28th Sep 2006 07:03
Skyepharma PLC28 September 2006 For Immediate Release 28 September, 2006 SkyePharma PLC Interim Results Announcement for the Six Months Ended 30 June 2006 LONDON, ENGLAND, 28 September 2006 - SkyePharma PLC (LSE: SKP; Nasdaq: SKYE)announces today financial results for the six months ended 30 June 2006. Operating highlights Marketed products: • Sales of royalty-earning products reported by SkyePharma's partners have largely met or exceeded our expectations Pipeline progress: • DepoDur(TM) approved in UK • DepoCyt(R) approved in Australia • zileuton CR filed by Critical Therapeutics • Lodotra(TM) filed by Nitec • Foradil(R) Certihaler(TM) successfully modified and modifications filed with the FDA • Flutiform(TM) commenced Phase III trials New corporate agreements: • Flutiform(TM) licensed to Kos Pharmaceuticals for USA • Flutiform(TM) licensed to Mundipharma for Europe • DepoBupivacaine(TM) rights regained from Mundipharma • Development of nisoldipine CR for Sciele Pharma • Negotiations ongoing to divest the Injectables unit Financial highlights • Revenue £25.6m (2005: £36m) • Royalties £11.5m (2005: £12m) • R&D spend £19.2m (2005: £10.9m) • Gross Profit £12m (2005: £21.4m) • Loss before tax £26.4m (2005: £12.8m) • Loss per share 3.5p (2005: 2.1p) • Net cash £21.8m (2005: £19.0m) Frank Condella, Chief Executive, commented: "SkyePharma has made significant progress on the strategic objectives putforward this year. With our new management team in place, we have licensedFlutiformTM, our major pipeline asset, in both the USA and Europe. We have alsoexpanded our development pipeline while improving our operational efficiency.Throughout the remainder of this year we look forward to continue executing onour strategic plan, including the divestiture of our injectables unit as anoutright sale or under the possible alternative scenario of the out-licensing of DepoBupivacaine. "We continue to believe that if we deliver on our strategic objectives we willreach sustainable profitability and create value for shareholders." For further information please contact: SkyePharma PLCFrank Condella, Chief Executive Officer UK + 44 207 491 1777Ken Cunningham, Chief Operating OfficerDonald Nicholson, Chief Financial Officer Buchanan Communications UK + 44 207 466 5000Tim Anderson / Mark Court / Rebecca Skye Dietrich The Trout Group US + 1 617 583 1308Seth Lewis Notes for editors About SkyePharma SkyePharma PLC develops pharmaceutical products benefiting from world-leadingdrug delivery technologies that provide easier-to-use and more effective drugformulations. There are now eleven approved products incorporating SkyePharma'stechnologies in the areas of oral, injectable, inhaled and topical delivery,supported by advanced solubilisation capabilities. For more information, visitwww.skyepharma.com. Certain statements in this news release are forward-looking statements and aremade in reliance on the safe harbour provisions of the U.S. Private SecuritiesLitigation Act of 1995. Although SkyePharma believes that the expectationsreflected in these forward-looking statements are reasonable, it can give noassurance that these expectations will materialize. Because the expectations aresubject to risks and uncertainties, actual results may vary significantly fromthose expressed or implied by the forward-looking statements based upon a numberof factors, which are described in SkyePharma's 20-F and other documents on filewith the SEC. Factors that could cause differences between actual results andthose implied by the forward-looking statements contained in this news releaseinclude, without limitation, risks related to the development of new products,risks related to obtaining and maintaining regulatory approval for existing, newor expanded indications of existing and new products, risks related toSkyePharma's ability to manufacture products on a large scale or at all, risksrelated to SkyePharma's and its marketing partners' ability to market productson a large scale to maintain or expand market share in the face of changes incustomer requirements, competition and technological change, risks related toregulatory compliance, the risk of product liability claims, risks related tothe ownership and use of intellectual property, and risks related toSkyePharma's ability to manage growth. SkyePharma undertakes no obligation torevise or update any such forward-looking statement to reflect events orcircumstances after the date of this release. CHAIRMAN'S STATEMENT SkyePharma has made substantial progress on executing our strategic planannounced earlier this year. 1. Appoint new leadership SkyePharma's founder Ian Gowrie-Smith resigned from the Board in January and Iwas appointed Non-executive Chairman in his place. A new executive managementteam has also been appointed with Frank Condella as Chief Executive and Dr KenCunningham as Chief Operating Officer. Both have now joined the Board. 2. Divest the injectables unit This is a stand-alone operation in San Diego with its own management team,manufacturing facilities for marketed products (DepoCyt(R) and DepoDurTM), andR&D activities with a pipeline of products including DepoBupivacaine(TM)andseveral therapeutic proteins. We retained UBS as our investment bank to managethe divestment process. We are in active negotiations with several partiesinterested in acquiring the entire business unit, with terms likely to include acombination of upfront and milestone payments and royalties on product sales. Inaddition a number of parties have expressed their interest in licensingDepoBupivacaineTM, the major pipeline asset. We are therefore in parallelnegotiations regarding a potential licence. Under this option, we would expectan upfront payment and full funding of further development of DepoBupivacaineTM,milestone payments and a longer term royalty stream. Should we pursue thelicence option, we would plan to reduce the size of the unit, minimizing theongoing cash burn, and pursue the future divestment of the remaining componentsof this business unit. We aim to complete a transaction before the end of theyear. 3. Continue Phase III for Flutiform(TM) and out-license this year Phase III trials started in February as planned, and represents our major R&Dexpenditure until anticipated completion in mid-2007. The 12 month safety studyis ongoing and the three pivotal studies have also commenced recently, all ontrack for our target of filing with the FDA in the second half of 2007 and inEurope in 2008. In May, we granted exclusive US marketing rights for Flutiform(TM)to Kos Pharmaceuticals, a US specialty pharmaceutical company with a highlysuccessful sales record and experience in the respiratory market. We areconvinced that Kos has an ideal profile to optimise sales of Flutiform(TM) in thekey US market and we are gratified by their obvious commitment to the product.We have recently announced a partnership with Mundipharma for Europe and otherterritories. 4. Focus on core oral/inhalation unit and expand pipeline In June SkyePharma's Business Review day disclosed two new projects about toenter clinical trials: a treatment for pain and inflammation and a novelapproach to the treatment of sleep disorders. We also announced one newpartnered project (a controlled release version of Sular(R) (nisoldipine), thelead product of Sciele Pharma, our US partner for Triglide(TM)), and twolate-stage products that have now been filed: a controlled release version ofthe oral asthma drug Zyflo(R) for Critical Therapeutics and Lodotra(TM), a delayedrelease formulation of an anti-inflammatory drug for rheumatoid arthritis forNitec. We are seeking additional complementary projects to reinforce ourpipeline. 5. Improve operational efficiency We have been reviewing all costs, but remain committed to prudent R&Dexpenditure as it is the future of the company. Having completed a survey of theLondon market, we have found the rent of our existing offices to be highlycompetitive. Regardless, we have reduced our space requirements and halved thecosts of our London head office. Also, we are vacating our US office in New Yorkwhich will further reduce overheads. We have reviewed overall staffing levelsand reduced the number of personnel at our plant in Lyon. Finally, we haverestructured our investor relations, legal and company secretarial functions. We are confident that the strategy we have adopted will enable the Company tomaximise the potential of Flutiform(TM) and other pipeline products, to becomeprofitable and to deliver long-term value for shareholders. Dr Jerry Karabelas Non-Executive Chairman REVIEW OF OPERATIONS Inhalation Products For Foradil(R) Certihaler(R) (formoterol) we developed not only the multidosedry-powder inhaler device but also the formulation technologies designed toensure dose consistency regardless of storage conditions. This product has nowbeen approved in 26 countries in Europe, the Middle East, Latin America, SouthAfrica and New Zealand. After launch in two European markets in late 2005, theproduct was voluntarily withdrawn by Novartis early this year because a smallnumber of patients received an incorrect dose after mishandling the device. Wehave now successfully made modifications to the inhaler to ensure properhandling that we hope will allow Foradil(R) Certihaler(R) to be returned to themarket in Europe and to obtain approval in the USA. We have filed modifications'to the Certihaler(R) with the FDA and we expect a decision on this in late 2006. Inhalation pipeline AstraZeneca has now received the first approvals in Europe, in Finland andLatvia, for the inhaled steroid Pulmicort(R) (budesonide) in a metered-doseaerosol inhaler (MDI) powered by a hydrofluoroalkane (HFA) propellant gas. Flutiform(TM) HFA-MDI (a fixed-dose combination of formoterol and the inhaledsteroid fluticasone) commenced its Phase III trial in February, on target, andremains on track for a target US filing date of H2 2007. In May we announced that we had entered into an agreement with KosPharmaceuticals, Inc. to jointly develop Flutiform(TM), our novel combinationproduct for asthma and chronic obstructive pulmonary disease ('COPD'). InSeptember we announced a parallel agreement with Mundipharma International todevelop Flutiform(TM) for Europe. Both Kos and Mundipharma share our belief inthe high potential of Flutiform(TM) as a superior product concept, differentiatedfrom competing combination asthma products, and poised to take advantage of aclear window of opportunity. Kos will have exclusive rights to market Flutiform(TM) in the US and a right offirst negotiation for Canada. SkyePharma could receive up to $165 million inmilestone payments on achievement of all regulatory and revenue targets (ofwhich $25 million was paid upfront) together with royalties starting inmid-teens on sales by Kos. We will share with Kos the development ofFlutiform(TM) for asthma and COPD: we will manage and fund the trials needed forapproval of Flutiform(TM)in adult asthma while Kos will manage and fund thetrials needed for all other indications and all marketing and post-approvalstudies. The US represents the largest market opportunity for Flutiform(TM),forecast to exceed $6 billion by 2009 when we expect Flutiform(TM) to belaunched. Mundipharma will have exclusive rights in Europe and other territories. Wereceived an upfront payment of €15 million ($19 million) on signature and couldreceive additional milestone payments of up to a further €70 million ($90million) on attainment of various development and revenue targets, together withdouble digit royalties. Mundipharma will have access to data from the trials weare conducting for FDA approval, which will be used as the basis for obtainingEuropean approval. Mundipharma will also conduct, at its own expense, anadditional clinical study needed for regulatory approval in Europe and also thestudies needed to extend the indication to paediatric patients and to a higherdose strength. The costs of these studies will be recouped from future royaltyand milestone payments to SkyePharma. In a second collaboration with Novartis, the Certihaler(TM) and relatedformulation technology have been applied to QAB149 (indacaterol), which hascompleted Phase II development in both asthma and COPD. While Novartis hasprogressed to Phase III with another device, the QAB149 Certihaler(TM) projectis on hold, pending finalization by Novartis of development plans for thisformulation and full implementation of the device modifications. Oral and Topical Products US marketing of Paxil CR(TM) was suspended for four months in 2005 because ofmanufacturing problems at GlaxoSmithKline's plant in Puerto Rico. Even afterreturning to the market, new administrative procedures, introduced as part of aconsent decree with the FDA, have resulted in continuing supply constraints andsales have not returned to the pre-withdrawal level. In the first half of 2006sales were up by 22% in the US on the prior year period to $141 million, onwhich we earned a royalty of 4%. However, royalty income was down since duringthe first half of 2005 we were paid royalties based on higher budgeted sales.The first US generic competitor for Paxil CR(TM) could enter the market in thesecond half of 2007. Xatral(R) OD (Uroxatral(R) in the USA) is our once-daily version ofSanofi-Aventis's Xatral(R) (alfuzosin), a treatment for the urinary symptoms ofbenign prostatic hypertrophy. European sales have started to be affected bygeneric competition after the expiry of a key European patent in May, howeverthe impact was offset by strong growth in the US. In the first half of 2006,reported sales of all forms of Xatral(R) were €186 million ($229 million), up by16% on the prior year period. Solaraze(R), our topical gel treatment for actinic keratosis, is marketed in theUS by Bradley Pharmaceuticals. Sales in the first half of 2006 more than doubledto $10.0 million. Sales in Europe and certain other territories by ShirePharmaceuticals were $6.9 million, up by 28% on the prior year period. Bothpartners are actively involved in campaigns to raise awareness of the risksposed by this common condition, an early form of skin cancer. Although Solaraze(R) has been approved and marketed in the USA and Europe for several years, wehave recently been informed by the Australian regulatory authority that it willnot approve the product. Triglide(TM) (fenofibrate) is marketed in the US by Sciele Pharma, Inc. (formerlyknown as First Horizon Pharmaceutical Corporation). Triglide(TM), an oraltreatment for elevated blood lipid disorders, was launched in July 2005. Bymid-2006, Triglide(TM) had captured 1.8% of new prescriptions for fenofibrate and1.4% of total prescriptions and was one of the key drivers in Sciele's strongfirst half revenue growth. Oral pipeline Requip Once-a-day tablets for Parkinson's disease, developed in partnership withGlaxoSmithKline, was filed at the end of 2005 in Europe and is expected toreceive pan-European approval in the second half of 2007. The US NDA filing waswithdrawn for technical reasons but is expected to be resubmitted in the fourthquarter of 2006. We have developed an improved formulation of the oral asthma drug zileuton forCritical Therapeutics. Zileuton is a highly potent anti-inflammatory drug fortreating severe asthma but the current version (marketed as Zyflo(R)) has to betaken four times a day. Our twice-daily version was filed with the FDA at theend of July. Our partner expects it to reach the market in the second half of2007. Lodotra(TM), developed for Nitec, is a novel modified-release formulation of awidely-used anti-inflammatory drug for treating the pain and stiffness caused byrheumatoid arthritis. With our Geoclock(TM) delivery system the drug can be takenat bedtime but released in the early hours of the morning, the optimum time.Nitec has now filed the product in Europe. Merck KGaA has marketing rights forGermany and Austria. Nitec is currently in negotiations with potential licenseesfor other markets. In May we entered into an agreement with Sciele Pharma (our US licensee forTriglide(TM)) to develop an improved version of Sciele's leading product Sular(R)(nisoldipine), a calcium channel blocker antihypertensive. This product isexpected to be filed in the first half of 2007 and to enter the US market in thefirst half of 2008. Injectable products Sales of DepoCyt(R) in the USA by our partner Enzon were $4.0 million, up 15% onthe prior year. Our European partner Mundipharma had sales of $4.6 million, morethan double the 2005 level. DepoCyt(R) is currently approved for the treatmentof lymphomatous meningitis, a very rare condition. As a condition of US approvalSkyePharma was required to conduct a Phase IV study: data from this trial hasbeen filed with the FDA and we expect a decision in April 2007. We are seekingto expand the current indication to the most common form of neoplasticmeningitis, associated with solid tumours. We have recently decided to withdrawour European filing in order to incorporate data from additional patients.Encouragingly, we have recently received approval for the treatment of all formsof neoplastic meningitis in Australia, where we are in the process of appointinga licensee. DepoDur(TM) is our sustained-release injectable morphine analgesic for thetreatment of pain after surgery. Sales by our US marketing partner EndoPharmaceuticals in the first half of 2006 were $1.6 million. Endo considers thatthe product is still in its launch phase. In the UK, we received approval in Maywhich will be used as the basis for seeking approval throughout the EuropeanUnion under the EU's Mutual Recognition procedure. Injectable pipeline Our long-acting local anaesthetic DepoBupivacaine(TM) is expected to commencePhase III trials later this year. In July we regained European rights fromMundipharma. This allows us to offer rights to this product in both the US andEurope as part of our divestment plans. We believe that DepoBupivacaine, for therelief of pain after surgery, has significant market potential. In April we agreed with our US partner Endo Pharmaceuticals to halt developmentof Propofol IDD-D(TM), an injectable anaesthetic and sedative. Frank Condella Chief Executive Officer Financial Review Revenue The Group's revenues are sensitive to the timing and recognition of milestonepayments and up-front payments received on the signing of new agreements.Revenues for the first six months of 2006, at £25.6 million, were 29% below the£36.0 million reported in the first half of 2005, primarily due to the phasingof recognition of up-front revenues received in 2006 for the US marketing anddistribution rights for Flutiform(TM) Contract development and licensing revenue in the half year decreased by £9.3million to £10.2 million, compared with £19.5 million in 2005. Revenuesrecognised from milestone payments and up-front payments received on the signingof agreements amounted to £8.3 million in the first half of 2006 compared with£17.6 million in 2005, primarily due to differences in revenue recognition forup-front payments received. Under SkyePharma's accounting policy for revenuerecognition, up-front payments are generally deferred and recognised over theperiod of development up to filing. Consequently, while SkyePharma received£13.4 million ($25 million) in May 2006 from Kos for the US marketing rights toFlutiformTM, only £2.9 million was recognised in the first half of 2006. Bycontrast in the first half of 2005 we were able to recognise £10.7 million fromthe payment from Sciele Pharma for the approval of Triglide(TM). Research anddevelopment costs recharged remained constant at £1.9 million. The recent up-front payment of £10.1 million (€15.0 million) received onsignature of a licensing transaction with Mundipharma for European rights toFlutiform(TM) will result in a significant increase in the total revenue inrespect of Flutiform(TM) that can be recognised in the second half of 2006,compared with the £2.9 million recognised in the first half of 2006. Royalty income decreased slightly to £11.5 million, compared with £12.0 millionin the first half of 2005. During the early part of 2005 the Company receivedroyalties based on GlaxoSmithKline's budgeted sales of Paxil CR(TM) while theproduct was temporarily off the market as a result of GSK's suspension ofproduction at their Cidra plant in Puerto Rico. The slight decrease in 2006 wasdue to a 48% fall in Paxil CR(TM) royalty income: although the product returned tothe market in June 2005, continuing supply constraints mean that sales have notfully recovered to the pre-withdrawal level. This was largely offset in 2006 byan increase in royalty income from DepoCyt(R), Triglide(TM), Xatral(R) and Coruno(R). Excluding Paxil CR(TM), royalties for the balance of SkyePharma's otherproducts grew by 50% in the first half of 2006 compared with the first half of2005. Manufacturing and distribution revenue decreased by £0.6 million in the firsthalf to £3.9 million, compared with £4.5 million in the first half of 2005,primarily due to a fall in the production of clinical trial material forNovartis in respect of QAB 149 following the withdrawal of Foradil(R) Certihaler(TM) from the market. Deferred income During the first half of 2006, there was a net increase in deferred income of£3.8 million under SkyePharma's revenue recognition policy. The movement indeferred income was as follows: 31 December Recognised/ 30 June 2005 Received * Transferred 2006 £m £m £m £mContract development and licensingrevenue 10.6 16.8 (13.0) 14.4 * Includes exchange adjustments Cost of sales Cost of sales comprises expenditure on research and development conducted forthird parties, primarily the costs of certain clinical trials incurred on behalfof our collaborative partners; the direct costs of contract manufacturing;direct costs of licensing arrangements; and royalties payable. Cost of salesdecreased by £1.0 million to £13.6 million in the first half of 2006, mainly dueto the aforementioned fall in the production of clinical trial material forNovartis in respect of QAB 149. The resulting gross profit decreased 44% to£12.0 million, compared with £21.4 million in the first half of 2005. Expenses Selling, marketing and distribution expenses increased to £1.6 million in thefirst half of 2006, compared with £0.5 million in the first half of 2005, dueprimarily to SkyePharma's contribution towards the marketing costs of Triglide(TM). The expenses for the 2005 calendar year of £5.9 million included acontribution towards the marketing costs of DepoDur(TM)which SkyePharma is nolonger obliged to make. Amortisation of intangible assets increased slightly to £1.1 million in thefirst half 2006, compared with £1.0 million in the first half of 2005. Otheradministration expenses were £10.0 million in 2006, £0.9 million higher than the£9.1 million reported in 2005, mainly due to the additional costs of theStrategic Review and the EGM. SkyePharma's own research and development expenses in the period increased by£8.3 million to £19.2 million, mainly due to the development expenditureincurred on the start of the Flutiform(TM)phase III clinical trials. The other income of £0.4 million is mainly due to the profit on disposal of theGroup's holding in Vectura Group plc and certain Vital Living Inc securities. Results The operating loss was £19.5 million in the half year 2006, compared with £0.3million in the comparable period in 2005, due principally to the reduction inrevenue, the increased R&D costs for Flutiform(TM)phase III clinical trials andthe additional costs of the Strategic Review and EGM. The finance costs of £9.3 million (first half of 2005: £12.3 million) mainlycomprise notional interest on the Paul Capital funding liabilities as well asthe interest payable on the convertible bonds. The finance income of £2.6million in 2006 includes £1.8 million of foreign exchange gains (first half of2005: loss of £3.1 million) relating to the Paul Capital funding liabilitieswhich are denominated in US dollars. As at 31 December 2005 the Paul Capitalobligations were revised to reflect a change in estimated future payments,resulting in additional finance income of £9.0 million. The Group's share of the losses of Astralis was £0.2 million for the first half2006, compared with £0.6 million in the first half of 2005. The retained loss increased by £13.7 million to £26.6 million, also dueprimarily to the fall in revenue and the higher costs as a result of theFlutiform(TM)clinical trials. Earnings before interest, tax, depreciation and amortisation showed a loss of£15.8 million in the first half of 2006, compared with a profit of £3.2 millionin the comparable period in 2005. The loss per share for the first half of 2006 was 3.5 pence, which compares with2.1 pence in the first half of 2005. Foreign currency movements did not have a material impact on the results ofoperations in the first half 2006 compared with the comparable period in 2005. Segment information Segmental information on revenue and operating loss is as follows: 6 months to 30 6 months to 30 June 2006 June 2005 £m £mRevenueInjectable 3.9 5.1Oral and Inhalation 21.7 30.9 25.6 36.0 Operating (loss)/ profitInjectable (11.7) (7.2)Oral and Inhalation (7.8) 6.9 (19.5) (0.3) The £9.2 million fall in Oral and Inhalation revenue in the first half of 2006is primarily due to the aforementioned timing of revenue recognition on theup-front payment received on the licensing of US marketing and distributionrights for Flutiform(TM)to Kos. The £14.7 million increase in Oral and Inhalation operating loss is causedprincipally by the reduction in revenue and the increased costs arising from thestart of the Flutiform(TM)phase III clinical trials. The operating loss by segment includes an allocation of corporate costs to eachsegment. Balance sheet The Group balance sheet as at 30 June 2006 shows total shareholders' equity of£8.1 million (31 December 2005: £31.9 million). The Group has £69.6 million convertible bonds due May 2024 and £20 millionconvertible bonds due June 2025 outstanding as at 30 June 2006. On the balancesheet these are reflected as £63.9 million in liabilities and £28.4 million inequity. In addition the Group has other borrowings at 30 June 2006 of £42.0 million dueto Paul Capital. Whilst the contractual arrangements contemplate the payment ofa share of our royalty income to Paul Capital, IAS 39; Financial Instruments:Recognition and Measurement requires the Group to record a liability equal tothe net present value of the royalties the Group expects to pay Paul Capitalover the term of the agreements. Liquidity and capital resources At 30 June 2006 SkyePharma had net cash of £21.8 million, comprising cash andcash equivalents of £22.8 million and a bank overdraft of £1.0 million, comparedwith £34.3 million net cash at 31 December 2005. Bank and other non convertibledebt amounted to £10.3 million at 30 June 2006 (31 December 2005: £9.9 million),consisting principally of a £6.8 million property mortgage secured on the assetsof Jago (31 December 2005: £6.9 million). In addition the Group has 6%convertible bonds due May 2024 of £69.6 million (31 December 2005: £69.6million) and 8% convertible bonds due June 2025 of £20.0 million (31 December2005: £20.0 million). Net debt (excluding the Paul Capital funding liabilities)amounted to £51.4 million (31 December 2005: £39.2 million). In the first half 2006 there was a net cash outflow from operating activities of£2.3 million, compared with a net inflow of £4.5 million in the first half of2005. During the 2006 period the Group spent £1.4 million on property, plant andequipment; and expenditure on intangible assets of £1.1 million, mainly relatedto the purchase of licenses to intellectual property in the area of pulmonarydelivery. The proceeds on disposal of the holding in Vectura Group plc andcertain Vital Living Inc securities were £1.3 million. Borrowings of £6.5 million were repaid in the period, primarily comprising PaulCapital's share of the Group's royalty income. In addition the Group paid £3.1million of interest during in first half 2006, mainly relating to theconvertible bonds. The results for the period to 30 June 2006 have been formally reviewed andreported on by Ernst & Young LLP the Company's new auditors. The auditors'independent review report is modified in two respects: They were appointed auditors on 21 August 2006 and did not report on thefinancial information as presented in the 30 June 2006 financial statements forthe period ended 30 June 2005. For that reason they have not reviewed the 30June 2005 comparatives as would be required for a full review in accordance withBulletin 1999/4. Their report contains an emphasis of matter paragraph drawing attention to theuncertainties outlined in Note 1 to the financial statements included in theinterim review. Their review opinion is not qualified in this regard. The auditors' conclusion is that they are not aware of any materialmodifications that should be made to the financial information as presented forthe six months ended 30 June 2006. International Financial Reporting Standards Since the 2005 Interim Report the Group has changed its interpretation of theapplication of IAS 39 to the Paul Capital funding liabilities. Previously theproceeds received from Paul Capital were treated as a floating rate financialliability, and any change in the estimated future payments to Paul Capital waseffectively spread forward and reflected in a reduced implicit interest cost infuture years. Following the change in the year ended 31 December 2005, theestimated payments to Paul Capital are discounted using each contract's originaleffective interest rate, and any change in the estimated future payments to PaulCapital is recognised immediately as an income or expense in the incomestatement. The restatement resulted in an increase in the first half 2005 finance costs of£3.6 million, and a decrease in the Paul Capital funding liabilities at 30 June2005 of £1.7 million. Forward looking statements The foregoing discussions contain certain forward looking statements and aremade in reliance on the safe harbour provisions of the US Private SecuritiesLitigation Act of 1995. Although SkyePharma believes that the expectationsreflected in these forward looking statements are reasonable, it can give noassurance that these expectations will materialise. Because the expectations aresubject to risks and uncertainties, actual results may vary significantly fromthose expressed or implied by the forward looking statements based upon a numberof factors, which are described in SkyePharma's 20-F and other documents on filewith the SEC. Factors that could cause differences between actual results andthose implied by the forward looking statements contained in these InterimFinancial Statements include, without limitation, risks related to thedevelopment of new products, risks related to obtaining and maintainingregulatory approval for existing, new or expanded indications of existing andnew products, risks related to SkyePharma's ability to manufacture products on alarge 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 sharein the face of changes in customer requirements, competition and technologicalchange, risks related to regulatory compliance, the risk of product liabilityclaims, risks related to the ownership and use of intellectual property, andrisks related to SkyePharma's ability to manage growth. SkyePharma undertakes noobligation to revise or update any such forward looking statement to reflectevents or circumstances after the date of these Interim Financial Statements. Donald Nicholson Finance Director CONSOLIDATED INCOME STATEMENT for the six months ended 30 June 2006 Unaudited 6 Unaudited 6 Audited 12 months to 31 December 2005 months to 30 months to 30 June 2006 June 2005 (restated) Notes Pre-exceptional Exceptional Total £m £m £m £m £m Revenue 2 25.6 36.0 61.3 - 61.3 Cost of sales (13.6) (14.6) (29.2) - (29.2) Gross profit 12.0 21.4 32.1 - 32.1 Selling, marketing and distribution expenses (1.6) (0.5) (5.9) - (5.9) Administration expenses Amortisation of other intangibles (1.1) (1.0) (2.1) - (2.1) Other administration expenses (10.0) (9.1) (13.8) (21.4) (35.2) (11.1) (10.1) (15.9) (21.4) (37.3) Research and development expenses (19.2) (10.9) (26.0) - (26.0) Other income/ (expense) 0.4 (0.2) (0.4) - (0.4) Operating loss (19.5) (0.3) (16.1) (21.4) (37.5) Finance costs 3 (9.3) (12.3) (22.3) - (22.3) Finance income 3 2.6 0.4 10.0 - 10.0 Share of loss in associate (0.2) (0.6) (0.8) - (0.8) Loss before income tax (26.4) (12.8) (29.2) (21.4) (50.6) Income tax expense (0.2) (0.1) (0.3) - (0.3) Loss for the period (26.6) (12.9) (29.5) (21.4) (50.9) Basic and diluted earnings per share 4 (3.5)p (2.1)p (4.7)p (3.4)p (8.1)p All results represent continuing activities. See Notes to the Interim Financial Statements. CONSOLIDATED BALANCE SHEET as at 30 June 2006 Notes Unaudited 30 Unaudited 30 Audited 31 June 2006 June 2005 December 2005 (restated) £m £m £mASSETSNon-current assetsGoodwill 68.7 68.7 68.7Other intangible assets 5 26.3 27.0 26.8Property, plant and equipment 34.9 36.5 37.1Investments in associates 6 - 16.8 0.2Available-for-sale financial assets 7 0.4 4.4 1.6 130.3 153.4 134.4Current assetsInventories 2.3 2.5 3.6Trade and other receivables 14.8 15.5 14.2Financial assets at fair value through profit or 0.3 0.9 0.4lossCash and cash equivalents 22.8 20.2 34.3 40.2 39.1 52.5Total Assets 170.5 192.5 186.9 LIABILITIESCurrent liabilitiesTrade and other payables (26.9) (17.4) (21.0)Other borrowings 8 (4.3) (4.5) (3.4)Deferred income (12.0) (10.8) (7.7) (43.2) (32.7) (32.1)Non-current liabilitiesConvertible bonds 8 (63.9) (63.4) (63.6)Other borrowings 8 (48.0) (55.4) (51.1)Deferred income (2.4) (2.4) (2.9)Other non-current liabilities (3.3) (3.2) (3.4)Provisions (1.6) (1.6) (1.9) (119.2) (126.0) (122.9)Total Liabilities (162.4) (158.7) (155.0) Net Assets 8.1 33.8 31.9 SHAREHOLDERS' EQUITYShare capital 76.6 64.0 76.6Share premium 345.6 323.3 345.6Translation reserve 0.6 (0.5) (1.2)Fair value reserve (0.2) (1.4) 0.2Retained losses (452.3) (389.4) (427.1)Other reserves 37.8 37.8 37.8Total Shareholders' Equity 8.1 33.8 31.9 See Notes to the Interim Financial Statements. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE for the six months ended 30 June 2006 Unaudited Unaudited Audited 6 months to 6 months to 30 12 months to 31 30 June 2006 June 2005 December 2005 (restated) £m £m £mNet currency translation effect 1.8 0.4 (0.3)Fair value movements on available for sale investments (0.4) (0.9) 0.2Actuarial gains on defined benefit plans 0.2 - -Net profits/ (losses) recognised directly in equity 1.6 (0.5) (0.1)Loss for the period (26.6) (12.9) (50.9)Total recognised income and expense for the period (25.0) (13.4) (51.0) There were no transactions with equity holders during the period that wouldrequire disclosure in accordance with IAS 34; Interim financial reporting. CONSOLIDATED CASH FLOW STATEMENT for the six months ended 30 June 2006 Unaudited 6 Unaudited 6 Audited months to 30 months to 30 12 months to June 2006 June 2005 31 December 2005 Note £m £m £m Operating activitiesCash (used in)/ provided by operating activities (a) (2.1) 4.6 (7.6)Income tax paid (0.2) (0.1) (0.3)Net cash (used in)/ provided by operating activities (2.3) 4.5 (7.9) Investing activitiesPurchases of property, plant and equipment (1.4) (1.0) (2.6)Purchases of intangible assets (1.1) (2.0) (2.3)Purchase of shares in associates - (0.2) (0.2)Purchase of own shares - - (0.4)Proceeds from disposal of available for sale investments 1.3 - 1.6Net cash used in investing activities (1.2) (3.2) (3.9) Financing activitiesGross proceeds from rights issue - - 37.7Expenses of rights issue - - (2.9)Proceeds from issue of ordinary share capital - - 0.1Proceeds from issue of convertible bonds due June 2025 - 20.0 20.0Expenses of issue of convertible bonds due June 2025 - - (1.2)Repayment of convertible bonds due June 2005 - (9.8) (9.8)Repayments of borrowings (6.5) (5.2) (7.4)Interest paid (3.1) (2.9) (6.7)Interest received 0.7 0.3 0.8Net cash (used in)/ generated from financing activities (8.9) 2.4 30.6 Effect of exchange rate changes (0.1) - 0.2Net (decrease)/ increase in cash and cash equivalents (12.5) 3.7 19.0 Cash and cash equivalents including bank overdraft at beginning of the period 34.3 15.3 15.3Cash and cash equivalents including bank overdraft at end of the period 21.8 19.0 34.3 See Notes to the Interim Financial Statements. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Cash flow from operating activities Unaudited Unaudited Audited 6 months to 6 months to 30 12 months to 31 30 June 2006 June 2005 December 2005 (restated) £m £m £m Loss for the period (26.6) (12.9) (50.9)Adjustments for: Tax 0.2 0.1 0.3 Depreciation 2.8 3.1 6.2 Amortisation 1.1 1.0 2.1 Impairments - - 19.4 Fair value loss/ (gain) on derivative financial instruments 0.2 (0.2) (0.3) Finance costs 9.3 12.3 22.3 Finance income (2.6) (0.3) (10.0) Share of loss in associate 0.2 0.6 0.8 Profit on disposal of available for sale financial assets (0.5) - (0.3) Other non-cash changes 1.1 1.7 3.2Operating cash flows before movements in working capital (14.8) 5.4 (7.2) Changes in working capital Decrease/ (increase) in inventories 1.3 (1.0) (2.1) (Increase)/ decrease in trade and other receivables (0.8) 2.5 4.2 Increase/ (decrease) in trade and other payables 8.2 (2.0) 1.2 Increase/ (decrease) in deferred income 4.1 (0.8) (3.4) (Decrease)/ increase in provisions (0.1) 0.6 (0.3)Cash (used in)/ provided by operations (2.1) 4.7 (7.6) Notes to the Interim Financial Statements 1 Accounting policies General information SkyePharma PLC (the "Company") and its subsidiaries (together the "Group") is aspeciality pharmaceutical Group which uses its multiple drug deliverytechnologies to create a product pipeline for out-licensing to marketingpartners. The Company is incorporated and domiciled in United Kingdom, with its registeredoffice at 105 Piccadilly, London W1J 7NJ. The principal accounting policies adopted in the preparation of theseconsolidated financial statements are set out below. (a) Basis of preparation In accordance with EU regulations, SkyePharma is required to prepare statutoryfinancial statements which comply with the International Financial ReportingStandards adopted for use in the European Union ("IFRS"). The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards adopted by the European Union. All IFRS's issuedby the International Accounting Standards Board ("IASB") that were effective atthe time of preparing the financial statements and adopted the EuropeanCommission for use inside the EU were applied by SkyePharma. These condensed consolidated financial statements have been prepared inaccordance with IFRS and, the interpretations issued by the InternationalFinancial Reporting Interpretations Committee ("IFRIC") and with those parts ofthe Companies Act 1985 applicable to companies reporting under IFRS. Thefinancial statements have been prepared under the historical cost convention, asmodified by the revaluation of financial assets and financial liabilities. Thefinancial statements have has been prepared using accounting policies consistentwith those adopted by the Group in its financial statements for the year ended31 December 2005 and in accordance with IAS 34; Interim financial reporting. The financial statements are unaudited and do not constitute statutory financialstatements within the meaning of section 240 of the Companies Act 1985. Theresults for the period to 30 June 2006 have been formally reviewed and reportedon by the auditors. The figures for the year ended 31 December 2005 are anextract from the audited financial statements for that period which have beendelivered to the Registrar of Companies and on which the auditors have issued anunqualified report which contained no statement under section 237 (2) or section237 (3) of the Companies Act 1985. In order to provide sufficient working capital to fund its strategic priorities,which, as previously reported, include the Group's refocus to concentrate onoral and inhalation products, the Board has determined the need to execute anumber of initiatives. Having recently completed an agreement for the licensingof Flutiform(TM)in Europe, the Group is negotiating the divestment of itsinjectable business interests, and the sale of certain non-core assets. TheCompany's working capital requirements continue to be affected by the structureand timing of transactions which may result from these negotiations. In theevent that these initiatives do not provide sufficient funds to meet the Group'sshort term working capital requirements, and given also that those requirementscontinue to be affected by the timing and receipt of milestone payments andpayments received on the signing of new contracts, the Board has developed anumber of contingency plans including the divestment of further non-core assets,various financing arrangements, including obtaining bridging finance, and otherstrategic initiatives. The Directors have reviewed the working capital requirements of the Group forthe next twelve months and have a reasonable expectation that sufficient fundswill be raised from the initiatives in hand and have therefore prepared thefinancial information contained herein on a going concern basis which assumesthat the Company will continue in operational existence for the foreseeablefuture. The financial statements do not reflect any adjustments that would berequired to be made if they were to be prepared on a basis other than the goingconcern basis. Use of estimates The preparation of the financial statements, in conformity with generallyaccepted accounting principles, requires the use of estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Although these estimates are based on management's bestknowledge of the amount, event or actions, actual results may ultimately differfrom those estimates. (b) Consolidation The underlying financial statements comprise a consolidation of the accounts ofthe Company and all its subsidiaries and includes the Group's share of theresults and net assets of its associates. Subsidiaries Subsidiaries are all entities over which the Group has control. Control isachieved where the Company has the power to govern the financial and operatingpolicies of an entity so as to obtain benefits from its activities. Subsidiariesare fully consolidated from the date on which control is transferred to theGroup. They are de-consolidated from the date on which control ceases. Theresults of subsidiaries acquired or disposed during the period are included inthe consolidated income statement from the effective date of acquisition or upto the effective date of disposal, as appropriate. The Group uses the purchase method to account for the acquisition ofsubsidiaries. The cost of an acquisition is measured as the fair value of theassets given, equity instruments issued and liabilities incurred or assumed atthe date of exchange, plus costs directly attributable to the acquisition.Identifiable assets acquired and liabilities and contingent liabilities assumedin a business combination are measured initially at their fair values at theacquisition date, irrespective of the extent of any minority interest. Theexcess of the cost of acquisition over the fair value of the Group's share ofthe identifiable net assets acquired is recorded as goodwill. If the cost ofacquisition is less than the fair value of the group's share of the net assetsof the subsidiary acquired, the difference is recognised directly in the incomestatement. Inter-company transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. Unrealised losses are also eliminatedunless the transaction provides evidence of an impairment of the assettransferred. Subsidiaries' accounting policies have been changed where necessaryto ensure consistency with the policies adopted by the Group. Associates Associates are all entities over which the Group has the power to exercisesignificant influence but not control generally accompanying a shareholding ofbetween 20% and 50% of the voting rights. Investments in associates areaccounted for by the equity method of accounting and are initially recognised atcost. The Group's investment in associates includes goodwill identified onacquisition. The Group's share of its associates' post-acquisition profits or losses isrecognised in the income statement, and its share of post-acquisition movementsin reserves is recognised in reserves. The cumulative post-acquisition movementsare adjusted against the carrying amount of the investment. When the Group'sshare of losses in an associate or joint venture equals or exceeds its interestor participation, including any other unsecured long-term receivables, the Groupdoes not recognise further losses, unless it has incurred obligations or madepayments on behalf of the associate or joint venture. Unrealised gains on transactions between the Group and its associates areeliminated to the extent of the Group's interest in the associates. Unrealisedlosses are also eliminated unless the transaction provides evidence of animpairment of the asset transferred. Associates' accounting policies have beenchanged where necessary to ensure consistency with the policies adopted by theGroup. (c) Segment reporting The Group's primary segment for IFRS segment reporting is the business segment.A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. Geographical regions are the secondary reporting segments. A geographic segmentis engaged in providing products or services within a particular economicenvironment that are subject to risks and return that are different from thoseof components operating in other economic environments. Segment reporting reflects the internal management reporting structure and theway the business is managed. (d) Revenue recognition Revenue comprises the fair value for the sale of goods and services, net ofsales taxes, rebates and discounts and after eliminating sales within the Group.Revenue is recognised as follows: Contract development and licensing Contract development and licensing income represents amounts earned for servicesrendered under development and licensing agreements, including up-frontpayments, milestone payments, technology access fees and research anddevelopment costs recharged. Revenues are recognised where they arenon-refundable, the Group's obligations related to the revenues have beendischarged and their collection is reasonably assured. Refundable contractrevenue is treated as deferred until such time that it is no longer refundable.In general up-front payments are deferred and amortised on a systematic basisover the period of development to filing. Milestone payments related toscientific or technical achievements are recognised as income when the milestoneis accomplished. Royalty income Royalty income is recognised on an accruals basis and represents income earnedas a percentage of product sales in accordance with the substance of therelevant agreement. Manufacturing and distribution Manufacturing and distribution revenues principally comprise contractmanufacturing fees invoiced to third parties and income from product sales.Revenues are recognised upon transfer to the customer of significant risks andrewards, usually upon despatch of goods shipped where the sales price is agreedand collectability is reasonably assured. (e) Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of acquisition. Goodwill is tested annually for impairment andcarried at cost less accumulated impairment losses. Goodwill is allocated tocash generating units for the purpose of impairment testing. Each of those cashgenerating units represents the Group's investment in each country of operation. Intellectual property Intellectual property comprises acquired patents, trade marks, know-how andother similarly identified rights. These are recorded at their fair value atacquisition date and are amortised on a straight line basis over their estimateduseful economic lives from the time they are available for use. The period overwhich the Group expects to derive economic benefits does not exceed 20 years. Research and development Research expenditure is charged to the income statement in the period in whichit is incurred. Development expenditure is capitalised when the criteria forrecognising as an asset are met - when it is probable that the project will be asuccess, considering its commercial and technological feasibility and costs canbe measured reliably. Regulatory and other uncertainties generally mean thatsuch criteria are not met. Where development costs are capitalised they areamortised over their useful economic lives from product launch. Prior to productlaunch the asset is tested annually for impairment. Computer software Costs that are directly associated with the purchase and implementation ofidentifiable and unique software products by the Group are recognised asintangible assets. Expenditures that enhance and extend the benefits ofcomputer software programmes beyond their original specifications and lives arerecognised as a capital improvement and added to the original cost of thesoftware. Direct costs include the software development employee costs and anappropriate portion of relevant overheads. Software costs are amortised overtheir useful economic lives, generally a period of 3 to 5 years. (f) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment. Assets that are subject to amortisation ordepreciation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognised for the amount by which the asset's carryingamount exceeds its recoverable amount. The recoverable amount is the higher ofan asset's fair value less costs to sell and value in use. Any impairment lossis charged to the income statement in the period concerned. For the purposes ofassessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash in flows (cash-generating units). The expected cash flows generated by the assets are discounted using assetspecific discount rates which reflect the risks associated with the groups ofassets. These risks vary with the nature and the location of the cashgenerating units. (g) Investments The Group classifies its investments according to the purpose for which theinvestments were acquired. Management determines the classification ofinvestments at initial recognition and re-evaluates the designation at everyreporting date. The Group has the following categories of investments: Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are not acquired togenerate profit from short-term fluctuations in price. They are included innon-current assets unless management intends to dispose of the asset within 12months of the balance sheet date. Available-for-sale investments are initially recorded at cost, being the fairvalue of consideration given, plus transaction costs. Subsequently,available-for-sale investments comprising marketable equity securities that aretraded in active markets are carried at their fair value as of each balancesheet date. Unrealised gains and losses arising from changes in the fair value ofnon-monetary securities classified as available-for-sale investments arerecognised in equity. When available-for-sale investments are sold or impaired,the accumulated fair value adjustments in equity are recycled into the incomestatement as gains and losses from investment securities. The Group assesses at each balance sheet date whether there is objectiveevidence that a financial asset or a group of financial assets is impaired. Ifany such evidence exists for available-for-sale financial assets, the cumulativeloss - measured as the difference between the acquisition cost and the currentfair value, less any impairment loss on that financial asset previouslyrecognised is removed from equity and recognised in the income statement.Impairment losses recognised in the income statement on equity instruments arenot reversed through the income statement. Financial assets at fair value through profit or loss The Group classifies investments in this category if acquired principally forthe purpose of selling in the short term or if so designated by management.Financial assets at fair value through profit or loss are initially recorded,and subsequently carried, at fair value. Realised and unrealised gains andlosses arising from changes in the fair value of assets held in this categoryare included in the income statement in the period in which they arise.Financial assets at fair value through profit or loss are classified as currentassets if they are either held for trading or are expected to be realised within12 months of the balance sheet date. 2 Segment information Based on the risks and returns of the various segments, the Directors considerthat the Group's primary reporting format is by business segment withgeographical reporting being the secondary format. The Group is a specialitypharmaceutical company, using its multiple drug delivery technologies to createa product pipeline for out-licensing to marketing partners. The businesssegments consist of the Injectable business and the Oral and Inhalationbusiness. Business segment data includes an allocation of corporate costs toeach segment on an appropriate basis. There are no material inter-segmenttransfers. All Group activities are continuing operations. Revenue by business segment: 6 months to 6 months to 12 months to 30 June 2006 30 June 2005 31 December 2005 £m £m £mInjectable 3.9 5.1 10.5Oral and Inhalation 21.7 30.9 50.8 25.6 36.0 61.3 Revenue earned can be analysed as: Contract development and licensing Milestone payments 8.3 17.6 22.1 Research and development costs 1.9 1.9 5.5recharged 10.2 19.5 27.6 Royalties 11.5 12.0 21.7 Manufacturing and distribution 3.9 4.5 12.0 25.6 36.0 61.3 Operating loss by business segment: 6 months to 6 months to 12 months to 30 June 2006 30 June 2005 31 December 2005 (restated) £m £m £mInjectable (11.7) (7.2) (18.6)Oral and Inhalation (7.8) 6.9 2.5Operating loss pre exceptional items (19.5) (0.3) (16.1)Exceptional items - - (21.4)Operating loss (19.5) (0.3) (37.5)Share of loss in associate (0.2) (0.6) (0.8)Net interest (6.7) (11.9) (12.3)Tax (0.2) (0.1) (0.3)Loss after tax (26.6) (12.9) (50.9) 3 Finance costs and income 6 months to 6 months to 12 months to 30 June 2006 30 June 2005 31 December 2005 (restated) £m £m £m Interest and similar expense: Interest: - bank borrowings (0.3) (0.3) (0.5) - Paul Capital arrangements (5.9) (6.2) (12.7) - interest on convertible bonds (3.1) (2.7) (5.8) (9.3) (9.2) (19.0) Foreign exchange on Paul Capital arrangements - (3.1) (3.3) Total interest and similar expense (9.3) (12.3) (22.3) Interest and similar income: Paul Capital change in estimated future payments - - 9.0 Other interest income 0.8 0.4 1.0 Foreign exchange on Paul Capital arrangements 1.8 - - Total interest and similar income 2.6 0.4 10.0 4 Earnings per share 6 months to 6 months to 12 months to 30 June 2006 30 June 2005 31 December 2005 (restated) £m £m £mAttributable loss before exceptional items (26.6) (12.9) (29.5)Exceptional items - - (21.4)Basic and diluted attributable loss (26.6) (12.9) (50.9) Number Number Number m m mBasic and diluted weighted average number of 748.8 619.4 624.9shares in issue Loss per Ordinary Share before exceptional (3.5)p (2.1)p (4.7)pitemsExceptional items - - (3.4)pBasic and diluted loss per Ordinary Share (3.5)p (2.1)p (8.1)p There is no difference between basic and diluted loss per share since in a lossmaking period all potential shares from convertible bonds, stock options,warrants and contingent issuance of shares are anti dilutive. Shares held by the SkyePharma PLC General Employee Benefit Trust have beenexcluded from the weighted average number of shares. 5 Other intangible assets Intellectual Software Development property costs costs Total £m £m £m £mCostAt 1 January 2006 41.0 1.0 1.0 43.0Exchange differences (1.0) - (0.1) (1.1)Additions 1.3 0.1 - 1.4Disposals - (0.1) - (0.1)At 30 June 2006 41.3 1.0 0.9 43.2 Accumulated amortisationAt 1 January 2006 14.4 0.8 1.0 16.2Exchange differences (0.2) - (0.1) (0.3)Amortisation charge 1.0 0.1 - 1.1Disposals - (0.1) - (0.1)At 30 June 2006 15.2 0.8 0.9 16.9 Net book valueAt 30 June 2006 26.1 0.2 - 26.3At 31 December 2005 26.6 0.2 - 26.8 There are no intangible assets with indefinite useful lives. All amortisationcharges in the period have been charged through administrative expenses. Intellectual property acquired mainly relates to the purchase of licenses tointellectual property in the area of pulmonary delivery. 6 Investments in associates As at As at As at 30 June 2006 30 June 2005 31 December 2005 £m £m £mBeginning of the period 0.2 14.3 14.3Additions - 3.0 3.0Share of loss (0.2) (0.6) (0.8)Impairment - - (16.3)End of the period - 16.7 0.2 The investment in Astralis Limited was recorded at £Nil million at 30 June 2006(31 December 2005: £0.2 million). The investment in Astralis had a market valueof £1.5 million at 30 June 2006 (31 December 2005: £0.4 million). 7 Available for sale financial assets As at As at As at 30 June 2006 30 June 2005 31 December 2005 £m £m £mBeginning of the period 1.6 5.2 5.2Exchange (0.1) (0.1) 0.1Additions 0.1 - 0.1Disposals (0.8) - (1.8)Impairments - - (2.6)Revaluation (deficit)/ surplus transfer (0.4) (0.7) 0.6End of the period 0.4 4.4 1.6 Available for sale financial assets comprise the following unlisted securities: Vital Living Inc Vital Living is a US nutriceuticals company traded on the OTC Bulletin Board.During the period Skye sold its interests in Vital Living's 12% senior securedconvertible notes due 2008 and series D preferred shares to VTLV LLC (a companyformed by Vital Living management) for US$0.4 million cash. In addition, theGroup received an additional 12.5 million common shares of Vital Living, inconsideration for the termination by SkyePharma of an outstanding US$0.75million debt owed by Vital Living to SkyePharma. As a result of thesetransactions, as at 30 June 2006 the total SkyePharma holding was 29,493,599common shares and warrants expiring 2008 exercisable for 4 million common sharesat an exercise price of $0.25, representing approximately 23.6% of the commonshares. The investment in Vital Living was recorded at £0.3 million at 30 June2006 (31 December 2005: £0.4 million). Micap plc Micap is a UK science-based technology company traded on the AlternativeInvestment Market. As at 30 June 2006 the total SkyePharma holding was 5,238,334ordinary shares and 1,830,000 convertible shares, representing approximately9.4% of the ordinary share capital. The investment in Micap was recorded at £0.1million at 30 June 2006 (31 December 2005: £0.2 million). Vectura Group plc Vectura is a UK emerging pharmaceutical company traded on the AlternativeInvestment Market. During the period the Group sold its 1.2 million ordinaryshares in Vectura for £1.1 million and as at 30 June 2006 the Group no longerheld any ordinary shares. 8 Borrowings As at As at As at 30 June 2006 30 June 2005 31 December 2005 (restated) £m £m £m Current Bank overdraft 1.0 1.2 -Bank borrowings 2.3 2.2 2.3Property mortgage 0.3 0.3 0.3Paul Capital funding liabilities 0.7 0.8 0.7Finance lease liabilities - - 0.1Other current borrowings 4.3 4.5 3.4 Non-currentConvertible bonds due May 2024 51.0 50.6 50.8Convertible bonds due June 2025 12.9 12.8 12.8Convertible bonds 63.9 63.4 63.6 Bank borrowings 0.2 1.0 0.6Property mortgage 6.5 6.5 6.6Paul Capital funding liabilities 41.3 47.8 43.9Finance lease liabilities - 0.1 -Other non-current borrowings 48.0 55.4 51.1 Total non-current borrowings 111.9 118.8 114.7 Total borrowings 116.2 123.3 118.1 Bank borrowings At 30 June 2006 bank borrowings include two amounts due to theBasellandschaftliche Kantonalbank of £0.9 million (CHF 2 million) and £0.6million (CHF 1.5 million) (31 December 2005: £0.9 million (CHF 2 million) and£0.7 million (CHF 1.5 million)). Both loans can be terminated with six weeksnotice by either party and bear interest at 6.5% and 6.0% respectively. Bothloans are secured on the assets of Jago and the £0.6 million (CHF 1.5 million)loan is guaranteed by SkyePharma PLC. The Group had a loan as at 30 June 2006 with GE Capital Corp of £1.0 million($1.8 million) (31 December 2005: £1.4 million ($2.4 million)). The loan issecured by certain assets of SkyePharma Inc, SkyePharma US Inc and SkyePharmaPLC. The loan bears interest at 8.0% and is repayable by instalments untilSeptember 2007. Convertible bonds The Group has £69.6 million convertible bonds due May 2024 at a conversion priceof 95 pence, and £20 million convertible bonds due June 2025 at a conversionprice of 58 pence. The conversion price of the £20 million convertible bonds dueJune 2025 was reset from 77 pence to 58 pence in June 2006. Property mortgage At 30 June 2006, the Group had a property mortgage facility with theBasellandschaftliche Kantonalbank of £6.8 million (CHF 15.2 million) (31December 2005: £6.9 million (CHF 15.5 million)). The mortgage is in twotranches, both secured by the assets of Jago. The first tranche of £2.6 million(CHF 6.0 million) bears interest at 2.75% and is repayable by instalments over20 years semi-annually. The second tranche of £4.2 million (CHF 9.2 million)bears interest at 2.75% and is repayable by instalments over 50 yearssemi-annually. Paul Capital funding liabilities The Group entered into two transactions with Paul Capital Royalty AcquisitionFund ('Paul Capital') in 2000 and 2002. Under these transactions Paul Capitalprovided a total of $60 million in return for the sale of a portion of thepotential future royalty and revenue streams on a selection of the Group'sproducts. Whilst the contractual arrangement with Paul Capital is a royalty agreementunder which royalties are payable on revenues earned and payments received, theproceeds received from Paul Capital meet the definition of a financial liabilityunder IAS 39, and are treated as a financial liability. Royalties paid to PaulCapital are treated as repayment of the liability and notional interest ischarged on the liability. The estimated payments to Paul Capital are discountedusing each contract's original effective interest rate, and any change in theestimated future payments to Paul Capital is recognised immediately as an incomeor expense in the income statement. Since the 2005 Interim Report the Group has changed its interpretation of theapplication of IAS 39 to the Paul Capital funding liabilities. Previously theproceeds received from Paul Capital were treated as a floating rate financialliability, and any change in the estimated future payments to Paul Capital waseffectively spread forward and reflected in a reduced implicit interest cost infuture years. The restatement resulted in an increase in the first half 2005finance costs of £3.6 million, and a decrease in the Paul Capital fundingliabilities at 30 June 2005 of £1.7 million. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
SKP.L