28th Sep 2005 07:04
Skyepharma PLC28 September 2005 FOR IMMEDIATE RELEASE 28 SEPTEMBER, 2005 SkyePharma PLC Interim Results Announcement for the Six Months Ended 30 June 2005 Operating highlights • US approval and launch of Triglide(TM) (fenofibrate) • New agreement with GlaxoSmithKline on Paxil CR(TM) • Paxil CR(TM) returned to US market 27 June • DepoDur(TM) granted conditional approval in UK • DepoBupivacaine(TM) licensed to Mundipharma for all territories outside North America and Japan • Foradil(R) Certihaler(R) approved in Germany and launched by Novartis • Pulmicort(R) HFA-MDI filed by AstraZeneca in first European market Financial highlights • Revenue up 3% to £36.0 million (2004: £35.1 million) • Royalties 33% of total revenue, up 17% to £12.0 million (2004: £10.3 million) • Gross profit down 9% to £21.4 million (2004: £23.5 million) • R&D down 24% to £10.9 million (2004: £14.4 million) • Operating loss before exceptionals down 82% to £0.3 million (2004: £1.6 million) • Operating loss after exceptionals up £0.2m to £0.3 million (2004: £0.1 million) • Deferred income down by £0.9 million to £13.2 million (as at 31 December 2004: £14.1 million) • Loss for the period up 7% to £9.3 million (2004: £8.7 million) • Loss per share 1.5p (2004: 1.4p) • Net cash £19.0 million (as at 31 December 2004: £15.3 million) • Announcement of rights issue, raising £35 million of new money Michael Ashton, Chief Executive, said: "The first half of 2005 has seen a numberof significant achievements including the approvals and subsequent launches oftwo important products, Triglide(TM) in the US and Foradil(R) Certihaler(R) inGermany, its first major market. We have appointed the first licensee forDepoBupivacaine(TM) on terms which will largely fund its development. I am pleasedto report that Paxil CR(TM) has returned strongly to the US market. We have alsodecided to take Flutiform(TM) through Phase III development ourselves beforeout-licensing which will, we believe, create significant additional value forshareholders." For further information please contact:SkyePharma PLCIan Gowrie-Smith, Non-executive ChairmanMichael Ashton, Chief Executive OfficerPeter Laing, Director of Corporate CommunicationsToday +44 207 466 5000Thereafter +44 207 491 1777Sandra Haughton, US Investor Relations +1 212 753 5780 Buchanan Communications +44 207 466 5000Tim Anderson / Mark Court/Rebecca Skye Dietrich About SkyePharma SkyePharma PLC uses its world-leading drug delivery technology to developeasier-to-use and more effective formulations of drugs. The majority ofchallenges faced in the formulation and delivery of drugs can be addressed byone of the Company's proprietary technologies in the areas of oral, injectable,inhaled and topical delivery, supported by advanced solubilisation capabilities.For more information, visit http://www.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. OPERATIONAL REVIEW Products on the market In March 2005, the FDA halted US distribution of Paxil CR(TM), our improvedformulation of GlaxoSmithKline's Paxil(R), and another unrelated product becauseof manufacturing problems at a GlaxoSmithKline plant in Puerto Rico. Theseproblems have now been resolved and GlaxoSmithKline returned Paxil CR(TM) to themarket at the end of June. However because of the supply disruptionGlaxoSmithKline's total sales of Paxil CR(TM) in the first half of 2005 were downby 65% in constant exchange rate terms to £67 million ($126 million). Prior tothe FDA action, Paxil CR(TM) held about 7% of all new US prescriptions for SSRIantidepressants and we are encouraged by the trend in new prescriptions. Weconcluded a new agreement with GlaxoSmithKline in April that not only providedus with a $10 million lump-sum payment and increased the royalty rate on thisproduct from 3% to 4% but also maintained our royalty income even while theproduct was off the market. 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. Xatral(R) OD has been on the market outside theUSA since April 2000 and the older multidose versions of Xatral(R) have nowlargely been withdrawn. Uroxatral(R), launched in the USA in November 2003,currently holds 11% of the combined prescriptions written for it and for itsmain competitor. Xatral(R) OD has now been approved in Europe for a secondindication, acute urinary retention, with Phase III trials ongoing for the USA.In the first half of 2005, reported sales of all forms of Xatral(R) were €157million, up by 16% in constant exchange rate terms. Sales of DepoCyt(R) in the USA by our partner Enzon were $3.3 million, up 45% onthe prior year. Our European partner Mundipharma, which launched the product asDepoCyte(R) in February 2004, had sales of $2.2 million. We have now completedthe Phase IV trial that will be used to support a filing for the most commonform of neoplastic meningitis, associated with solid tumours. Solaraze(R), our topical gel treatment for actinic keratosis, is now marketed inthe US by the Doak Dermatologics unit of Bradley Pharmaceuticals. Sales in thefirst half of 2005 were in the region of $5 million. Solaraze(R) is marketed inEurope and certain other territories by Shire Pharmaceuticals. In the first halfof 2005 Shire's total non-US sales were $5.4 million, up by 44%. In December our US marketing partner Endo Pharmaceuticals launched DepoDur(TM),our new injectable analgesic for the treatment of pain after surgery. Sales inthe first half of 2005 were $2.3 million. Given the length of time typicallyneeded to establish hospital products, we are confident that this initial saleslevel does not reflect the full potential of the product. In the UK, we wereinformed by the UK regulatory agency, the CSM, that it will recommend approvalfor DepoDur(TM), subject to certain conditions being satisfied. We are indiscussions with the CSM about these conditions (which do not require furtherclinical trials). Assuming final approval is received, the UK approval will beused as the basis for seeking approval throughout the European Union under theEU's Mutual Recognition procedure. DepoDur(TM) will be marketed in Europe by ourpartner Zeneus Pharma. Following FDA approval in May, First Horizon Pharmaceutical Corporation launchedTriglide(TM) (fenofibrate) on the US market in July. We licensed Triglide(TM), aonce-daily oral treatment for elevated blood lipid disorders, to First Horizonin 2004. We will receive 25% of First Horizon's net sales of this product in theform of royalty income and manufacturing revenues. Lipid disorders such aselevated cholesterol and triglycerides are proven risk factors forcardiovascular disease and already affect over half of the US population. Evenamong the minority who are treated, only a few attain target goals. Treatmenttherefore represents a major area of unmet medical need. Fenofibrate not onlylowers levels of total triglycerides and LDL cholesterol ("bad cholesterol") inthe bloodstream but also has the valuable property of raising abnormally lowlevels of HDL cholesterol ("good cholesterol"), increasingly recognized as amajor cardiovascular risk factor. Sales of Abbott's Tricor(R), the currentbranded version of fenofibrate, already exceed US$ 1 billion. Fenofibrate ishighly insoluble in water, resulting in variable uptake from the stomach andrequiring the patient to take the tablets with food. In Triglide(TM) this drawbackhas been overcome by our proprietary IDD(TM)-P solubilization technology. Triglide(TM) has comparable absorption under both fed and fasting conditions and thereforeallows patients to take the drug at any time, improving compliance andsimplicity for both patients and prescribers. Products in late-stage development Foradil(R) Certihaler(R) is our new version of Novartis' long-actingbronchodilator Foradil(R) (formoterol). We developed not only the multidosedry-powder inhaler device but also the formulation technologies that ensure doseconsistency regardless of storage conditions. These technologies are alsoinvolved in a new collaboration with Novartis to jointly develop anotherbronchodilator, QAB149. The product has now been launched in Germany and isapproved in eleven other countries in Europe, Latin America and South Africa. Inthe USA, where the product will be marketed by Schering-Plough, Novartis hasresponded to the FDA about the conditions imposed in a second "approvable"letter issued in December 2004. We have completed Phase III trials of Requip 24hr(TM), the once daily version ofGlaxoSmithKline's Parkinson's drug Requip(R). The product is expected to befiled by GlaxoSmithKline later this year. We are developing several other asthma drugs in metered-dose aerosol inhalers(MDIs) powered by a hydrofluoroalkane (HFA) propellant gas. AstraZeneca has nowfiled for approval of an HFA-MDI version of the inhaled steroid Pulmicort(R)(budesonide) in the first country in Europe, triggering a milestone payment. Wewill also receive double-digit royalties on sales of Pulmicort(R) HFA-MDI. Ourown HFA-MDI version of the bronchodilator formoterol will commence Phase IIItrials in the autumn, on track for planned filing in 2007. Because of thesuccess of combination products, there is now a correspondingly diminishingmarket opportunity for single agent bronchodilators and we are thereforecurrently undertaking a strategic review of formoterol HFA-MDI. Flutiform(TM) HFA-MDI (a fixed-dose combination of formoterol and the inhaledsteroid fluticasone) has now completed its Phase II trial. The results have beenreviewed by the FDA and we have now submitted an IND to commence Phase IIItrials in early 2006 with a target filing date of mid-2007. The market forcombination products for asthma alone is already worth in excess of $5 billionand growing rapidly and is projected to be worth $10 billion by 2010. Wecontinue to believe that Flutiform(TM) will be an important product, withsignificant advantages over the limited number of potentially competitiveproducts that we expect can reach this market over the next few years. Asdiscussed in more detail in the accompanying release today, we have now decidedto proceed with Phase III development at our own expense. This should allow usto appoint a marketing partner or partners at a later stage and therefore onsubstantially better terms than we had previously intimated. We have extended our relationship with Mundipharma, our European marketingpartner for DepoCyte, by granting rights outside North America and Japan forDepoBupivacaine(TM), a long-acting local anaesthetic that we believe complementsDepoDur(TM). We will receive up to $80 million in milestone payments and a 35%share of sales (30% in markets outside Europe). DepoBupivacaine(TM) is currentlyin Phase II trials, with results expected in the autumn. At that time we willcommence negotiations with potential US licensees. Endo, our US marketingpartner for DepoDur(TM), has the right of first negotiation for US commercialrights to DepoBupivacaine(TM). We are also in negotiations to appoint licenseesfor other territories. Propofol IDD-D(TM) is our novel formulation of propofol, a widely-used injectableanaesthetic and sedative. Our formulation has been designed not to supportmicrobial growth, a recognised problem with current versions, and should provideuninterrupted sedation for 24 hours, ideal for the fast-growing intensive caremarket. We are in dialogue with the FDA on the design of the additional trialsrequired for approval. We are also in current discussion with potentiallicensees for Europe and certain other markets. Current trading and prospects Apart from the continued delay in the licensing in Flutiform(TM), the results andnet loss for the first half of 2005 were in line with the Directors'expectations. These expectations have been revised as a result of the decisionto self-fund the development of Flutiform(TM). This decision will result inadditional development costs of £8 million which it had previously assumed wouldbe reimbursed by a partner during the second half of 2005. The balance of thebusiness is expected to perform broadly in line with Directors' previousexpectations. The future We are determined to maximise the long-term return from our products and to moveaway from reliance on one-off milestone payments, which historically have madeup the majority of our revenues. Where possible, we have also taken productsfurther in development before out-licensing in order to optimise the returns wecan obtain. Inevitably this has brought a short-term penalty in terms ofrevenues and cashflow but we are confident that this is the correct long-termapproach, which will greatly enhance the value of our products to the company. In the accompanying release, you will see that I have indicated to the Boardthat it is my intention to retire next year after I reach the age of 60. It hasbeen my great pleasure to work with such a talented group of staff atSkyePharma. I will be stepping down no later than the Annual General Meeting.Meanwhile I will be working with the Board to identify a successor and to ensurea smooth transition. Michael AshtonChief Executive FINANCIAL REVIEW Turnover Revenues for the half year were 3% higher at £36.0 million compared with £35.1million in the same period in 2004. This is primarily due to an increase inroyalty income as well as higher manufacturing and distribution revenue.Revenues have increased by a cumulative annual growth rate of 37% since 1996. Contract development and licensing revenues decreased 7% to £19.5 million forthe period (H1 2004: £21.0 million). Revenues recognised from milestone paymentsand payments received on the signing of agreements in the period decreased by£0.5 million to £17.6 million and included revenues from First Horizon for theUS marketing and distribution rights for Triglide and Mundipharma for theEuropean marketing and distribution rights for DepoBupivacaine. In addition,£3.3 million of revenue was recognised from GlaxoSmithKline on the phase IIIclinical trials of Requip (ropinirole), AstraZeneca on the phase III clinicaltrials of Budesonide HFA and Novartis on the phase II clinical trials of QAB149. Research and development costs recharged fell by £1.0 million mainly due toa fall in the costs recharged to Micap plc in respect of the development oftheir microencapsulation technology. Royalty income, principally from Paxil CR, Xatral OD, DepoCyt and Solaraze,increased by 17% to £12.0 million compared with the first half of 2004. Manufacturing and distribution revenues increased by 19% to £4.6 million for theperiod mainly due to higher production of QAB 149, compared with £3.9 million inH1 2004. Deferred income During the period there was a net reduction in deferred income of £0.9 millionunder SkyePharma's revenue recognition policy. Total deferred income of £13.2million as at 30 June 2005 comprised: 31 December 2004 30 June Received * Recognised 2005 £ million £ million £ million £ millionContract development and licensingrevenue 14.1 18.6 (19.5) 13.2 * Includes exchange adjustments Deferred income will be released in subsequent periods as the related costs areincurred or as any associated obligations under the relevant contracts aresatisfied. Cost of sales Cost of sales comprises research and development expenditures, including thecosts of certain clinical trials incurred on behalf of our collaborativepartners, the direct costs of contract manufacturing, direct costs of licensingarrangements and royalties payable. Cost of sales increased by 26% to £14.6million in the first six months of 2005 (H1 2004: £11.6 million). This wasmainly due to an increase in manufacturing and distribution expenses ahead ofthe approval and launch of Triglide, as well as DepoDur costs since its launchin December 2004. The resulting gross profit decreased 9% to £21.4 millioncompared with £23.5 million in the first half of 2004. Expenses Selling, marketing and distribution expenses decreased to £0.5 million (H1 2004:£1.1 million), reflecting continued savings resulting from the Groupreorganisation announced in 2003. Amortisation of intangible assets remained at £1.0 million. Other administrationexpenses before exceptionals also remained relatively constant at £9.1 millionin the first half, compared with £9.2 million in H1 2004. After exceptionalitems other administration expenses decreased marginally at £9.1 million in thefirst half (H1 2004: £9.8 million). SkyePharma's own research and development expenses in the period decreased by£3.5 million to £10.9 million mainly due to a reduction in expenditure onBudesonide HFA, DepoDur and other injectable products partly off set by anincrease in expenditure on DepoBupivacaine and Flutiform. The other operating expense in the first six months of £0.3 million relates to aloss due to the movement in the fair value of the Group's investment inGeneMedix plc. This compares with a net gain of £2.7 million in H1 2004,comprising a gain of £0.6 million on the revaluation of the investment inGeneMedix and an exceptional £2.0 million profit in H1 2004 on disposal of theGroup's entire holding of Transition Therapeutics shares. The Group began to equity account for Astralis Limited in December 2004 and thecharge for the first six months is £0.6 million, compared with no charge in thefirst half of 2004. Operating results The operating loss after exceptionals of £0.3 million is broadly constant withthe loss in 2004 of £0.1 million. Before exceptionals the Group made a loss of£0.3 million compared with a loss of £1.6 million in H1 2004. The reduction ismainly due to the decrease in the Group's own research and development of £3.5million, partly offset by the increase in cost of sales. The retained loss forthe period increased by 7% to £9.3 million (H1 2004: £8.7 million), after netinterest payable of £8.3 million (H1 2004: £8.5 million). Earnings beforeinterest, tax, depreciation and amortisation ('EBITDA'), a commonly usedindicator, resulted in a profit of £3.3 million in the period (H1 2004: £3.9million). The loss per share for the period was 1.5 pence, which represents a 7% increasecompared with a loss of 1.4 pence for the same period in 2004. Foreign currency movements did not have a material impact on the results ofoperations in 2005 compared with 2004. Balance sheet The balance sheet at 30 June 2005 shows shareholders' equity of £32.1 million,with cumulative goodwill written off to the profit and loss account reserve of£147.6 million. In July 2004 the Group exchanged £49.6 million of its convertible bonds due 2005for convertible bonds due 2024, leaving £9.8 million of the 2005 bondsoutstanding. In September 2004 the £49.6 million 2024 convertible bonds wereconsolidated to form a single series with the £20 million 2024 bonds issued inMay 2004. In June 2005 the Group issued £20 million 8% convertible bonds. Unlesspreviously redeemed or converted, the bonds will be redeemed by the Group attheir principal amount in June 2025. In addition the company repaid the £9.8million balance on the convertible bonds due June 2005. As a result of thesetransactions the Group has £69.6 million convertible bonds due May 2024 and £20million convertible bonds due June 2025 outstanding as at 30 June 2005. On thebalance sheet these are reflected as £63.3 million in liabilities and £28.5million in equity. During the period the Group issued 5,482,238 Ordinary Shares to two formerAstralis Directors to acquire 11,160,000 common shares in Astralis. Liquidity and capital resources At 30 June 2005 SkyePharma had cash and short-term deposits of £20.2 million anda bank overdraft of £1.2 million, compared with £15.3 million cash and no bankoverdraft at 31 December 2004. Bank and other non-convertible debt amounted to£11.3 million at 30 June 2005, consisting principally of a £6.8 million propertymortgage secured by the assets of Jago. Net debt excluding the Paul Capitalfunding liabilities amounted to £54.4 million (31 December 2004: £55.5 million). There was a net cash inflow from operating activities of £4.5 million for thehalf year (H1 2004: £3.0 million outflow). During the first half of 2005purchases of property, plant and equipment were £1.1 million. Purchases ofintangible fixed assets of £2.0 million mainly relate to the purchase oflicenses to intellectual property in the area of pulmonary delivery. This resulted in cash inflow before financing for the period of £1.3 millioncompared with a cash outflow of £4.4 million in the same period in 2004. Cash inflows from financing in the period were £2.3 million (H1 2004: £11.7million). In May 2005 the Group announced that it had signed agreements for aprivate placement of £20 million 8% convertible bonds, with a first put afterfive years by the holder of the bonds, and a final maturity of June 2025. Thebonds were issued on 3 June 2005. This £20.0 million raised was received priorto 30 June 2005 with expenses being incurred after this date. The bonds areconvertible at the option of the holder into SkyePharma Ordinary Shares at aninitial conversion price of 81 pence at any time prior to maturity. Borrowings of £5.2 million were repaid in the period (H1 2004: £3.3 million).This primarily comprises royalty payments paid to Paul Capital. The proceedsfrom the sale of future royalty interests to Paul Capital are classified asborrowings under IFRS and payments of royalties treated as a reduction of theliability. In addition the company repaid the £9.8 million balance on the convertible bondsdue June 2005. International Financial Reporting Standards The interim financial information for the six months ended 30 June 2005 has beenprepared for the first time in accordance with IFRS. In preparing the financialinformation certain first-time adoption provisions have been applied. The Grouphas established IFRS accounting policies which it expects to apply in itsfinancial statements for the year ended 31 December 2005 and applied thesepolicies to its interim 2005 results. Further information on the impact of ourtransition to IFRS can be found in note 11. Donald NicholsonFinance Director CONSOLIDATED INCOME STATEMENTfor the six months ended 30 June 2005 Unaudited 6 months to 30 June 2004 Unaudited 6 months to 30 June 2005 Pre-exceptional Exceptional items (note 3) Notes Total £'000 £'000 £'000 £'000 Revenue 2 36,036 35,099 - 35,099Cost of sales (14,612) (11,581) - (11,581)Gross profit 21,424 23,518 - 23,518Selling, marketing and (467) (1,133) - (1,133)distribution expensesAdministration expenses Amortisation (1,020) (1,005) - (1,005) Other administrative expenses (9,073) (9,223) (537) (9,760) (10,093) (10,228) (537) (10,765)Research and development expenses (10,889) (14,362) - (14,362)Other (expense)/ income 4 (252) 644 2,021 2,665Operating loss (277) (1,561) 1,484 (77)Interest and similar expense (8,652) (8,856) - (8,856)Interest and similar income 357 370 - 370Share of loss in associate (576) - - -Loss before income tax (9,148) (10,047) 1,484 (8,563)Income tax expense (124) (95) - (95)Loss for the period (9,272) (10,142) 1,484 (8,658)Attributable to:Equity holders of the Company (9,272) (10,142) 1,484 (8,658) Earnings per share attributable 5to the equity holders of theCompany during the period (expressed in pence per share)Basic earnings per share (1.5)p (1.6)p 0.2p (1.4)pDiluted earnings per share (1.5)p (1.6)p 0.2p (1.4)p All results represent continuing activities. See Notes to the Interim Financial Statements. CONSOLIDATED BALANCE SHEETas at 30 June 2005 Unaudited 30 Unaudited 31 June December Notes 2005 2004 £'000 £'000ASSETSNon-current assetsGoodwill and intangible assets 95,724 95,361Property, plant and equipment 36,546 40,921Investments in associates 6 16,752 14,332Available-for-sale financial assets 4,371 5,236 153,393 155,850Current assetsInventories 2,497 1,531Trade and other receivables 15,532 18,145Financial assets at fair value through profit or loss 841 1,093Cash and cash equivalents 20,227 15,337 39,097 36,106Total Assets 192,490 191,956 LIABILITIESCurrent liabilitiesTrade and other payables (17,356) (20,610)Convertible bonds 8 - (9,441)Other borrowings 7 (12,455) (10,723)Derivative financial instruments - (164)Deferred income (10,821) (11,808)Provisions - (282) (40,632) (53,028) Non-current liabilitiesConvertible bonds 8 (63,343) (50,382)Other borrowings 7 (49,238) (49,347)Deferred income (2,360) (2,322)Other non-current liabilities (3,193) (2,924)Provisions (1,606) (1,664) (119,740) (106,639)Total Liabilities (160,372) (159,667) Net Assets 32,118 32,289 SHAREHOLDERS' EQUITYShare capital 9 63,990 63,440Share premium 323,264 320,980Translation reserve (1,592) (1,156)Fair value reserve (1,406) (543)Retained earnings (389,973) (382,844)Other reserves 37,835 32,412Total Shareholders' Equity 32,118 32,289 See Notes to the Interim Financial Statements. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the six months ended 30 June 2005 Share Share Translation Fair Retained Other capital premium value earnings reserves Total reserve reserve equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2005 63,440 320,980 (1,156) (543) (382,844) 32,412 32,289Foreign currency - - (436) - - - (436)translation differencesFair value loss on - - - (863) - - (863)available-for-saleinvestmentsNet income recognised - - (436) (863) - - (1,299)directly in equityLoss for the period - - - - (9,272) - (9,272)Total recognised income - - (436) (863) (9,272) - (10,571)Share based payments - - - - 1,445 - 1,445Issue of share capital 548 2,276 - - - - 2,824Exercise of share options 2 8 - - - - 10Repayment of convertible - - - - 698 (698) -bonds due June 2005Issue of convertible - - - - - 6,121 6,121bonds due May 2024At 30 June 2005 63,990 323,264 (1,592) (1,406) (389,973) 37,835 32,118 See Notes to the Interim Financial Statements. CONSOLIDATED CASH FLOW STATEMENTfor the six month ended 30 June 2005 Unaudited 6 months Unaudited 6 months to 30 June 2005 to 30 June 2004 Notes £'000 £'000 Cash flows from operating activitiesCash generated from operations 10 4,658 (2,886)Income tax paid (119) (95)Net cash generated from operating activities 4,539 (2,981) Cash flows from investing activitiesPurchases of property, plant and equipment (1,050) (2,760)Purchases of intangible assets (1,978) (1,168)Purchase of shares in associates (173) -Purchase of available for sale investments - (168)Disposal of available for sale investments - 2,650Net cash used in investing activities (3,201) (1,446) Cash flows from financing activitiesProceeds from issue of ordinary share capital 11 181Proceeds from issue of convertible bonds due June 2025 20,000 -Proceeds from issue of convertible bonds due May 2024 - 20,000Expenses of issue of convertible bonds due May - (1,135)2024Repayment of convertible bonds due June 2005 (9,806) -Repayments of borrowings (5,151) (3,339)Repayment of finance lease principal (39) (176)Interest paid (2,920) (4,112)Interest received 249 316Net cash used in financing activities 2,344 11,735 Effect of exchange rate changes (16) (323) Net increase in cash and equivalents 3,666 6,985 Cash and cash equivalents at beginning of the period 15,337 22,042Cash and bank overdrafts at end of the period 19,003 29,027 See Notes to the Interim Financial Statements. NOTES TO THE INTERIM FINANCIAL STATEMENTSfor the six months ended 30 June 2005 1 Accounting policies and the basis of preparation Basis of preparation The Group is required to prepare consolidated financial statements in accordancewith International Financial Reporting Standards ('IFRS') and applicableinterpretations, as adopted for use in the EU, and with those parts of theCompanies Act, 1985 applicable to companies reporting under IFRS, for the yearended 31 December 2005. The interim financial information for the six months ended 30 June 2005 isunaudited and has been prepared by SkyePharma PLC in accordance with IFRS asadopted for use in the EU and expected to be endorsed by 31 December 2005. Inpreparing the underlying financial information, the Directors have appliedcertain first-time adoption provisions allowed by IFRS 1 based on thosestandards and interpretations that they expect to be effective and the policiesthey expect to adopt in the financial statements as at 31 December 2005.Comparative financial information presented for the periods ended 30 June 2004and 31 December 2004 has been restated to conform to the same basis ofpreparation. The comparative information is unreviewed and unaudited. The interim report does not constitute statutory financial statements within themeaning of section 240 of the Companies Act 1985. Statutory accounts for theyear ended 31 December 2004, which were prepared under accounting principlesgenerally accepted in the UK have been delivered to the Registrar of Companies.The auditors report on those accounts was unqualified and contained no statementunder section 237(2) or section 237(3) of the Companies Act 1985. The Group has established IFRS accounting policies which it expects to apply inits financial statements for the year ended 31 December 2005 and applied thesepolicies and applicable IFRS 1 transition provisions to determine the openingbalance sheet at its date of transition, 1 January 2004. The impact oftransition from UK GAAP to IFRS on the Group's shareholders' funds as at 31December 2004, and on the Group's income statement for the six months ended 30June 2004 is discussed in Note 11. Transitional arrangements The adoption of the provisions set out in IFRS 1 and the assumptions made aboutthe standards and interpretations expected to be effective as at 31 December2005 are outlined below. • Business Combinations: A first-time adopter may elect not to applyIFRS 3 - "Business Combinations" retrospectively to business combinations thatoccurred before the date of transition to IFRS. The Company elected to takeadvantage of this exemption, not applying IFRS 3 to the business combinationsthat occurred before the date of transition. • Share-Based Payments: A first-time adopter is encouraged, but notrequired, to apply IFRS 2 - "Share-Based Payments" to equity instruments thatwere granted on or before 7 November 2002 and not vested at 1 January 2005. TheCompany elected to adopt full retrospective application of IFRS 2, not takingadvantage of the IFRS 1 exemption. NOTES TO THE INTERIM FINANCIAL STATEMENTS for the six months ended 30 June 2005 • Cumulative Translation Differences: A first-time adopter need notcomply retrospectively with the requirement in IAS 21 - "The Effects of Changesin Foreign Exchange Rates" to classify translation differences as a separatecomponent of equity related to foreign operations and recycle them through theincome statement on disposal of the foreign operations. The Group elected notto take advantage of this exemption. • Financial Instruments: In its first IFRS financial statements a firsttime adopter need not restate the comparative information in compliance withIAS 32 - "Financial Instruments: Disclosure and presentation" and IAS 39 -Financial Instruments: Recognition and Measurement'. The Company elected not totake advantage of this exemption. The Group has assumed that the European Commission will endorse the amendment toIAS 19 - "Employee benefits - Actuarial gains and losses, group plans anddisclosures". The Group recognises actuarial gains and losses arising fromexperience adjustments and changes in actuarial assumptions directly in equity,in the period they have occurred. Summary of principal accounting policies (a) Consolidation The underlying financial information comprises a consolidation of the accountsof the Company and all its subsidiaries and includes the Group's share of theresults and net assets of its associates. The accounts of the Group'ssubsidiaries and associates are made up to 31 December. 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 year are included in theconsolidated income statement from the effective date of acquisition or up tothe 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. NOTES TO THE INTERIM FINANCIAL STATEMENTSfor the six months ended 30 June 2005 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. (b) Revenue recognition Revenue comprises the fair value for the sale of goods and services, net ofsales taxes, rebates and discounts and after eliminated 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. Interest income Interest income is recognised on a time-proportion basis using the effectiveinterest method. NOTES TO THE INTERIM FINANCIAL STATEMENTSfor the six months ended 30 June 2005 (c) 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 subsidiary/associate at the date of acquisition. Goodwill is tested annually for impairmentand carried at cost less accumulated impairment losses. 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 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. (d) 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 year 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. NOTES TO THE INTERIM FINANCIAL STATEMENTSfor the six months ended 30 June 2005 (e) 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 value as of each balance sheetdate. 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. (f) Convertible bonds On issue the debt and equity components of a convertible bond are separated andrecorded at fair value net of issue costs. The fair value of the liabilityportion is determined applying a market interest rate for an equivalentnon-convertible bond to the forecast cash flows under the convertible bondagreement. This amount is recorded as a liability on an amortised cost basisuntil extinguished on conversion or maturity of the bonds. The remainder of theproceeds of the bond is allocated to the conversion option which is recognisedand included in shareholders' equity, net of income tax effects. The value ofthe conversion option is not changed in subsequent periods. NOTES TO THE INTERIM FINANCIAL STATEMENTSFor the six months ended 30 June 2005 2 Analysis of revenues Revenue earned may be analysed by category as follows: Unaudited 6 months to Unaudited 6 months to 30 June 2005 30 June 2004 £'000 £'000 Contract development and licensing Milestone payments 17,631 18,087 Research and development costs recharged 1,842 2,889 19,473 20,976Royalties 11,995 10,271Manufacturing and distribution 4,568 3,852 36,036 35,099 An analysis of revenue by customer location is presented below: Unaudited 6 months to Unaudited 6 months to 30 June 2005 30 June 2004 £'000 £'000UK 8,519 9,066Europe 8,536 11,673North America 15,307 12,551Rest of world 3,674 1,809 36,036 35,099 3 Exceptional items Unaudited 6 months to Unaudited 6 months to 30 June 2005 30 June 2004 £'000 £'000 Restructuring costs - (537)Profit on disposal of available-for-sale investment - 2,021 - 1,484 Exceptional items in 2004 include a charge of £0.5 million relatingto the reorganisation of some research and development operations and otherbusiness functions commenced during 2003. The reorganisation has been completedduring 2005. In addition, £2.0 million relates to the profit on disposal of theGroup's investment in Transition Therapeutics. The exceptional items do not giverise to a taxation charge or credit. 4 Other income and expenses Unaudited 6 months to Unaudited 6 months to 30 June 2005 30 June 2004 £'000 £'000 (Loss)/ gain on financial assets at fair value through profitor loss (252) 644Profit on disposal of available-for-sale investment - 2,021 (252) 2,665 NOTES TO THE INTERIM FINANCIAL STATEMENTSFor the six months ended 30 June 2005 5 Earnings per share Loss Weighted average Per share amount number of shares £'000 '000 Pence Basic and diluted loss per share (9,272) 619,369 (1.5)The loss per share can be analysed as follows:Loss per share before amortisation (8,252) 619,369 (1.3)Amortisation (1,020) 619,369 (0.2)Basic and diluted loss per share (9,272) 619,369 (1.5) There is no difference between basic and diluted loss per share since in a lossmaking period all potential shares are anti-dilutive. Shares held by the SkyePharma PLC General Employee Benefit Trust have beenexcluded from the weighted average number of shares. 6 Investments in associates 30 June 2005 31 December 2004 £'000 £'000 Beginning of the period 14,332 -Reclassification of investment as associate - 14,217Additions 2,996 125Share of loss (576) (10)End of the period 16,752 14,332 During the period the Group issued 5,482,238 Ordinary Shares to two formerAstralis Directors to acquire 11,160,000 common shares in Astralis. Theresulting holding at 30 June 2005 represents approximately 49.7% of the commonshares. NOTES TO THE INTERIM FINANCIAL STATEMENTSFor the six months ended 30 June 2005 7 Borrowings 30 June 2005 31 December 2004 £'000 £'000CurrentConvertible bonds due June 2005 - 9,441 Bank overdraft 1,224 -Bank borrowings 2,221 3,526Property mortgage 258 275Paul Capital funding liabilities 8,723 6,847Finance lease liabilities 29 75Other current borrowings 12,455 10,723 Total current borrowings 12,455 20,164 Non-currentConvertible bonds due May 2024 50,577 50,382Convertible bonds due June 2025 12,766 - 63,343 50,382 Bank borrowings 977 -Property mortgage 6,546 7,100Paul Capital funding liabilities 41,643 42,187Finance lease liabilities 72 60Other non-current borrowings 49,238 49,347 Total non-current borrowings 112,581 99,729 Total borrowings 125,036 119,893 Bank Overdraft At 30 June 2005 the Group had an overdraft facility of £1.3 million (CHF 3million) with Bassellandschaftliche Kantonalbank secured on the assets of Jago. Bank Borrowings At 30 June 2005 bank borrowings include two amounts due to theBasellandschaftliche Kantonalbank of £0.9 million (CHF 2 million) and £0.7million (CHF 1.5 million). Both loans are renewable annually and bear interestat 6.5% and 6.0% respectively. Both loans are secured on the assets of Jago andthe £0.7 million (CHF 1.5 million) loan is guaranteed by SkyePharma PLC. The Group had a loan as at 30 June 2005 with GE Capital Corp of £1.7 million($3.1 million). The loan is secured by certain assets of SkyePharma Inc,SkyePharma US Inc and SkyePharma PLC. The loan bears interest at 8.0% and isrepayable by instalments until September 2007. NOTES TO THE INTERIM FINANCIAL STATEMENTS For the six months ended 30 June 2005 Property Mortgage At 30 June 2005, the Group had a property mortgage facility with theBasellandschaftliche Kantonalbank of £6.8 million (CHF 15.8 million) of which£0.3 million (CHF 0.6 million) is shown within current borrowings. The mortgageis in two tranches, both secured by the assets of Jago. The first tranche of£2.7 million (CHF 6.4 million) bears interest at 2.75% and is repayable byinstalments over 16 years semi-annually. The second tranche of £4.1 million (CHF9.4 million) bears interest at 2.75% and is repayable by instalments over 47years semi- 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 32, 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 liability has no face value but represents the netpresent value of royalties the Company expect to pay Paul Capital over the termof the agreement. If ultimately revenues are lower than we forecast, the royaltypayments to Paul Capital will be lower and the calculated value of the liabilitywill fall. Finance lease liabilities Obligations under hire purchase and finance leases are secured upon the assetsto which they relate and as at 30 June 2005 £0.1 million (SKR 0.9 million) isguaranteed by SkyePharma PLC. 8 Convertible Bonds On 31 May 2005 the Group announced that it had signed agreements fora private placement of £20 million 8% convertible bonds, with a first put afterfive years by the holder of the bonds, and a final maturity of June 2025. Thebonds were issued on 3 June 2005. The bonds are convertible at the option of theholder into SkyePharma Ordinary Shares at an initial conversion price of 81pence at any time prior to maturity. The bond contains a price reset featuresuch that if on 3 June 2006 the Company's average share price for the preceding10 days (reset price) is less than the conversion price, then the conversionprice shall be adjusted to the reset price subject to a maximum reduction of 25%in the conversion price. Unless previously redeemed or converted, the bondswill be redeemed by the Group at their principal amount in June 2025. Theconvertible bonds existing at 30 June 2005, due in May 2024, are not affected bythis transaction. On 19 June 2005 £9.8 million of convertible bonds due June 2005 wereredeemed in full by the Company at their principal amount. As a result of these transactions the Group has £69.6 millionconvertible bonds due May 2024 and £20 million convertible bonds due June 2025outstanding as at 30 June 2005. NOTES TO THE INTERIM FINANCIAL STATEMENTS For the six months ended 30 June 2005 9 Share capital Ordinary Shares of Nominal value Deferred 'B' Shares Nominal value 10p each of 10p each Number £'000 Number £'000 At 1 January 2005 622,398,743 62,240 12,000,000 1,200Exercise of share options 20,204 2 - -Acquisition of shares in 5,482,238 548 - -AstralisAt 30 June 2005 627,901,185 62,790 12,000,000 1,200 During the period the Group issued 5,482,238 Ordinary Shares to two formerAstralis Directors to acquire 11,160,000 common shares in Astralis. 10 Cash flow from operating activities Unaudited 6 months to Unaudited 6 months to 30 June 2005 30 June 2004 £'000 £'000 Loss for the period (9,272) (8,658) Adjustments for: Tax 124 95 Depreciation 3,110 2,929 Amortisation 1,020 1,005 Fair value (gain)/loss on derivative financial instruments (164) 907 Interest expense 8,652 8,856 Interest income (357) (370) Share of loss in associate 576 - Other non-cash changes 1,697 773 Profit on disposal of investment - (2,021)Operating cash flows before movements in 5,386 3,516working capital Changes in working capital Increase in inventories (966) (52) Decrease in trade and other receivables 2,535 1,174 Decrease in trade and other payables (1,979) (2,319) Decrease in deferred income (949) (4,437) Increase/(decrease) in provisions 631 (768)Cash generated from operations 4,658 (2,886) NOTES TO THE INTERIM FINANCIAL STATEMENTSFor the six months ended 30 June 2005 11 Transition from accounting practices generally accepted in the UKto International Financial Reporting Standards Set out below are reconciliations of total equity and reserves and income fromUK GAAP to IFRS. Total equity and reserves Unaudited year ended 31 December 2004 Notes £ 000Total equity and reserves as reported under UK GAAP 63,623Adjustments to conform to IFRSRevenue recognition (a) (6,727)Sale of royalty interests to Paul Capital (b) (43,225)Amortisation of goodwill (d) 4,136Convertible bonds (e) 16,429Fixed assets investments (f) (543)Other financial instruments (g) (162)Pensions (h) (1,242)Total equity and reserves under IFRS 32,289 Loss for the period Unaudited 6 months to 30 June 2004 Notes £ 000Loss for the period as reported under UK GAAP (10,194)Revenue recognition (a) 6,576Sale of royalty interest to Paul Capital (b) (4,369)Share based payments (c) (1,660)Goodwill amortisation (d) 2,067Convertible bonds (e) (171)Other financial instruments (g) (907)Loss for the period as reported under IFRS (8,658) The IFRS adjustments set out in the reconciliations are explained below: (a) Revenue recognition Under UK GAAP SkyePharma has generally recognised up front payments immediatelyin full where there are no material future obligations and the payments arenon-refundable, on the basis that the up front payment relates to past services.Under IFRS generally up front payments will be deferred and amortised on asystematic basis over the period of product development to filing. However, theaccounting for each agreement will continue to be determined on an individualbasis. The IFRS restatement increases revenue in the period to 30 June 2004 by £6.6million so reducing operating and retained loss by £6.6 million. This relates toupfront payments that have been previously recognised in the UK GAAP financialstatements in earlier years but which under IFRS would not have been recognisedin full, but deferred across the period of development to filing. Therestatement increases deferred income at 31 December 2004 by £6.7 million. NOTES TO THE INTERIM FINANCIAL STATEMENTSFor the six months ended 30 June 2005 (b) Sale of royalty interest to Paul Capital 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. Under UK GAAP the proceeds received from Paul Capital are treated as asale and recorded as operating income and the royalties are expensed whenincurred. Under IFRS the proceeds received from Paul Capital meet the definition of afinancial liability under IAS 32, and are treated as such. No operating incomeis recognised, royalties paid to Paul Capital are treated as repayment of theliability and in addition notional interest is charged on the liability. Thecontractual arrangement with Paul Capital is unaffected by this change inaccounting and the arrangement remains a royalty agreement under which royaltiesare payable on revenues earned and payments received. The liability has no facevalue but represents the net present value of royalties we expect to pay PaulCapital over the term of the agreement. The IFRS restatement reduces operating loss in the period to 30 June 2004 by£1.8 million, being the removal of royalties payable of £1.9 million, foreignexchange losses of £0.9 million and other operating income of £1.0 million.However the IFRS restatement increases the interest charge in the period to 30June 2004 by £6.2 million to result in an overall increase in retained loss by£4.4 million. The restatement decreases net assets at 31 December 2004 by £43.2million being the recognition of the Paul Capital debt of £49.0 million, theremoval of £7.1 million of deferred operating income, which will no longer berecognised under IFRS and elimination of £1.3 million in relation to prepaidroyalties. (c) Share based payments IFRS 2 requires that for share option awards to employees, the fair value of theemployee services received should be measured by reference to the fair value ofthe share option at the grant date. This differs significantly from thetreatment under UK GAAP where the charge to the profit and loss account wasbased on the difference between the fair value of the shares at the date ofgrant and the exercise price. Since SkyePharma has historically granted employeeoptions where the share price at the date of grant equals the exercise price,there has been no charge recorded under UK GAAP. SkyePharma is adopting full retrospective application of IFRS 2. The IFRSrestatement results in an additional charge to the income statement in theperiod to 30 June 2004 of £1.7 million, increasing both operating and retainedloss. The restatement has no impact on net assets. (d) Goodwill amortisation Under UK GAAP goodwill has been amortised over its estimated expected usefullife which the Directors determined as 20 years. Under IFRS, goodwill isconsidered to have an indefinite life and so is not amortised, but is subject toannual impairment testing. Therefore the annual goodwill charge made under UKGAAP will not be recorded under IFRS from 1 January 2004, the IFRS transitiondate. The IFRS restatement results in a reduction in the amortisation charge inthe period to 30 June 2004 of £2.1 million thereby reducing both operating andretained loss. NOTES TO THE INTERIM FINANCIAL STATEMENTSFor the six months ended 30 June 2005 (e) Convertible bonds Under UK GAAP the total net proceeds of the convertible bond issues in 2000 (duein 2005) and 2004 (due in 2024) were recorded as debt. Under IFRS the conversionfeature of each of the bonds must be split from the debt and classified asequity. The net impact of the changes to IFRS and in particular the split of theequity component of each bond has led, at 31 December 2004, to a reduction inthe carrying value of convertible debt of £16.4 million and a correspondingincrease in equity. While the carrying value of the convertible debt in thebalance sheet is reduced, the amount of debt repayable at maturity is unchangedand consequently under IFRS the Group records higher interest charges in eachyear to maturity or conversion. In the period to 30 June 2004, the impact of these factors led to an additionalinterest charge of £0.2 million. The terms of the debt are unaffected and thephysical cash payments due remain the same; as such the cost of the debt in cashterms is unaffected. (f) Fixed assets investments Under UK GAAP fixed asset investments are stated at the lower of cost and netrealisable value. Under IFRS most of SkyePharma's investments are classified as'Available for sale investments' and as such stated at fair value with anyunrealised gains or losses recorded in equity. The IFRS restatement reduces netassets at 31 December 2004 by £0.5 million and does not effect the incomestatement. (g) Other financial instruments Under UK GAAP, periodic gains and losses on interest and foreign currencyderivatives designated as hedges are not recognised until the operationaltransactions to which they are linked occur. No derivatives have been designatedas hedges under IFRS and therefore in accordance with IAS 39 such instrumentshave been recognised at fair value at the balance sheet date with gains andlosses being recorded in the income statement. SkyePharma is adopting full retrospective application of IAS 32 and IAS 39 andhas therefore restated its opening balance and 2004 result accordingly. Thisrestatement has led to an additional charge in the period to 30 June 2004 of£0.9 million, increasing both operating and retained loss. As at 31 December2004 the IFRS restatement reduces net assets by £0.2 million. (h) Pensions The IFRS adjustment on pensions relates to the Company's pension schemes inFrance and Switzerland. In accordance with IFRS1, the Group has fully recognisedall actuarial gains and losses on its pension schemes in France and Switzerlandat 1 January 2004, its transition date. Subject to the endorsement by theEuropean Union of IAS 19 (revised), ongoing actuarial gains and losses will berecognised in the Statement of Recognised Income and Expenditure. (i) Other Under IFRS the Group is required to capitalise research and development costswhen the criteria laid out in IAS 38 are met. The Group has reviewed itshistorical research and development projects and determined that no expenditureincurred to date meets the criteria for capitalisation in IAS 38. However theGroup will continue to review its development expenditure against the relevantcriteria and will capitalise such expenditure when it is appropriate. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
SKP.L