland has been vacated and is up for sale. This has a net book value of CHF 6.1 million (£4.1 million) and a mortgage of CHF 3.6 million (£2.4 million) which, together with a loan of CHF 2.0 million (£1.4 million), will be repayable on completion of any sale.

Paul Capital Note

In the six months to 30 June 2012, a revaluation loss of £0.1 million was charged reflecting revisions made of the forecast of payments to be made by Pacira Pharmaceuticals to Paul Capital. Following this revaluation, the carrying value of the Paul Capital Note increased by £0.1 million. There was no revaluation in the six months to 30 June 2011. 

Half of the first U.S.$20 million of milestone payments received in respect of flutiform® are to be paid as prepayments of the Paul Capital Note. Of this, U.S.$2.9 million had been paid as at 30 June 2012.

CRC finance

During the year ended 31 December 2011, the Group entered into an amended agreement in respect of its CRC Finance Facility ("Facility"). Effective from 1 July 2011, the interest rate applicable to the Facility, which is variable based on EURIBOR and LIBOR, increased by 2 percentage points and the obligation to pay 50% of further milestone payments or signing fees in respect of flutiform® licenses, up to approximately U.S.$9 million, is deferred until 4 September 2013 and waived altogether if, by 4 September 2013, the Group's Convertible Bonds have been converted to equity or rescheduled or refinanced on certain terms, including that the earliest date on which the Bonds may be called for repayment is at least five years later than the date of such rescheduling or refinancing. There were no further amendments made to the Facility during the six months ended 30 June 2012.

16 Provisions

The total provisions balance above 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 Alliance in France who are not expected to retire during the initial lease period and would return to the Group's employment on expiry of the lease.

17 Long-term creditors

As at 31 December 2011, the long-term creditor of €3.0 million (£2.5 million) related to an amount payable to a former partner which funded capital expenditure related to the flutiform® supply chain. No interest is payable on the balance. As the funding is repayable in March 2013, or earlier, if the supply chain is outsourced, the creditor amount is recorded within current 'Trade and other payables' as at 30 June 2012.

18 Share capital

19 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 third parties contingent upon future events such as the approval and launch of products, although such payments may be funded from amounts received from development partners.