Half Yearly Report

Skyepharma

Interim Results Statement

Strong Revenue Growth Underpinned by Recent Product Approvals and Launches

LONDON, ENGLAND, 15 August 2013 - Skyepharma PLC (LSE: SKP), the expert oral and inhalation drug delivery company, today reports its interim results for the six months ended 30 June 2013.

Financial Highlights

· Revenues up 58% at £31.3m (H1 2012: £19.8m), primarily due to growing sales of flutiform®

· Pre-exceptional operating profit up 24% at £4.6m (H1 2012: £3.7m)

· Pre-exceptional EBITDA up 35% at £6.6m (H1 2012: £4.9m)

· Total net loss after tax from continuing operations £1.7m (H1 2012: £2.6m)

· Cash and cash equivalents of £18.8m at 30 June 2013 (2012: £16.4m)

Operating Highlights

· flutiform® approved in 21 European countries, Australia and Hong Kong, for the treatment of asthma

· €2.0m (£1.7m) milestone payment from Mundipharma received in July following launch of flutiformo® in Italy

· flutiform® continues to track or exceed in-market value of sales compared with the most recent launch of a new non-generic combination brand in the ICS/LABA market segment for the same period post launch

· BREO™ ELLIPTA™ (GSK) approved for treatment of COPD in the U.S., the first GSK product utilising Skyepharma's proprietary dry powder formulation technology for inhalation products

Post-period Events

· flutiform® recommended for approval by a committee of the MHLW in Japan

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

"The first half of 2013 saw substantial progress, both financially and in terms of the continued roll-out of flutiform in Europe, most recently in Italy. Mundipharma continues to receive positive feedback from the initial launch markets, with increasing levels of awareness of the product among prescribers. We look forward to the continued roll-out of flutiform in Europe and further progress in bringing flutiform to market in Japan and Latin America.

"The approval of GSK's BREO ELLIPTA by the U.S. FDA in May provided further validation of Skyepharma's proprietary dry powder formulation technology for inhalation products. Our technology has been incorporated in two potentially significant GSK combination products and could generate up to £9 million per annum in royalties. As momentum builds behind flutiform and a number of other recently-approved products, we have a strong platform for future growth, from which to generate new development opportunities, both organically and with industry partners."

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

For further information please contact:

About Skyepharma PLC

Skyepharma combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products. The Group is eligible for revenues from 14 approved products in the areas of inhalation, oral, topical and injectable drug delivery as well as generating income from the development of further products and technology licenses. The products developed by the Group are marketed throughout the world by big pharmaceutical as well as specialty pharmaceutical companies. For more information, visit www.skyepharma.com

BUSINESS REVIEW

SUMMARY

Overview

The first half of 2013 saw substantial progress, with the continued roll-out of flutiform® in Europe, including the approval and launch in Italy. The Group's partner, Mundipharma International Corporation Limited ("Mundipharma") has received good feedback on progress made in the initial launch markets, which include Germany and the UK, with good levels of awareness of the product among prescribers. flutiform® has also been approved in Hong Kong and Australia and launch will follow once pricing reimbursement has been agreed. In Japan, where it is licensed to Kyorin Pharmaceutical Co, Ltd. ("Kyorin"), flutiform® has received a positive recommendation from the Pharmaceutical Affairs and Food Sanitation Council's Second Committee on Drugs, which is part of the Ministry of Health, Labour and Welfare ("MHLW") and has progressed to the next stage in the approval process.

The Group's technology has been incorporated in two potentially significant GSK combination products and could generate up to £9 million per annum in royalties. The approval of GSK's BREO™ ELLIPTA™ by the United States Food and Drug Administration ("FDA") in May provided further validation of Skyepharma's proprietary dry powder formulation technology for inhalation products.

These achievements, combined with previous product approvals and launches in 2012, provide a strong platform for future growth.

Financial highlights

Revenue in the first half of 2013 increased by 58 per cent to £31.3 million (H1 2012: £19.8 million), primarily due to the supply of flutiform®. Cost of sales in the first half of 2013 totalled £17.8 million, up from £8.0 million in H1 2012, due to increased manufacturing volumes.

Operating costs excluding exceptional items increased to £8.9 million in the first half of 2013 (H1 2012: £8.1 million), reflecting increased investment in research and development of £6.6 million (H1 2012: £6.3 million).

The increase in operating costs and other operating income was offset by higher revenues during the first half of 2013, resulting in pre-exceptional operating profit from continuing operations of £4.6 million, up 24 per cent from £3.7 million achieved in H1 2012.

There were no exceptional items recorded during the first half of 2013. During H1 2012, the Group received a U.S.$10 million (£6.2 million) milestone from Pacira following the launch of EXPAREL® in the United States, which is shown as exceptional income from discontinued operations.

The loss after tax from continuing operations reduced to £1.7 million (H1 2012: £2.6 million) and basic loss per share from continuing operations reduced to 3.6 pence (H1 2012: 10.5 pence). The loss after tax from continuing and discontinued operations for the first half of 2013 was £1.7 million (H1 2012: £3.6 million profit) and basic loss per share from continuing and discontinued operations for the first half of 2013 was 3.6 pence (H1 2012: 15.6 pence profit).

The Group received revenues from 13 approved and marketed products during the first half of 2013, which together generated £23.2 million of revenues from royalties and product supply (H1 2012: £14.5 million). In addition, flutiform® generated £4.5 million of milestones and contract development revenue in the first half of 2013 (H1 2012: £3.2 million).

Cash flows benefited from £0.7 million in milestone receipts (H1 2012: £6.2 million). Pre-exceptional EBITDA from continuing operations totalled £6.6 million (H1 2012: £4.9 million) or 21 per cent of revenues (H1 2012: 25 per cent of revenues).

Operational highlights

flutiform®

flutiform® is an important value driver for the Group. Further good feedback has been received on the launch of flutiform® in Europe, from the Group's licensee, Mundipharma, which is responsible for the development and commercialisation of flutiform® in Europe and the Rest of World outside the Americas and Japan.

flutiform® has now been approved in 21 European countries and launched in ten countries: Germany, the UK, Cyprus, Denmark, Finland, Ireland, Italy, the Netherlands, Norway and Sweden. For the remaining 11 countries, further launches are anticipated during 2013/14, once pricing and reimbursement processes are concluded. Mundipharma aims to continue to launch as soon as possible through its network of independent associated companies once national approvals are granted and, where relevant, reimbursement confirmed.

Mundipharma management has stated that uptake and sales of flutiform® continue to be in line with their expectations. flutiform® combines, for the first time in Europe, the fast acting LABA (long-acting beta agonist), formoterol, and the most widely prescribed ICS (inhaled corticosteroid), fluticasone.

According to Mundipharma, in-market sales* of flutiform® from launch (which commenced in September 2012) to the end of May 2013 totalled €5.4 million* (£4.6 million). When compared with the most recent launch of a new non-generic combination brand in the ICS/LABA market segment, flutiform® continues to track or exceed in-market value of sales for the same period post launch. Mundipharma has achieved a "share of voice"† in this segment similar to that of the category leaders, and market research shows that flutiform® messages and key data are being well received. (*Source: IMS Health, IMS MIDAS. May MAT 2013. †Note: "Share of voice" represents the proportion of discussions recalled by prescribers based on independent surveys.)

Following the launch of flutiform® in Italy, where it is known as flutiformo®, in June 2013, a milestone payment of €2.0 million (£1.7 million) was received in July from Mundipharma. Half of the milestone was paid by Skyepharma to Paul Capital as a pre-payment of the Paul Capital Note.

flutiform® has been approved in Australia and launch will follow once pricing reimbursement has been agreed. Mundipharma has also filed marketing authorisation applications in a number of countries in the Asia-Pacific region and approval has been granted in Hong Kong. It is anticipated that approvals will follow in other Asian markets over the next two years.

The Group's partner in Japan, Kyorin, continues to plan to launch flutiform® as soon as possible after receiving approval and agreeing reimbursement prices. In July 2013, the Pharmaceutical Affairs and Food Sanitation Council's Second Committee on Drugs, which is part of the Japanese MHLW, has recommended approval of flutiform® for bronchial asthma treatment in Japan. The NDA for flutiform® will now be considered by the MHLW's regulatory committee (Bunka-Kai) for the official administrative marketing authorisation. In parallel, the MHLW is also considering pricing for the National Health Insurance drug price list, which must be agreed prior to any launch.

In Mexico, Central and South America, the Group's licensee, Sanofi, is expected to start filing NDAs for flutiform® shortly.

Other products

Skyepharma technology has been incorporated into two potentially significant GSK combination products, involving three chemical entities, and could generate up to £9.0 million per annum in royalties. The approval of GSK's BREO™ ELLIPTA™ in the United States for the treatment of Chronic Obstructive Pulmonary Disease ("COPD") has provided further validation of Skyepharma's proprietary dry powder formulation technology for inhalation products. The same combination product, with the proposed name of RELVAR™ ELLIPTA™, is under review in Europe for COPD and asthma and Japan for asthma. NDAs for the other combination product, ANORO™ ELLIPTA™, have been filed for approval for the potential treatment of COPD in the United States, Europe and Japan.

During H1 2013, the Group received a full six month contribution from EXPAREL® following the launch on 9 April 2012 in the United States. During H1 2013, Pacira reported net sales of EXPAREL® of U.S.$25.7 million (£16.6 million), up from $12.4 million (£7.8 million) in H2 2012. Skyepharma is entitled to a 3 per cent share of revenues (based on cash received by Pacira).

The full launch of RAYOS® took place in the United ‎States in late January 2013 by the Group's partner, Horizon Pharma, Inc. ("Horizon"). The product is being marketed for the treatment of a broad range of conditions, including rheumatoid arthritis, by a sales force of approximately 150.

Business Development and Strategy

Skyepharma combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products. 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

Skyepharma has developed metered dose and dry powder inhalation products which have received approvals in more than 35 countries, including in the United States and the European Union. As well as continuing to support flutiform®, the Group aims to capitalise on its proven and long-established expertise in developing respiratory products by seeking further projects where it can apply its inhalation drug development expertise and intellectual property. The Board will consider funding early stage development of carefully selected respiratory projects where it believes the Group's expertise can develop the concept through to a suitable value inflection point. Other projects are likely to be largely funded by partners.

Since 2011, Skyepharma's respiratory development team has provided contract development services for RespiVert Ltd ("RespiVert"), a small molecule drug discovery company and a subsidiary of Janssen Biotech, Inc. The projects are in the early stage of development of dry powder inhaler ("DPI") dosage forms on a number of RespiVert compounds, and are aimed at the development of new inhaled therapies for patients with severe, chronic respiratory diseases including COPD and severe asthma.

Over the past 15 years, the Group has also been involved in the development of 13 marketed oral products, with approvals in most key markets and sales in over 80 countries. These products have generated approximately U.S.$4 billion of sales for our partners over the past five years. During 2012, Skyepharma's delayed-release chronotechnology, Geoclock™, gained its first product approval and launch in the United States with RAYOS® for the treatment of a number of conditions. Further work has been carried out on the development of SKP-1052, which also uses Geoclock™, as a potential product to treat nocturnal hypoglycaemia in insulin-dependent diabetics. The Group has also started feasibility work on novel oral drug delivery technologies.

Subject to suitable opportunities being available, the Board's current plan is to allocate between £5 million and £10 million per annum on own-funded research and development, including approximately £2 million to £3 million per annum on supporting flutiform®.

Lyon Manufacturing Facility

In July 2011, Skyepharma Production SAS leased its pharmaceutical manufacturing business and premises at Saint Quentin-Fallavier, Lyon, (together the "Facility") to Aenova France SAS ("Aenova"), for an initial period of two years which ended on 30 June 2013, following which certain termination or renewal rights apply. Aenova was acquired by BC Partners in August 2012 and, subsequently acquired the Temmler Group, which provided Aenova with a number of options for manufacture of its products. Accordingly, Aenova undertook a review of all its facilities and initiated a process to ascertain if it has the right to terminate the lease of the Facility, based on a specified calculation. Skyepharma does not believe that Aenova has such a right to terminate and is planning to renew the leasing arrangements for the period to 30 June 2016. The contractual arrangements set out a specific process which should lead to a final determination of the position and this process has been initiated. Upon a renewal of the leasing arrangements, a rental of €2.0 million per annum is payable by Aenova to the end of June 2016. Aenova continues to be obliged to manage and be responsible for the financial performance of the Facility on a day to day basis until the leasing arrangements are terminated.

The key terms and conditions of the lease are set out in the Financial Review section.

Outlook

Further progress with flutiform® in Europe is expected to contribute to the Group's near-term performance as well as its longer-term prospects. Two potential financial milestones over the next six months include €3.0 million (£2.6 million) from the launch of flutiform® in France and several million U.S. dollars on the approval of flutiform® (KRP-108) in Japan, but it is not certain that these will fall into 2013.

Contract research and development funded by partners is expected to continue to play an important role in generating revenues. The Group also anticipates an increase in net investment in its own research and development as it undertakes projects to support the flutiform® supply chain, enhance its dry powder inhalation development capability and carry out feasibility work for new oral drug delivery technologies.

Total royalties and other revenues (from EXPAREL®) are expected to be similar in 2013 compared with 2012 due to initial contributions from flutiform® and other products launched in new markets offsetting growing generic competition affecting certain products. Revenues and costs from product supply are expected to be substantially higher in 2013 compared with 2012, due to the supply of flutiform®, but this supply is not expected to be profitable until it has been launched in most major markets in Europe and Japan.

The Group will continue to support its partners, Mundipharma, Kyorin and Sanofi, in making further progress with flutiform® in Europe, Japan and Latin America respectively. The Board looks forward to building on recent successes to drive future growth and to further exploit the Group's proven inhalation drug development and oral drug delivery technologies and expertise.

APPROVED PRODUCTS

flutiform® - Europe

The development and marketing agreement ("DMA") with Mundipharma entered into in 2006, and later amended, includes milestones of up to €73.0 million (£59.5 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, €8.0 million (£6.3 million at that time) was paid in October 2012 following the launch of flutiform® in Germany and the UK and €2.0 million (£1.7 million at that time) was paid in early July 2013 following the launch in Italy. Up to €5.0 million (£4.3 million) is due in instalments as further launches occur in other major markets in Europe and up to €40.0 million (£34.2 million) is sales-related.

Out of the €2.0 million (£1.7 million) received in early July 2013, €1.0 million (£0.9 million) has been paid out as a mandatory prepayment of the Paul Capital Note. Potential milestones in the second half of 2013 include €3.0 million (£2.6 million) from the launch of flutiform® in France.

Mundipharma has funded third party development costs, capped at €19.0 million (£16.3 million) principally related to the development of a high strength version of flutiform® ("High Strength Costs").  Mundipharma has also commenced a double blind study of flutiform® in children aged 5-12, as required under the agreed Paediatric Investigation Plan ("PIP") for Europe. The DMA was amended in March 2013 to change the previous obligations to refund High Strength Costs, paediatric development and certain other costs so that, now, the funding of High Strength Costs together with 50 per cent of the paediatric study costs and certain other costs ("Recoverable Costs") can be recovered by Mundipharma, with the maximum recovery being €25.0 million (£21.4 million). These Recoverable Costs will be deducted against 100 per cent of sales-related milestones and (i) in respect of sales from 1 January 2014, 50 per cent of royalties; and (ii) in respect of sales from 1 January 2016, 75 per cent of royalties due to the Group, until fully repaid. The amendment also gave the Group certain potential rights to use of data and improved payment conditions for product supply.

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

Under the DMA 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 deductions noted above for Recoverable Costs. Royalties are also subject to a cap which limits the aggregate amount of royalties and costs of product supplied to Mundipharma by the Group to a maximum of 35 per cent of net sales. The payment of royalties continues whilst the agreement with Mundipharma is in force, which is the period until the later of September 2027 (being 15 years from the date of the first commercial delivery of flutiform® in a major country) and the expiration of the last of the Group's relevant patents utilised in the territory.

The current granted patents relating to flutiform® in most territories expire in August 2019. Patent extensions and supplementary protection certificates are being sought where available, which may provide additional periods of protection up to a maximum of five years. In addition, patent applications have been filed which could, if granted, extend the patent life to 2030. In Europe there is data exclusivity which prevents a generic from being marketed for 10 years from the first approval of flutiform®, which was in September 2012.

Solaraze®

Solaraze® (diclofenac), a topical gel treatment for actinic keratosis, is marketed in the United States by Fougera Pharmaceuticals Inc. ("Fougera"), which was acquired by Sandoz, a division of Novartis ("Sandoz") in July 2012. Almirall, S.A. ("Almirall") is the Group's distribution and marketing partner in Europe and certain other territories. 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 expired in H1 2013, and following this, the royalty rate due from Almirall has reduced substantially to a high-mid single digit rate.

Net sales of Solaraze® in the United States in the first half of 2013 were U.S.$26.2 million (£17.1 million), 12 per cent lower than reported in 2012. Sales in the first half of 2013 by Almirall reached €15.5 million (£13.2 million), similar to the €15.5 million (£12.8 million) reported in H1 2012.

An Abbreviated New Drug Application ("ANDA") was filed by Tolmar, Inc. ("Tolmar") and a Paragraph IV Certification Notice was served relating to a potential generic Solaraze® in the United States in April 2010. Fougera and Jagotec AG filed a patent infringement suit against Tolmar. Subsequently, Fougera was acquired by Sandoz which had, prior to such acquisition, been in a collaboration with Tolmar in respect of their potential generic product. As a consequence of agreements entered into by Sandoz with the United States Federal Trade Commission ("FTC") in order to complete the acquisition of Fougera, Sandoz undertook to divest its interest in, amongst other things, the Tolmar generic development, to procure the dismissal of the ANDA infringement action against Tolmar and to grant Tolmar a sub-license under the Jagotec AG/Fougera License with respect to the potential generic product, but with no right to any trademark. Jagotec AG subsequently entered into an agreement with Fougera resolving the various issues with regard to Tolmar and the FTC such that if a generic product is launched by Tolmar, the royalty rate payable on sales of Solaraze® will increase from a low teens to high teens percentage of net sales and certain milestones will be payable.

Requip® Once-a-day

Requip® Once-a-day, marketed under various brand names, is a once-daily formulation of ropinirole for Parkinson's disease and was developed in collaboration with 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 28 August 2012, Requip® Once-a-day was launched in Japan, having obtained marketing authorisation for the indication of Parkinson's disease on 29 June 2012.

Requip® Once-a-day was launched in the United States in July 2008. Commencing in 2009, a number of ANDAs were filed with the U.S. FDA for generic versions of ropinirole extended release tablets and from May 2012 onwards, a number of generic versions have been approved and launched in the United States.

In the first half of 2013, net sales of Requip® Once-a-day totalled £33.3 million, a decrease of 36 per cent from H1 2012. Of this, £22.4 million was generated in Europe, a 35 per cent decrease from H1 2012, £2.4 million arose in the United States, a decrease of 82 per cent and £8.5 million arose in the rest of the World, an increase of 102 per cent, mainly driven by the launch of the product in Japan.

The Group earns low mid-single digit percentage royalties on net sales of Requip® Once-a-day. On a country by country basis, the royalty reduces following patent expiry to low-single digit or zero. During the patent term, the basis of calculation changes from net sales to gross margin upon, and for so long as, substantial competition occurs from ropinirole containing modified release products in that country.

Xatral® OD

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. In the first half of 2013, Sanofi reported net sales of all forms of Xatral® of €51 million (£43.4 million), down 26 per cent at constant exchange rates on H1 2012 net sales of €69 million (£55.6 million). Sales in all regions were down compared with H1 2012, as a result of generic competition. In the United States, net sales of Uroxatral® were €2 million (£1.7 million), down 83 per cent; net sales in Western Europe were €19 million (£16.2 million), down 24 per cent; and net sales for the rest of the World were €30 million (£25.6 million), a reduction of 3 per cent. The Group earns low-single digit royalties on net sales of Xatral® OD. In April 2013, it was announced that Sanofi had agreed to sell the full commercial rights to Uroxatral® in the United States to Covis Pharmaceuticals, Inc.

Paxil CR™

Paxil CR™ is a controlled release 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 2013, reported sales outside the United States were U.S.$53.5 million (£34.5 million), up 68 per cent compared with U.S.$31.9 million (£20.6 million) in H1 2012. Sales in the United States were U.S.$21.1 million (£13.6 million) (H1 2012 U.S.$19.9 million (£12.9 million)) and continue to be affected by generic competition which also affects sales in certain other territories. However, growth in sales in Asia and emerging markets, enhanced by the launch in Japan in June 2012, outpaced the decline in the United States and this trend is expected to continue. On a country-by-country basis, the Group earns between nil and mid-single digit percentage royalties on net sales of Paxil CR™ depending on generic competition, number of years since launch and patent expiry.

ZYFLO CR®

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 net sales of U.S.$29.4 million (£19.0 million) in the first half of 2013, an increase of 26 per cent (at constant exchange rates) compared with H1 2012. The product is manufactured at the Lyon facility. The Group is eligible for a high mid-single digit percentage royalty on net sales of ZYFLO CR®. Certain protections covering ZYFLO CR® expire in H2 2013 and there may be no royalties payable from that time.

LODOTRA®/RAYOS®

LODOTRA® is a novel delayed-release formulation of low dose prednisone, utilising the Group's proprietary Geoclock™ chronotechnology, which was developed in collaboration with Horizon. LODOTRA® was approved in Europe, under the European decentralised procedure, in March 2009 for the treatment of moderate to severe active rheumatoid arthritis in adults particularly when accompanied by related morning stiffness. LODOTRA® is now approved for marketing in 30 countries outside of the U.S. Horizon has signed exclusive distribution and supply agreements with Mundipharma for the commercialisation of LODOTRA® in Europe, Australia, China, Hong Kong, Indonesia, Korea, Malaysia, New Zealand, The Philippines, Singapore, South Africa, Taiwan, Thailand and Vietnam. In March 2012, this was extended to include Mexico, Brazil, Argentina, Colombia, Venezuela, Peru, Chile, Ecuador, The Dominican Republic, Guatemala, Costa Rica, Uruguay, Bolivia, Panama, Nicaragua, El Salvador and Honduras.

In the United States the product, known as RAYOS®, was approved by the FDA on 27 July 2012 for a range of indications. Horizon initially launched the product for rheumatologic diseases through its own specialist sales force in December 2012. In January 2013, Horizon initiated the full commercial launch to rheumatologists and high-value primary care physicians through its full 150-person sales force.

Horizon reported gross sales of LODOTRA® of U.S.$4.7 million (£3.1 million) during the first half of 2013 and net sales of U.S.$4.6 million (£3.0 million), after deductions for trade discounts and allowances (H1 2012: U.S.$4.3 and U.S.$3.9 million respectively (£2.7 and £2.5 million)). Horizon recognises a significant portion of its LODOTRA® sales at the time of delivery to its distribution partner, Mundipharma, and those deliveries are not linear or related to end market sales in terms of timing. Gross sales of RAYOS® for the first half of 2013 were U.S.$1.1 million (£0.7 million) and net sales were U.S.$0.9 million(£0.6 million) (H1 2012: U.S.$nil). The figures reported by Horizon are not the same as the in-market sales used for the calculation of the royalties paid to the Group.

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

In March 2013, the Group and Horizon received letters from Alvogen Pine Brook, Inc. ("Alvogen"), informing that Alvogen had filed an ANDA with the United States FDA for a generic version of RAYOS®, containing up to 5 mg of prednisone and that Alvogen's submission contained Paragraph IV certifications. Alvogen did not indicate the timing or status of the FDA's review of its filing and the validity of the letters for ANDA notification purposes was challenged by Horizon and Skyepharma. Subsequently, Alvogen has agreed that their Notice Letters do not constitute Notice as described in 21 U.S.C. 355(j)(2)(B).

On July 15, 2013, the Group and Horizon received a Paragraph IV Patent Certification from Watson Laboratories, Inc. - Florida ("WLF"), advising that WLF had filed an ANDA with the FDA for a generic version of RAYOS®, containing up to 5 mg of prednisone. WLF has not advised the Group and Horizon as to the timing or status of the FDA's review of its filing. The Group and Horizon are evaluating the Paragraph IV Patent Certifications and intend to vigorously enforce their intellectual property rights relating to RAYOS®. All of the issued U.S. patents covering RAYOS® are listed in the FDA's Orange Book. Under the FDA's rules and regulations, if the Group and Horizon initiate a patent infringement suit to defend the patents identified in a Paragraph IV notice within 45 days after the FDA's receipt of a proper notice under 21 U.S.C. 355(j)(2)(B), the FDA would be prevented from approving the ANDA until the earlier of 30 months from the date of the suit or a decision in the infringement case that each of the patents is not infringed or invalid.

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 and these products were launched in March 2008.

Sales of Sular® continue to be under pressure from a declining market and increasing competition, including competitive generic versions of the lower-dose formulations, the first of which was approved and launched in January 2011 in the United States.

The lower-dose formulations of Sular® are manufactured at the Lyon facility.

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 facility. The Group is entitled to receive royalties as a percentage of net sales of Triglide®, less the price of product supplied to Shionogi.

EXTERNAL PROGRAMMES

EXPAREL®

EXPAREL® (bupivacaine liposome injectable suspension 1.3 per cent) is an injectable product for administration into the surgical site to produce postsurgical analgesia and has been developed by the Group's former Injectable Business, now called Pacira. Under the terms of the sale of the Injectable Business in 2007, the Group is entitled to certain contingent milestones and share of net sales of EXPAREL® in respect of certain patents sold with the business. The latest expiration date listed in the Orange Book (the United States FDA listing of approved drugs along with the patents relating to them) for EXPAREL® is 18 September 2018.

In April 2012, the United States FDA approved the NDA for EXPAREL® and the Group received a milestone payment of U.S.$10 million (£6.2 million at the time), upon the first commercial sale of EXPAREL® in the United States. In the longer-term, the Group is entitled to receive further contingent milestone payments up to an aggregate of U.S.$52 million (£34.2 million) from Pacira, depending on certain events occurring: (i) U.S.$4 million (£2.6 million) on the first commercial sale in a major EU country (UK, France, Germany, Italy or Spain); (ii) U.S.$8 million (£5.3 million) if worldwide annual net sales reach U.S.$100 million; (iii) a further U.S.$8 million (£5.3 million) if worldwide annual net sales reach U.S.$250 million; and (iv) a further $32 million (£21.0 million) if worldwide annual net sales reach U.S.$500 million.

From launch in April 2012 to the end of 30 June 2013, EXPAREL® sales totalled U.S.$40.3 million (£26.1 million), with H1 2013 sales totalling U.S.$25.7 million (£16.6 million). Pacira has reported that it continues its steady expansion since the launch of EXPAREL®, reporting 1,435 total accounts of EXPAREL® ordered since launch. For the second quarter of 2013, Pacira announced 370 new accounts and an average of 30 new customers per week.

The Group is entitled to three per cent of net sales of EXPAREL® in the United States (based on cash received by Pacira), and a similar share of net sales if approved and launched in Japan, the UK, France, Germany, Italy and Spain.

Licensing

In 2003 the Group signed an agreement with GSK to provide access to one of the Group's proprietary dry powder formulation technologies for two inhalation products - BREO™ ELLIPTA™ / RELVAR™ ELLIPTA™ and ANORO™ ELLIPTA™. GSK made an initial payment to the Group on signature, and subsequent milestones were paid in 2009 and 2011.

BREO™ ELLIPTA™ (fluticasone furoate/vilanterol 100/25 mcg) is a combination medicine for the long-term, once-daily, maintenance treatment of airflow obstruction in patients with COPD, including chronic bronchitis and/or emphysema. In May 2013, the NDA submitted by GSK was approved in the United States by the FDA for the long-term, once-daily maintenance treatment of airflow obstruction in patients with COPD, including chronic bronchitis and/or emphysema. It is also indicated to reduce COPD exacerbations in patients with a history of exacerbations. BREO™ ELLIPTA™ is not indicated for the relief of acute bronchospasm or for the treatment of asthma. GSK has stated that it anticipates that BREO™ ELLIPTA™ will be available in the United States during the third / fourth quarter of 2013. The same combination product, with the proposed name of RELVAR™ ELLIPTA™ is under review for approval in Europe for COPD and asthma and Japan for asthma.

The technology has also been incorporated in another investigational combination product, with a proposed brand name of ANORO™ ELLIPTA™ (umeclidinium bromide/vilanterol). This contains two chemical entities, one of which is common to both BREO™ ELLIPTA™ and ANORO™ ELLIPTA™. NDAs for ANORO™ ELLIPTA™ have been filed for approval in the United States, Europe and Japan.

An FDA Advisory Committee Meeting of the Pulmonary-Allergy Drugs Division has been scheduled for 10 September 2013 for ANORO™ ELLIPTA™. The Prescription Drug User Fee Act ("PDUFA") target date for the application for ANORO™ ELLIPTA™ (for COPD) by the FDA in the United States is 18 December 2013. The product was also filed for approval in Europe and Japan in January and April 2013 respectively. This medicine is not approved or licensed anywhere in the world.

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 £3.0 million per annum for each GSK chemical entity for the life of the relevant patents. BREO™ ELLIPTA™ and ANORO™ ELLIPTA™ together involve three new chemical entities.

DEVELOPMENT PIPELINE

flutiform® - Japan

flutiform® is licensed to Kyorin in Japan. Under the licensing agreement with Kyorin, the Group has received an upfront milestone and certain development milestone payments, including a final pre-approval milestone received in 2011. A milestone worth several million U.S. dollars is payable to the Group on approval and there is a high-mid single digit percentage royalty on net sales payable until the later of 10 years from the date of first commercial sale in Japan and the expiry 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. On 25 September 2012, Kyorin submitted the NDA to the Japanese authorities for KRP-108/flutiform®. The NDA submission included the results from two additional Phase III clinical studies, which both met their primary endpoints. Review of the NDA is ongoing and, subject to receiving approval, Kyorin is planning to be in a position to launch as soon as possible after receiving approval.

flutiform® - Mexico, Central and South America

On 28 July 2011, Skyepharma entered into an exclusive Development, License and Marketing Agreement with Sanofi for flutiform® in Mexico, Central and South America. Under the agreement, the Group 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. Sanofi aims to pursue marketing authorisation applications for flutiform® throughout the region. The applications will be based on data included in the European MAA for flutiform® and Sanofi is expected to start filing NDAs shortly.

flutiform® - United States

Following the review of the FDA and complete response letter in January 2010, meetings held with the FDA confirmed that considerable work would need to be undertaken to meet the requirements for approval of flutiform® in the United States. The FDA also confirmed its position that a substantial safety study would need to be carried out post-approval in the asthma indication, 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® in the United States 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 the Group's proprietary Geoclock™ chronotechnology for delayed release. The formulation is designed to treat people who have difficulty maintaining sleep but not with sleep onset, and is intended to prevent middle-of-the-night awakening while avoiding morning residual effects.

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 with placebo, with no evidence of next-morning adverse cognitive effects". Somnus is continuing to seek 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 (£22.4 million) in milestone payments, of which U.S.$4.0 million (£2.0 million at that time) was received on signing and U.S.$1.0 million (£0.7 million at that time) was received on completion of the initial Phase I study. A further U.S.$10.0 million (£6.6 million) is payable on product launch, and U.S.$20.0 million (£13.1 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. A successful proof of concept study has been carried out. As well as investigating the regulatory pathways, 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.

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 to RespiVert, a subsidiary of Janssen Biotech, Inc., and, during 2012, this led to similar feasibility studies to develop DPI dosage forms on further RespiVert compounds. The projects are aimed at the development of new inhaled therapies for patients with 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. SkyeHaler™ is a multi-dose reservoir device suitable for acute and chronic therapies with a dose counter and an end of life lockout mechanism.

The Group has also commenced early stage feasibility work on some new oral drug delivery technology.

MANUFACTURING AND SUPPLY

flutiform® Supply Chain

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

The Group has entered into agreements with a number of suppliers in order to obtain materials required 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 the manufacturing processes. The existing manufacturing process for the product for Europe was validated during 2011.

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €9.0 million to €11.0 million (£7.7 million to £9.4 million) per annum through to 2015.

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 of flutiform® until the product has been successfully established in a number of major countries. In addition to these costs, the Group will need to continue to invest working capital to support additional launches of flutiform® as well as to further scale up the manufacturing process at increased volumes in anticipation for the growth of flutiform®. The Group expects to invest a further £2 million to £3 million per annum in capital expenditure for the next three years to scale up the manufacturing process at increased volumes.  In the medium-term, the Directors are expecting the flutiform® supply chain to contribute to the profitability of the Group.

Lyon Manufacturing Facility

Skyepharma's manufacturing facility in Saint Quentin-Fallavier, Lyon, France, is leased to the Aenova Group which manages the Facility on a day to day basis. 

The facility manufactures six products which use the Geomatrix™ family of technologies: Diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Sular®, LODOTRA®/RAYOS® and Madopar DR®. The facility also manufactures one other oral product, Triglide®, based on Skyepharma's solubilisation technology. The facility has current good manufacturing ("cGMP") status, with approvals from the European Medicines Agency and United States FDA. The facility has recently been inspected by the United States FDA, and no concerns were raised.

Further details of the lease are described in the Financial Review under "Aenova lease".

FINANCIAL REVIEW

Revenue

Revenue recognised from signing and milestone payments was £2.4 million in the first half of 2013 (H1 2012: £0.9 million), which benefited from the €2.0 million (£1.7 million) milestone following the commercial launch of flutiform® in Italy.

Contract research and development revenue increased by 20 per cent to £4.9 million in the first half of 2013 (H1 2012: £4.1 million) which included further work on flutiform®, for Kyorin and Mundipharma, and contract development services provided to RespiVert.

Royalty income was £8.8 million in the first half of 2013, in line with H1 2012, representing a decrease at constant exchange rates of 2 per cent. The increase due to the launch of flutiform® in the EU and increased royalties from certain other products were offset by the expected reduction in sales of a number of products as a result of generic competition.

Product supply revenue totalled £14.4 million in the first half of 2013 (H1 2012: £5.7 million), representing an increase of 151 per cent at constant exchange rates, mainly due to the supply of flutiform®.

Other revenue of £0.8 million (H1 2012: £0.3 million) comprises the Group's three per cent share of Pacira's cash receipts from net sales of EXPAREL® in the United States and rental income in respect of the management lease agreement with the Aenova Group to lease the Group's manufacturing facility in Lyon, France.

Research and development expenses

Research and development expenses incurred in the first half of 2013 increased to £6.6 million (H1 2012: £6.3 million). The Group's net investment in research and development (expenses, net of contract development revenues) was £1.7 million, compared with £2.2 million in H1 2012, as the Group carried out more externally funded development projects. The net expenditure during the first half of 2013 is primarily on the development of flutiform®, principally support activities related to product supply. Due to the complexity of a combination respiratory product like flutiform® it is anticipated that there will be a long-term continuing requirement to support the product, both to scale up and maintain manufacturing capacity and to deal with maintenance of the supply chain. In addition to anticipated capital costs described in the flutiform® Supply Chain section (under Manufacturing and Supply), this could cost several million pounds a year for the foreseeable future.

Pre-exceptional operating result from continuing operations

Pre-exceptional operating result and from continuing operations are as follows:

Exceptional items

There were no exceptional items recorded during the first half of 2013.

During H1 2012, the Group reported £6.2 million from discontinued operations in relation to the U.S.$10 million milestone from Pacira following the launch of EXPAREL® in the United States.

All exceptional items are described in further detail in Note 7: Exceptional items.

Finance costs and income

Finance costs - interest totalled £6.9 million (H1 2012: £5.7 million) and consisted of £4.8 million (H1 2012: £3.2 million) in respect of the Bonds, £1.5 million (H1 2012: £1.4 million) in respect of the CRC finance, £0.4 million (H1 2012: £0.8 million) of interest attributable to the Paul Capital Note and £0.2 million (H1 2012: £0.3 million) on other bank borrowings.

Finance costs - revaluation loss: in H1 2012, a loss of £0.1 million arose 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 2013 this amounted to a gain of £0.6 million (H1 2012: £nil).

Result

Operating profit from continuing operations after exceptional items in the first half of 2013 was £4.6 million (H1 2012: £3.3 million).

Loss before tax from continuing operations for the first half of 2013 was £1.6 million (H1 2012: £2.5 million). Loss for the first half of 2013 from continuing operations after exceptional items and taxation was £1.7 million (H1 2012: £2.6 million). Total net loss from both continuing and discontinued operations in the first half of 2013 was £1.7 million (H1 2012: £3.6 million profit), which in the prior period included the £6.2 million milestone received from Pacira following the launch of EXPAREL® in the United States.

Earnings per share

From continuing and discontinued operations during the first half of 2013, both basic loss per share and diluted loss per share amounted to 3.6 pence (H1 2012: 15.6 pence profit).

From continuing operations during the first half of 2013, both basic loss per share and diluted loss per share amounted to 3.6 pence (H1 2012: 10.5 pence).

As at 30 June 2013 there were 46,127,645 Ordinary Shares in issue (H1 2012: 23,943,162) following the issue of Ordinary Shares to the Bondholders as part of the Bond Restructuring implemented on 24 September 2012.

In addition there were outstanding as at 30 June 2013 a number of potential issues of Ordinary Shares as follows:

At 14 August 2013, the Company's closing share price was 82.0 pence.

Cash position

As at 30 June 2013 the Group had cash and cash equivalents of £18.8 million (2012: £16.4 million). During the first half of 2013, the Group generated cash from operations of £5.5 million compared with £1.8 million in H1 2012.

The Group also met scheduled financing commitments comprising scheduled repayment of debt of £3.1 million, mainly to Paul Capital (H1 2012: £6.5 million) and £0.5 million of net interest was paid (H1 2012: £5.1 million), primarily relating to the Bonds (in the prior year only), CRC finance and Paul Capital Note.

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 the first half of 2013 of £28.9 million is higher than H1 2012, due to the supply of flutiform®.

Signing and milestone payments received

This shows amounts received with respect to pipeline products and product sales. The total cash received during the first half of 2013 of £0.7 million is lower than H1 2012, which benefited from the milestone received from Pacira of U.S.$10 million (£6.2 million) following the first commercial sale of EXPAREL® in the United States.

Total 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 during the first half of 2013 is shown in Note 6: Research and development expenses. The increase compared with H1 2012 is due to further work on flutiform®, for Kyorin and Mundipharma, and contract development services provided to RespiVert.

Net investment in research and development expenditure

This reflects the Group's total research and development expenditure net of costs reimbursed by development partners. The net expenditure is lower in the first half of 2013 compared with H1 2012 as the Group carried out less internally funded development projects. The net expenditure during the first half of 2013 is primarily on the development of flutiform®, principally support activities related to product supply.

Liquidity

This measures the availability of finance to fund current and future activities and to meet debt servicing requirements. Liquidity as at 30 June 2013 consisted of cash and cash equivalents of £18.8 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. During 2013, the total increased to 14 following the approval of BREOTM ELLIPTATM in the United States.

Product supply volume

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®). The slightly higher volume of 73 million units in the first half of 2013 compared with H1 2012 is due to increased volume of tablets manufactured at the Lyon facility.

Balance sheet

At 30 June 2013, the Group's balance sheet shows total shareholders' equity of £68.8 million deficit (2012: £66.0 million deficit).

Borrowings and liquidity

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

Total debt has increased by £5.2 million during the first half of 2013. This is mostly due to accrued finance costs, partially offset by repayments of £3.1 million.

An illustration of the potential cash payments in respect of the principle loan agreements (which comprise all borrowings except for the mortgage debt and bank borrowings) is as follows (by full year):

Notes:

(i) Under the remaining £60.8 million non-convertible 2024 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 tables, it is assumed that funds are called for repayment by the Bondholders at the earliest normal Put dates.

(iii) Under the remaining non-convertible 2024 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.

(iv) The Bonds, Paul Capital Note and CRC finance are described in further detail below.

Bonds

On 24 September 2012, a Bond Restructuring was approved and implemented, following which, a total of £60.8 million 6.5 per cent 2024 Bonds ("2024 Bonds") are outstanding as non-convertible bonds with the following key amended terms:

· Ordinary interest of 6.5 per cent per annum, with an option (which the Group has exercised), for the Group to defer payment of the next four semi-annual interest 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 or a significant cash equity issuance. Deferred interest will become payable earlier out of the proceeds, subject to restrictions, of certain cash equity issuances as well as on early redemption.

· 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) are both payable on redemption.

· The earliest date when the Bondholders may ordinarily redeem the 2024 Bonds is 4 November 2017.

The accounting for the Bond Restructuring resulted in an exceptional non-cash financing charge of £13.1 million included in the income statement in addition to the £2.3 million cash transaction costs during the year ended 31 December 2012.

Although shown in the balance sheet in accordance with IFRS at a value of £61.5 million (2012: £56.7 million), the Bonds had a face value as at 30 June 2013 of £60.8 million plus a redemption premium of £28.8 million.

An illustration of the expected finance costs in the income statement under the remaining £60.8 million non-convertible 2024 Bonds is as follows (by full year):

Paul Capital Note

The Group has a fixed amortisable senior note (the "Paul Capital Note") in the amount of U.S.$92.5 million (£61.0 million) due to Paul Capital. The Paul Capital Note is repayable on a quarterly basis in accordance with an amortisation schedule through to 2015. At 30 June 2013 a cumulative total of U.S.$83.5 million (£54.9 million), has been paid against the Paul Capital Note. The principal outstanding on the Paul Capital Note at 30 June 2013 is U.S.$9.0 million (£5.9 million).

Although the Group retains full responsibility for the Paul Capital Note, an estimate as at 30 June 2013 of U.S.$2.2 million (£1.4 million) will be paid by Pacira out of DepoCyt® sales, under the 2007 sale agreement for Pacira. At 30 June 2013, a cumulative total of U.S.$9.5 million (£6.2 million) of the Group's repayments of the Paul Capital Note had been made by Pacira. In July 2012, Pacira received an inspection letter from the Medicines and Healthcare products Regulatory Agency ("MHRA") noting certain critical and major deficiencies in the DepoCyt® manufacturing line. As a result, manufacturing was temporarily suspended, which, along with a selective recall, contributed to a reduction in product sales and royalty revenue of DepoCyt® in the second half of 2012, which affected payments to Paul Capital by Pacira. Following the MHRA's re-inspection and confirmation of Pacira's successful remediation efforts in January 2013, Pacira resumed DepoCyt®production in the first quarter of 2013 and is currently resupplying the U.S. and European markets. It does not currently expect an out-of-stock situation in either the United States or Europe as a result of the interruption in DepoCyt® manufacturing.

As at 30 June 2013 the net present value of the Paul Capital Note (net of anticipated payments by Pacira to Paul Capital) discounted at an annual rate of 11.2 per cent is U.S.$7.0 million (£4.6 million) compared with the value of U.S.$11.3 million (£7.0 million) at 31 December 2012.

The following amortisation schedule shows the scheduled amounts payable under the Paul Capital Note as at 30 June 2013, including the contributions made and forecast to be made by Pacira:

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 for DepoDur™ and DepoCyt®

(iii) Includes prepayments of the Paul Capital 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.$8.1 million had been paid as at 30 June 2013. Out of the milestone received from Mundipharma in respect of the launch of flutiform® in Italy, €1.0million($1.2 million) was paid to Paul Capital in July 2013. The above table assumes that from the €3m milestone due when flutiform® is launched in France, $0.7millionwill be paid to Paul Capital in H2 2013.

(iv) Excludes contingent amounts of up to U.S.$12.5 million due on the Paul Capital Note if sales of DepoDur™ exceed certain thresholds, which is extremely unlikely.

CRC finance

The CRC finance loan was taken out in 2006 and is a ten year secured amortising loan facility (the "CRC Facility") which, at inception, totalled approximately £35.0 million at the exchange rates prevailing at that time. The CRC 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 on the CRC Facility as at 30 June 2013 is U.S.$19.6 million (£12.9 million) and €15.2 million (£13.0 million). The CRC Facility specifies make-whole percentages, which decline over time to the end of the loan, for optional prepayments of the loan, and which are designed to compensate CRC for lost future interest margin.

In September 2012, the Group entered into a further amendment agreement to the CRC Facility to enhance the Group's short-term liquidity position.

Under the amendment agreement, the obligation for the Group to pay the six consecutive quarterly principal repayments, starting 30 September 2012, on each of the U.S.$ and Euro components of the CRC Facility were deferred until 31 December 2016 when they will be paid in a bullet payment.  The deferred principal payments amount to approximately U.S.$7.0 million and €5.4 million respectively, equivalent to approximately £8.6 million at the time for the six quarters.

Effective from 1 July 2012, the interest rates applicable to the U.S.$ and Euro components of the CRC Facility, which are variable based on LIBOR and Euribor, were increased by 2.08 per cent and 2.01 per cent respectively.

To enhance short-term liquidity further, the interest payments due at the end of the first three quarters of 2013 were also deferred and will be paid on 31 December 2013. The three delayed interest payments will not bear additional rolled interest.

Skyepharma Holding, Inc., a wholly-owned subsidiary in the United States, has become a guarantor of the CRC Facility and the receivables due to it from Pacira, principally in respect of EXPAREL®, have been pledged as additional security for the CRC Facility.

The Directors chose not to exercise the option included in the amendment agreement, which expired on 30 June 2013, to not defer the two principal payments due on 30 September 2013 and 31 December 2013in return for a reduced interest margin.

The following amortisation schedule shows the interest payable and principal outstanding under the CRC Facility, for each component of the loan, as at 30 June 2013

The above table:

(i) Shows interest on a cash basis (no discounting is applied). The interest rates applicable at 30 June 2013 were 10.08 per cent on the Euro component (plus an additional 5 per cent on the first €7.5 million) and 10.21 per cent on the U.S.$ component.

(ii) Shows the minimum amortisation schedule assuming the cumulative milestones and royalties from Coruno®, LODOTRA®/RAYOS® 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® as the obligation to pay these amounts has been waived by CRC.

Other borrowings

Other borrowings amounted to £9.1 million at 30 June 2013 (2012: £9.0 million), consisting principally of £7.7 million (2012: £7.6 million) for two property mortgages secured on the assets of Skyepharma AG.

Liquidity

At 30 June 2013 Skyepharma had liquidity of £19.6 million (2012: £17.2 million), comprised as follows:

Non-current assets marketed for sale

One of the sites in Switzerland has been vacant and marketed for sale since January 2011. As at 30 June 2013, the net book value of the site is £4.2 million and has been recorded in the Group's balance sheet under property, plant and equipment of which £4.0 million relates to land and buildings and £0.2 million relates to laboratory and manufacturing equipment. As at 30 June 2012, the total carrying value of £4.1 million was classified as held for sale in the Group's balance sheet. Given the specialist nature of the property, management is of the view that any sale may take longer than a further 12 months to complete and in accordance with IFRS, the carrying value of the site was recorded in property, plant and equipment as at 30 June 2013. Although the site is no longer classified as held for sale under IFRS, the site will continue to remain vacant and continue to be actively marketed for sale and be available for immediate sale in the foreseeable future. External agents have also provided management an indicative fair value in excess of the carrying value. During the first half of 2013 and 2012, there was no depreciation or impairment recorded against the carrying value of the site.

Commitments

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €9.0 million to €11.0 million (£7.7 million to £9.4 million) per annum through to 2015, subject to certain early termination rights.

At set out in Note 18: Commitments, the Group has a further commitment of £20.9 million outstanding relating to capital expenditure of the flutiform® supply chain. A former partner has funded €3.0 million (£2.5 million) of the expenditure of the flutiform® supply chain, and the Group is repaying this amount in monthly instalments during 2013, with the balance outstanding being €1.5 million (£1.3 million) at 30 June 2013.

Aenova leasing arrangements

Skyepharma's manufacturing facility in Saint Quentin-Fallavier, Lyon, France, is leased to the Aenova Group which manages the Facility on a day to day basis. 

The principle terms of the leasing arrangements are as follows:

· Notwithstanding the effective date of the agreements, the financial effect was backdated as if the Alliance commenced on 1 July 2011.

· On inception of the leasing arrangements, Skyepharma retained all its then existing contractual arrangements with its partners for the supply of oral products and Aenova has continued to manufacture these products at the facility and supply them to the Group. 

· For the first two years to 30 June 2013, Aenova paid rent at a rate of €1 million (£0.9 million) per annum in cash (with the first six months' rent free), subject to certain deductions. 

· The leasing arrangements were for an initial period of two years to 30 June 2013, following which certain termination or renewal rights apply. In particular, Aenova's right to terminate depends on a specified calculation. The contractual arrangements set out a specific process which should lead to a determination of the position on such a calculation.

· If Aenova does not have a termination right at the end of the first two years, Skyepharma has a 12 month option period (renewal period) during which it can give immediate notice to renew the lease until 30 June 2016.

· During the renewal period no rent is payable by Aenova, but on renewal rent is payable at the rate of €2m (£1.8 million) per annum in cash, subject to certain deductions.

· If Skyepharma terminates the leasing arrangements or doesn't renew them within the 12 month option period, Aenova has a 2 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 related 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 the Group's 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 the Group's products, and large environmental protection projects, in which case they will be transferred at net book value and paid for over time.

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the Half Year Report 2013.

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 2013 to date or 2012.

The Board has continued to monitor the risks related to the Eurozone uncertainties and its impact on the Group's transactions and funding. The Corporate Governance section of the 2012 Annual Report contains further details of the Group's exposure to the Eurozone uncertainties.

Forward looking statements

The foregoing disclosures contain certain forward looking statements. Although Skyepharma believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance that these expectations will materialise. Because the expectations are subject to risks and uncertainties, actual results may vary significantly from those expressed or implied by the forward looking statements based upon a number of factors. Such forward looking statements include, but are not limited to, the timescales for approval, launch or regulatory filings for flutiform® and other products, the statements under "Outlook", prospects and any forecast sales of flutiform® and other products, the development of new products, risks related to obtaining and 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, and the risk that the Lyon manufacturing Alliance with Aenova is unsuccessful and the lease of the Lyon Facility is terminated. Skyepharma undertakes no obligation to revise or update any forward statement to reflect events or circumstances after the date of this Interim Report.

RESPONSIBILITY STATEMENT

The Directors of Skyepharma, as listed on pages 32 and 33 of the 2012 Annual Report and Accounts, confirm that to the best of their knowledge:

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

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

3. The interim management report includes a fair review of the information required by DTR 4.2.8 - the disclosure of related party transactions occurring during the first six months of the year, and any changes in related party transactions disclosed in the 2012 Annual Report and Accounts.

By Order of the Board

P Grant

Chief Executive Officer

14 August 2013

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2013

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED INCOME STATEMENT (CONTINUED)

For the six months ended 30 June 2013

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (EXPENSE)/INCOME

For the six months ended 30 June 2013

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEET

As at 30 June 2013

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2013

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2012

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2012

See Notes to the Half Year Financial Statements

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 June 2013

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 2013 ("Half Year Report 2013") was authorised for issue in accordance with a resolution of the Directors on 14 August 2013. The Half Year Report 2013 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 an expert pharmaceutical group which combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products.

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

The financial information for the year ended 31 December 2012 does not constitute statutory financial statements within the meaning of section 435 of the Companies Act 2006. A copy of the audited financial statements for that year has been delivered to the Registrar of Companies. The Auditors' opinion on those financial statements was unqualified.

2 Accounting policies

(a) Basis of preparation

The accounts have been prepared in accordance with International Financial Reporting Standards ("IFRS") as 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 2013 have been prepared in accordance with IAS 34 Interim Financial Reporting.

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

Going concern

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

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2 Accounting policies (continued)

(a) Basis of preparation (continued)

Significant accounting policies

The accounting policies, presentation and methods of computation are as applied in the Group's 2012 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:

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

· IFRS 9 Financial instruments - Classification and Measurement

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

The Group plans to adopt IFRS 9 for the year commencing 1 January 2015: this will impact the measurement and disclosure of financial instruments.

The Group has adopted the following accounting policy during the period ended 30 June 2013:

· IAS 1 Presentation of Items of Other Comprehensive Income - Amendments to IAS 1

· IAS 28 Investment in Associates and Joint Ventures (as revised in 2011)

· IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7

· IFRS 10 Consolidated Financial Statements

· IFRS 11 Joint Arrangements

· IAS 19 Employee Benefits (Revised)

· IAS 27 Separate Financial Statements

· IFRS 12 Disclosure of Interests in Other Entities

· IFRS 13 Fair Value Measurement

· IAS 16 Property, Plant and Equipment (May 2012 annual improvements)

· IAS 32 Offsetting Financial Assets and Financial Liabilities (May 2012 annual improvements)

· IAS 34 Interim Financial Reporting(May 2012 annual improvements)

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

3 Segmental information

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

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4 Revenue by income stream

During the six months ended 30 June 2013, flutiform® generated £2.7 million of royalty and contract development revenue (H1 2012: £2.6 million), as well as £10.0 million in product supply (H1 2012: £nil).

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

5 Cost of sales

During the six months ended 30 June 2013, the Group incurred £12.1 million in the supply of flutiform® (H1 2012: £1.4 million, Full Year 2012: £9.4 million).

6 Research and development expenses

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7 Exceptional items

(a) During 2011, AstraZeneca discontinued the production of Pulmicort®‎ pMDI (budesonide) 100 and 200 mg/dose HFA pMDI (pressurised metered dose inhaler) due to complex manufacturing issues related to technical aspects of their device. Subsequently, AstraZeneca terminated its agreements with the Group, which developed the formulation for Pulmicort® pMDI using its proprietary formulation technology. During the year ended 31 December 2012, the Group negotiated terms to settle certain disputes arising from the termination, including a final settlement amount of U.S.$8.0 million (£5.0 million) which was paid to the Group in December 2012. 

(b) During the year ended 31 December 2012, the Group recorded £0.5 million in restructuring charges for costs incurred during the reorganisation of the facility in Muttenz, Switzerland.

(c) The Bond Restructuring on 24 September 2012 resulted in a £15.4 million exceptional finance charge of which £13.1 million was non-cash. Refer to Note 15: Borrowings for more information.

Discontinued operations

During the six months ended 30 June 2013, the Group recognised no exceptional items under discontinued operations. During the year ended 31 December 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. Refer to Note 10: Discontinued operations.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8 Finance costs and income

9 Foreign exchange gain on net debt

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 three per cent of net sales of EXPAREL® (based on cash received by Pacira) in the United States, Japan, United Kingdom, France, Germany, Italy and Spain until the expiry of certain patents and patent applications.

During the year ended 31 December 2012, the U.S.$10 million milestone was treated as exceptional income arising from discontinued operations. 

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 and the year ended 31 December 2012, no income tax expense was 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.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11 Earnings per share

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

For the six months ended 30 June 2013 and 30 June 2012, and for the year ended 31 December 2012, 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 (non-convertible bonds from 24 September 2012), stock options, warrants and contingent issuance of shares are anti-dilutive. 

From continuing and discontinued operations

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11 Earnings per share (continued)

From continuing 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 Property, plant and equipment

In the six months to 30 June 2013, the Group made additions totalling £0.1 million (H1 2012: £0.3 million).

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

13 Inventories

During H1 2013, certain inventory was written down to net realisable value resulting in a charge of £1,023,000 (H1 2012: £490,000) to cost of sales.

14 Financial instruments

Set out below is an overview of financial instruments, other than cash and short-term deposits, held by the Group as at 30 June 2013.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15 Borrowings

Total debt has increased by £5.2 million in the period. This is due to accrued finance costs and capital repayments of £3.1 million, together with translation effects.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15 Borrowings (continued)

Bonds

In 2004, the Group issued £69.6 million 6 per cent Convertible Bonds (the "2024 Convertible Bonds") due 4 May 2024, which were convertible into Ordinary Shares at a conversion price of £3.71. In 2009, £6.6 million of the 2024 Convertible Bonds were converted into Ordinary Shares of Skyepharma PLC. The 2024 Convertible Bonds could have been called for repayment in November 2013, November 2015, November 2017 and November 2020.

On 31 May 2005, the Group signed agreements for a private placement of £20.0 million 8 per cent Convertible Bonds (the "2025 Convertible Bonds") due December 2025, which were convertible into Ordinary Shares at a conversion price of £3.82. The 2025 Convertible Bonds could have been called for repayment in December 2014, December 2016, December 2018 and December 2021.

On 24 September 2012, a Bond Restructuring was approved and implemented. Following implementation, an aggregate principal amount of £22.2 million of the £83.0 million outstanding Convertible Bonds were converted into 22,184,483 Ordinary Shares in the Company. Following the conversion, a total of £60.8 million 6.5 per cent 2024 Bonds ("2024 Bonds") are outstanding as non-convertible bonds with the following key amended terms:

· Ordinary interest of 6.5 per cent per annum, with an option (which the Group has exercised), for the Group to defer payment of the next four semi-annual interest 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 or a significant cash equity issuance. Deferred interest will become payable earlier out of the proceeds, subject to restrictions, of certain cash equity issuances as well as on early redemption.

· 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) are both payable on redemption.

· The earliest date when the Bondholders may ordinarily redeem the 2024 Bonds is 4 November 2017.

The accounting for the Bond Restructuring resulted in the de-recognition of the £83.0m outstanding Convertible Bonds and the recognition of the related consideration, being the fair values of the 22.2 million shares issued and the £60.8 million non-convertible 2024 Bonds carried forward. The difference between the carrying value of the outstanding Convertible Bonds of £62.2 million as at 24 September 2012 and the total consideration resulted in an exceptional non-cash financing charge of £13.1 million included in the income statement in addition to the £2.3 million cash transaction costs during the year ended 31 December 2012.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15 Borrowings (continued)

In addition, following the Bond Restructuring and the conversion of £22.2 million of the outstanding Convertible Bonds to Ordinary Shares, the carrying value of the conversion option recorded in share premium of £28.5 million was transferred to retained earnings.

Property mortgages

In February 2011 the Group renewed its two mortgage agreements with the Basellandschaftliche Kantonalbank. As at 30 June 2013, the carrying value of the first is CHF 3.2 million (£2.3 million), which bears interest at a variable rate (currently 4 per cent per annum) and is repayable with three months' notice from either party. As at 30 June 2013, the carrying value of the second is CHF 7.8 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 being marketed for sale. As at 30 June 2013, this site has a net book value of CHF 6.1 million (£4.2 million) and a mortgage of CHF 3.2 million (£2.3 million) which, together with a loan of CHF 2.0 million (£1.4 million), will be repayable on completion of any sale.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15 Borrowings (continued)

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 2013.

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.$8.1 million had been paid as at 30 June 2013.

CRC finance

On 28 September 2012, the Group entered into a further amendment agreement to the CRC Finance Facility ("CRC Facility"). Under the amendment agreement:

· The obligation for the Group to pay the six consecutive quarterly principal repayments, starting 30 September 2012, on each of the U.S.$ and Euro components of the CRC Facility were deferred until 31 December 2016 when they will be paid in a bullet payment. The deferred principal payments amount to approximately U.S.$7.0 million and €5.4 million respectively, equivalent to approximately £8.6 million in total for the six quarters.

· Effective from 1 July 2012, the interest rates applicable to the U.S.$ and Euro components of the CRC Facility increased by 2.08 per cent and 2.01 per cent respectively.

· Interest payments due at the end of the first three quarters of 2013 were also deferred and will be paid on 31 December 2013. The three delayed interest payments will not bear additional rolled interest.

· Skyepharma Holding, Inc., a wholly-owned subsidiary in the United States, become a guarantor of the CRC Facility and the receivables due to it from Pacira Pharmaceuticals, Inc. (Delaware), principally in respect of EXPAREL®, have been pledged as additional security for the CRC Facility.

· The Directors chose not to exercise an option, which expired on 30 June 2013, to not defer the two principal payments due on 30 September 2013 and 31 December 2013 in return for a reduced interest margin.

There were no further amendments made to the Facility during the six months ended 30 June 2013.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 management lease agreement in France who are not expected to retire during the initial lease period and could return to the Group's employment on expiry of the lease.

17 Share capital

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

18 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.

To establish the flutiform® supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes. The Group committed to capital expenditure of £20.9 million, of which £14.3 million has been paid for as at 30 June 2013. 

The Group has certain minimum commitments to its suppliers in respect of flutiform® which total approximately €9.0 million to €11.0 million (£7.7 million to £9.4 million) per annum through to 2015, subject to certain early termination rights.

INDEPENDENT REVIEW REPORT TO THE MEMBERS OF SKYEPHARMA PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2013 which comprises the Condensed Consolidated Income Statement, Condensed Consolidated Statement of Comprehensive Income/ (Expense), Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Changes in Equity, Condensed Consolidated Cash Flow Statement, and the related notes 1 to 18. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

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

Directors' Responsibilities

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

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

Our Responsibility

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

Scope of Review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2013 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Ernst & Young LLP,

Reading

14 August 2013