19th Apr 2006 07:02
Skyepharma PLC19 April 2006 FOR IMMEDIATE RELEASE 19 APRIL 2006 SkyePharma PLC Preliminary Results Announcement for the year ended 31 December 2005 LONDON, UK, April 19, 2006 - SkyePharma PLC (LSE: SKP; Nasdaq: SKYE) announcesthe Company's preliminary results for the year ended December 31, 2005. Operating highlights • Paxil CR(TM) back on US market• Triglide(TM) launched in USA• Pulmicort(R) HFA-MDI filed• Foradil(R) Certihaler(TM) now approved in more than 20 markets• Flutiform(TM) starts Phase III clinical trials• DepoBupivacaine(TM) completes Phase II clinical trials• Flutiform(TM) licence negotiations ongoing with several parties• DepoBupivacaine(TM) licensed to Mundipharma and Maruho• Rights issue raised £35 million (net of expenses)• Strategic decision to divest injectables business unit Financial highlights (under IFRS) • Turnover down by 18% to £61.3 m (2004: £75.2 m) - Absence of Flutiform(TM) licensing revenues - Strategic shift from up fronts to royalties• Royalty income decreased by 16% to £21.7 m (2004: £25.9 m) - Paxil CR(TM) supply problems - Royalties excluding Paxil CR(TM) up 38%• Gross profit down 32% to £32.1 m (2004: £47.0 m)• Exceptional items of £21.4 m (2004: £8.9 m) - Non cash investment impairments £19.4m - Abortive transaction costs £2.0m• Operating loss before exceptionals £16.1 m (2004: £0.4 m)• Operating loss after exceptionals £37.5 m (2004: £3.1 m)• Net loss £50.9 m (2004: £18.6 m)• Loss per share 8.1p (2004: 3.0p)• End 2005 net cash £34.3 m (2004: £15.3 m) Dr Jerry Karabelas, Non-executive Chairman, said: "2005 was a difficult year forSkyePharma but the Company now has a new management team and has adopted a newstrategy. We are focused in the short term on the licensing of Flutiform(TM) andthe divestment of our injectables business. While there is obviously uncertaintyas to the timing of these two transactions, they will not only greatly reducethe Company's current and future cash requirements but also provide us with thefunds to consider new opportunities related to oral and inhalation products. Weremain convinced that Flutiform(TM) will become a major product. We believe thatthe strategic initiatives we have adopted will enable the Company to maximisethe potential of Flutiform(TM) and other pipeline products, to become profitablein the near term and to deliver long-term value for shareholders." For further information please contact: SkyePharma PLC Jerry Karabelas, Non-executive ChairmanFrank Condella, Chief Executive OfficerPeter Laing, Director of Corporate CommunicationsToday +44 207 466 5000Thereafter +44 207 491 1777 Sandra Haughton, US Investor Relations +1 212 753 5780 Buchanan Communications +44 207 466 5000Tim Anderson / Mark Court / Rebecca Skye Dietrich CHAIRMAN'S STATEMENT There is no disguising that 2005 was a difficult year for SkyePharma. Despite anumber of significant achievements, outlined in the Review of Operations below,we did not complete a development agreement for Flutiform(TM), our major pipeline product. We believe that Flutiform(TM) has substantial commercial value. Faced with the prospect of a delay to the development of this important product, which might have impaired its commercial potential, we took the decision in September to raise £35 million (net of expenses) by means of a rights issue to keep Flutiform(TM) on its planned development timeline through Phase III. As such, our target launch date in the USA remains 2009. We are convinced that the decisions to proceed with the clinical development of Flutiform(TM) ourselves and to fund this development through a rights issue were in shareholders' best interests. We continue to have negotiations with potential strategic marketing partners forFlutiform(TM) who could also fund development of additional indications following initial approval for asthma. We hope to finalise an agreement with one or more marketing partners for Flutiform(TM) as soon as reasonably possible. The Board remains confident that an agreement will be reached in 2006. Prior to reaching the decision to ask shareholders for funding, we explored anumber of financing alternatives to fund the development of Flutiform(TM) and also a variety of strategic options for the Company. These included discussionsconcerning a transaction that, had it been successful, would have created acombined company that could have marketed Flutiform(TM) itself in some markets.The discussions were called off by SkyePharma due to uncertainties over theother party's prospects. SkyePharma was unable to disclose this at the time dueto reasons of confidentiality and the possibility that these discussions couldresume at some time in the future. In November, we also received an opportunistic takeover approach from InnovataPLC. As a result, the Board felt that it was in shareholders' interests toexplore all options and consequently appointed Lehman Brothers to conduct a fullstrategic review of all the options open to the Company. The conclusion of this review in early 2006 did not lead to an offer for theentire Company on terms that the Board felt able to recommend to shareholders.However, there were expressions of interest in individual parts of the business.The Board then took a strategic decision to divest the US-based injectablesbusiness in order to reduce the Company's projected cash outflow over the nextfew years and to raise funds to concentrate on the oral and inhalationbusinesses. The investment bank UBS has been retained recently to manage thissale and the process is ongoing. The injectables business includes DepoCyt(TM) and DepoDur(TM), both marketed products, and the lead injectable pipeline product DepoBupivacaine(TM). In January 2006 certain shareholders requisitioned an Extraordinary GeneralMeeting ("EGM") seeking to remove the Company's then Chairman and to appoint anominated director to SkyePharma's Board with the ultimate aim of having himappointed as Executive Chairman. Although this motion was defeated at the EGM inearly March, the Board has since made a number of changes and introduced aprocess whereby major investors are now involved in the selection of newNon-Executive Directors. Board Changes In January 2006, Ian Gowrie-Smith stepped down from his role as Non-ExecutiveChairman when I was appointed in his place. Ian subsequently resigned as aDirector in February. As shareholders will be aware, Ian founded SkyePharma in1996 and has seen it grow to become a substantial business. He remains ashareholder but will now be focusing his energies on a number of early-stagenon-pharmaceutical companies. I have been a Non-Executive Director of SkyePharmasince 2000 and I have also had extensive experience at senior management levelsof the international pharmaceutical industry. Michael Ashton, who has now reached the age of 60, indicated to the Board lastyear that it was his intention to retire as Chief Executive in 2006. Michaelwill continue to serve as a Director until the 2006 Annual General Meeting inJune but will not be seeking re-election. I am sure that shareholders will join me in thanking both Ian and Michael fortheir contribution to the development of SkyePharma since its formation. The Board has appointed Frank Condella as Chief Executive, who joined theCompany on 1 March 2006, having previously run the European operations of theleading generic company IVAX. Before joining IVAX, Frank was Chief Executive ofFaulding Pharmaceuticals and before that built up the speciality pharmaceuticalsbusiness of Roche. Frank joined the Board on 4 April 2006. The Board has also appointed Dr Ken Cunningham in the new role of ChiefOperating Officer. Ken was formerly Chief Executive of the private UK companyArakis and has a wealth of experience in pharmaceutical development, especiallyin the areas of oral and inhalation products. Two other Non-Executive Directors, Sir Michael Beavis and Dr Keith Mansford,will not be standing for re-election at the Annual General meeting. The Boardwill miss their wise counsel and wishes them well in retirement. In their place,we will be appointing two new Non-Executive Directors. The Future The EGM process was costly and also diverted significant management time awayfrom running the business. However, now that this is behind us we can focus onexecution of the new strategy referred to above and outlined in more detail inthe following pages. We are focused in the short term on the licensing ofFlutiform(TM) and the divestment of our injectables business. While there isobviously uncertainty as to the timing of these transactions, they will not onlygreatly reduce the Company's current and future cash requirements but alsoprovide us with the funds to consider new opportunities related to oral andinhalation products. We are also devoting a significant amount of resource toensure that Flutiform(TM) continues on its planned development timeline. We remain convinced that Flutiform(TM) will become a major product, as is evident from the number of companies that have expressed an interest in obtaining licensing rights. We believe that the strategic initiatives we have adopted will enable the Company to maximise the potential of Flutiform(TM) and other pipelineproducts, to become profitable in the near term and to deliver long-term valuefor shareholders. Dr Jerry KarabelasNon-Executive Chairman STRATEGY SkyePharma's mission is to become one of the world's leading specialitypharmaceutical companies, powered through excellence in drug delivery. On 2 February 2006, the Company announced the outcome of its Strategic Review.The Board concluded that in the interests of achieving sustainable profitabilityin the shortest reasonable time, SkyePharma should concentrate on oral andinhalation products and divest its injectable business interests. The proposeddivestment, which the Board expects to be subject to approval by shareholders,would not only release cash but also relieve the Company of a significant cashburn and future capital expenditure. The Board believes that the residual corebusiness would be able to achieve profitability in the near term. Furthermore,with greater focused resources the Company would be in a better position tofurther develop its pipeline of oral and inhalation products. Ultimately, it isthe Company's strategy to add a niche sales and marketing capability in one ormore markets that would improve profit growth and give it greater control overrevenue generation. The injectables business, located in San Diego, consists of two marketedproducts: DepoCyt(R) for a complication of cancer and Depodur(R) for thetreatment of post-surgical pain. This business also has a pipeline of projectsin various stages of development. These include controlled-release injectableformulations of a number of biological products and DepoBupivacaine(TM), along-acting injectable formulation of the local anaesthetic bupivacaine for thecontrol of post-operative pain. The Company remains convinced thatDepoBupivacaine(TM) addresses an important area of unmet medical need and hasmajor commercial potential. However, further development of this business wouldrequire significant cash resources and would also impact the Company's abilityto become profitable in the near term. The Company has retained UBS to act as its investment bank to manage thedivestment process. This process is ongoing and several third parties, bothtrade and financial, have already shown significant interest in the injectablesbusiness. Funds raised by the divestment of the injectables business will be available toenhance the core oral and inhalation business. We expect to be able toaccelerate the development of certain pipeline products whose development hashad to be delayed in recent years. Several of these products are at an earlystage of development but would address important therapeutic areas such asgastrointestinal, diabetes and hypertension. Development activities willcontinue to be based in Muttenz, Switzerland and manufacturing in Muttenz andLyon, France. Our oral and inhalation pipeline includes SkyePharma's most important projectFlutiform(TM), a combination asthma product. The Company is convinced thatFlutiform(TM) has substantial value as it is poised to enter a large and rapidlygrowing market with currently limited competition. We are currently negotiatingwith several companies for the rights to market Flutiform(TM) in the US, Canada,Japan and the countries of the European Union. The core oral and inhalation business has seven products marketed by licensees,including Paxil CR(TM), Xatral(R) OD and Triglide(TM). These products will continue to generate revenues and cash for the Company. There are also a number of late-stage products that are close to the market. The Company will focus its efforts on working with partners to maximise revenuesfrom existing and future marketed products. We will also be able to devote moreresources in this area to the development of additional products and to increasethe size of our pipeline. OPERATIONAL REVIEW INHALATION PRODUCTS Flutiform(TM) HFA-MDI Flutiform(TM) HFA-MDI is a fixed-dose combination of the long-actingbronchodilator formoterol and the inhaled steroid fluticasone in a metered-doseaerosol inhaler (MDI) using a hydrofluoroalkane (HFA) propellant. The world market for asthma drugs is expected to exceed $20 billion by 2010,with use in chronic obstructive pulmonary disease (COPD) expected to add afurther $10 billion. The fastest-growing part of this market is combinationtreatments, which combine a long-acting bronchodilator with an inhaled steroidin a single delivery device. Combinations are not only convenient for patientsbut also optimise the efficacy of the individual agents. Sales ofGlaxoSmithKline's combination Advair (Seretide in Europe) already exceed $6billion and AstraZeneca's Symbicort (which is not yet on the US market) addanother $1 billion. By 2010 the combination category is expected to account forover half of the asthma/COPD market by value. Formoterol provides 12 hours of bronchodilation and has a rapid onset of action(1-3 minutes). By contrast salmeterol, the bronchodilator used inGlaxoSmithKline's Advair/Seretide, is also a twice-daily product but has thedrawback of needing 30-45 minutes after inhalation to take effect. The inhaledsteroid fluticasone (a component of Advair/Seretide) is perceived to have abetter safety and efficacy profile than budesonide, the steroid used inAstraZeneca's Symbicort, and is the physician-preferred inhaled steroid in theUS. The SkyePharma formulation technology employed in Flutiform(TM) providespatent protection to 2019. In 2005 the Company completed phase II trials and a review of developmentactivities with the FDA and European regulatory agencies. Subsequent to thesemeetings, the Company initiated Phase III trials for Flutiform(TM) in February2006. The product is on track for its target filing date with the US Food andDrug Administration ("FDA") in the second half of 2007, with US market entryexpected in early 2009. SkyePharma expects Flutiform(TM) to be the thirdcombination product to enter the US market, following GlaxoSmithKline's Advairand AstraZeneca's Symbicort. Despite the eventual likelihood of additionalentrants, the Company believes that no competing product is likely to enter theUS market before 2012. We believe that Flutiform(TM) will be at worst the thirdcombination on the US market and differentiated from both Advair and Symbicort.There is potential to position Flutiform(TM) as "Best in Class". Furthermore there is limited risk of generic competition in the combination asthma market because there is no recognised test for bioequivalence after inhalation dosing and therefore no basis for approval of an "AB rated" generic inhaled drug in the US market. A generic company would therefore have to conduct clinical trials, which is much more expensive and risky than development of a conventional oral generic drug - so typical generic deep-discount pricing would not be possible. We therefore anticipate a peak sales potential for Flutiform(TM) well in excess of $1 billion with an appropriate marketing partner. SkyePharma had previously sought a partner to pay for the clinical developmentof Flutiform(TM) but negotiations have taken longer than expected. In September2005 we therefore decided to raise funds to proceed with Phase III developmentat our own expense. The Phase III trials will cost in excess of $50 million.This decision kept development under our control and reduced the risk of delaysto market entry that could jeopardise the sales potential of Flutiform(TM). It is still our intention to appoint a licensee or licensees as soon as possible.However, SkyePharma's flexibility on the terms and structure of any licensingdeal has been significantly increased by removal of the partner fundingobligation, elimination of the majority of the development risk and proximity tolaunch. SkyePharma remains in discussions with various potential marketingpartners. Foradil(R) Certihaler(TM) Foradil(R) Certihaler(TM) is our version of Novartis' long-acting bronchodilatorForadil(R) (formoterol). Global sales of Foradil(R) were $332 million in 2005,of which the Certihaler(TM) version made up a very small proportion, the producthaving only been on the market for a short time. We developed not only themulti-dose dry-powder inhaler device but also the formulation technology thathad been shown to ensure dose consistency. Foradil(R) Certihaler(TM) has now been approved in 22 countries in Europe, the Middle East and Latin America. Theproduct was launched in Germany and Switzerland in September 2005 but a recallfrom these markets was initiated in January 2006 because of concerns thataccidental mishandling of the device had resulted in inaccurate dosing in asmall number of cases. SkyePharma is collaborating with Novartis and therelevant health authorities to investigate the reasons and the actions necessarybefore the product can be returned to the market. These are likely to includemodification of the patient use instructions and the device. In the US, the FDAissued an "approvable" letter for Foradil(R) Certihaler(TM) in April 2006.However, the FDA is requiring device modification as a prerequisite forapproval. Novartis is currently working with the FDA on the most effective wayto address its concerns. The Certihaler(TM) and related formulation technology are also involved in asecond collaboration with Novartis to jointly develop QAB149 (indacaterol), anovel inhaled long-acting beta-2-agonist that provides sustained 24-hourbronchodilation with rapid onset of action, which has completed Phase IIdevelopment in both asthma and COPD. Novartis is currently revising theindacaterol development plan in Certihaler(TM) to accommodate the devicemodifications mentioned above. Formoterol HFA-MDI This is a formulation of the long-acting bronchodilator formoterol in anHFA-powered MDI. Because of the growing use of combination products for asthmaand COPD, there is now a correspondingly diminishing market opportunity forsingle agent bronchodilators. While this product has completed Phase IIdevelopment, pending the divestment of the injectables business, the Companywill conclude its strategic review of this product. Pulmicort(R) HFA-MDI This new HFA-powered MDI containing AstraZeneca's inhaled corticosteroidPulmicort(R) (budesonide) was filed for marketing authorization in June 2005 ona country-by-country basis in Europe for the treatment of asthma in adults andchildren. In February 2006, the product received approval in Finland, its firstEuropean market. Other European approvals are expected this year. The currentlyavailable MDI formulation of Pulmicort(R) has been on the market since 1981 anduses chlorofluorocarbons (CFCs) as the propellant. In accordance with theMontreal Protocol, this version will now be replaced by the non-ozone depletingdevice using HFAs as propellant. SkyePharma developed this new HFA-MDIformulation, which employs its proprietary formulation technology, and alsoconducted the clinical development programme for AstraZeneca. SkyePharma willearn a double digit royalty on AstraZeneca's sales of this formulation ofPulmicort(R). ORAL PRODUCTS Paxil CR(TM) Our improved formulation of GlaxoSmithKline's antidepressant Paxil(R)(paroxetine) remains a major source of royalty income. In March 2005GlaxoSmithKline temporarily suspended production of Paxil CR(TM) and certainother products made at its Cidra plant in Puerto Rico. GlaxoSmithKline announcedin April 2005 that it had entered into a consent decree with the FDA regardingmanufacturing processes at the plant and recommenced supply of product to themarket shortly thereafter. As previously reported, we concluded a new agreementwith GlaxoSmithKline last year that not only provided us with a $10 millionlump-sum payment and increased the royalty rate on this product from 3% to 4%but also maintained our royalty income even while the product was temporarilyoff the market. Despite the product's return to the market, new documentary proceduresintroduced as part of the consent decree have hindered the Cidra plant's abilityto meet demand and GlaxoSmithKline alerted customers to supply constraints inJanuary 2006. Paxil CR(TM) currently holds about 3% of new prescriptions in thismarket, well below the 7% share held before the March 2005 withdrawal. Worldsales of Paxil CR(TM) were $231 million in 2005, of which US sales were $209million, 70% below the 2004 level in constant exchange rate terms. In late 2005 we and our partner GlaxoSmithKline received notification from MylanPharmaceuticals Inc. that it had filed an Abbreviated New Drug Application ("ANDA") with the FDA for a version of paroxetine hydrochloride extended releasetablets. The ANDA contains a "Paragraph IV certification" that certain of thepatents listed in the FDA's "Orange Book" by GlaxoSmithKline for Paxil CR(TM)(paroxetine hydrochloride Controlled Release tablets) are not infringed. Thesepatents include SkyePharma's US patent 5,422,123. The certification does notchallenge GlaxoSmithKline's basic active ingredient patent covering paroxetinehydrochloride hemihydrate, which protects the product until June 2007.GlaxoSmithKline has decided not to exercise its right to file suit for patentinfringement within the 45-day period permitted by the Hatch-Waxman Act ("theAct") and therefore there will be no 30-month stay of approval for this productpursuant to the Act. SkyePharma has a number of issued patents coveringtechnology incorporated in Paxil CR(TM) and our policy is to enforce ourintellectual property wherever possible. Requip Once-a-day In December 2005, SkyePharma's collaborator GlaxoSmithKline submitted RequipOnce-a-day, a once-daily dosage formulation of Requip(R) (ropinirole), forapproval by US and European regulatory authorities for the treatment ofParkinson's disease. The FDA has raised some administrative issues that wereidentified in the preliminary initial review and which led GlaxoSmithKline towithdraw the US filing. SkyePharma has been informed that it is the intention ofGlaxoSmithKline to resubmit as soon as possible. It is not expected that theEuropean regulatory review process will be affected by these issues. This newonce-daily oral formulation of Requip(R) incorporates SkyePharma's Geomatrix(TM)oral controlled-release delivery technology. SkyePharma will receive royaltieson the product sales. Triglide(TM) Following FDA approval in May 2005, First Horizon Pharmaceutical Corporationlaunched Triglide(TM) (fenofibrate) on the US market in July. First Horizon, which licensed Triglide(TM) in 2004, has a 500-strong representative force focused on cardiovascular physicians and high-prescribing primary care practitioners and has a proven ability to capture market share in the cardiovascular therapeutic area. We and First Horizon see a substantial opportunity for Triglide(TM), a once-daily oral treatment for lipid disorders such as elevated cholesterol and triglycerides. Fenofibrate not only lowers levels of total triglycerides and LDL cholesterol ("bad cholesterol") in the bloodstream but also has the valuable property of raising abnormally low levels of HDL cholesterol ("good cholesterol"), increasingly recognized as a major cardiovascular risk factor. In Triglide(TM), the problem of variable uptake arising from the low solubility of fenofibrate has been overcome by our proprietary IDD-P(TM) solubilization technology. Triglide(TM) has comparable absorption under both fed and fasting conditions and therefore allows patients to take the drug at any time, improving compliance and simplicity for both patients and prescribers. First Horizon's 2005 sales of Triglide(TM) in the 5 months since launch were just under $5 million but we and First Horizon expect a significant increase in the current year. SkyePharma has now received $20 million in milestone payments from First Horizon($15 million of which was due on FDA approval, obtained in May 2005) and couldreceive up to $30 million more in sales-based milestone payments. In addition wereceive 25% of First Horizon's net sales, out of which we pay for manufacturingand supply. In 2005 we also agreed to contribute towards the marketing costsincurred by First Horizon to establish the product in its first two years afterlaunch, the aim being to enhance market penetration and thereby optimizerevenues. Originally we agreed to contribute up to $5 million towards FirstHorizon's marketing costs through 2007 and to provide samples. In January 2006this arrangement was modified in order to emphasise its intent as a marketingcontribution. SkyePharma will now make a contribution of up to $11.3 milliontowards First Horizon's marketing costs (of which $3.1 million was paid in 2005)and First Horizon will pay SkyePharma for the supply of product samples. Thereis no change in the net cost to SkyePharma. Xatral(R) OD 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 US in November 2003,currently holds over 11% of the combined prescriptions written for it and forits principal competitor Flomax (tamsulosin, jointly marketed in the US byBoehringer Ingelheim and Astellas). Xatral(R) OD has now been approved in morethan 50 countries, including 24 in Europe, for a second indication, acuteurinary retention. However Sanofi-Aventis is no longer pursuing US approval forthis indication. In 2005, global sales of all forms of Xatral(R) reported bySanofi-Aventis were €328 million ($410 million), up by 18% in constant exchangerate terms. Included in this total were US sales of Uroxatral(R) of €53 million($66 million), up by 121% in constant exchange rate terms. We estimate thatXatral(R) OD now accounts for more than 90% of the sales of Xatral(R) reportedby Sanofi-Aventis. Zyflo(R) CR SkyePharma's partner Critical Therapeutics, Inc. announced in January 2006 thatit had initiated two studies designed to support a New Drug Application for atwice-daily version of Zyflo(R)(zileuton), an oral leukotriene synthesisinhibitor for the treatment of asthma. The current version of Zyflo(R) has tobe taken four times a day and the CR version is expected to improve conveniencefor patients and therefore compliance. The controlled release formulationemployed in the CR version was developed by SkyePharma. Critical Therapeuticsexpects to file the CR version with the FDA in the third quarter of 2006. OTHER PRODUCTS Solaraze(R) Solaraze(R) is our topical gel treatment for actinic keratosis and ourproprietary hyaluronic acid formulation ensures that a high concentration of theactive ingredient is maintained in the upper layers of the skin. Solaraze(R) isnow marketed in the US by the Doak Dermatologics unit of BradleyPharmaceuticals. Bradley has recently reported that sales in the first ninemonths of 2005 were just under $10 million and SkyePharma estimates that fullyear sales were approximately $15 million. Sales in 2004 were only $6 million,reflecting the fact that product rights were not acquired by Bradley untilAugust 2004. Solaraze(R) is marketed in Europe and certain other territories byShire Pharmaceuticals. In 2005 Shire's total non-US sales of Solaraze were $12.5million, up by 32%. INJECTABLE PRODUCTS (TO BE DIVESTED) Biologicals portfolio There has been encouraging progress with the Company's portfolio of versions ofprotein drugs with enhanced delivery profiles, based on its two complementarysustained-release injectable technologies DepoFoam(TM) and Biosphere(TM). Theobjective of the work has been to develop different protein formulations toprovide a range of durations from 7 up to 28 days of activity. The DepoFoam(TM)system has the benefit of neither altering the native protein during theformulation process nor the way in which it acts upon release into the body.SkyePharma has now successfully formulated seven different protein drugs,including major commercial products such as G-CSF, EPO, HGH, IFN-(alpha) andIFN-(beta). In the second half of 2005 the Company entered into three newfeasibility study agreements with third parties for enhanced biologics. It isanticipated that several of these products will enter Phase I clinical trials in2007. DepoBupivacaine(TM) We are pleased to report that we have now completed the Phase II trial programmefor DepoBupivacaine(TM), a long-acting local anaesthetic for use in the treatment of post-operative pain. DepoBupivacaine(TM) is SkyePharma's novelsustained-release injectable formulation of the local anaesthetic bupivacaine,currently widely used as a local or regional anaesthetic during surgery, eitherin a hospital in-patient setting or in ambulatory (or "day") surgery in whichthe patient is discharged from the hospital or clinic shortly after surgery torecover at home. DepoBupivacaine(TM) employs SkyePharma's proprietary DepoFoam(TM) technology and was shown in Phase I and Phase II studies to provide local relief of pain for more than 48 hours after a single injection instead of 8-12 hours for conventional immediate-release bupivacaine. Superior control of pain after discharge is expected to reduce the need for other analgesics and to improve patient recovery and rehabilitation. The Phase III trial programme is expected to commence in the first half of 2006. We have extended our relationship with Mundipharma, our European marketingpartner for DepoCyte(R), by granting rights outside North America and Japan forDepoBupivacaine(TM). Under the terms of the agreement we could receive up to $80million in milestone payments and a 35% share of sales (30% in markets outsideEurope). The milestone payments include a contribution of up to $20 milliontowards the cost of the Phase III trial once Mundipharma agrees to the design ofthe trial. DepoBupivacaine(TM) has also been licensed to the Japanese pharmaceutical company Maruho for the Japanese market. Maruho will pay SkyePharma up to $18 million in milestone payments and conduct at its own cost the clinical development of DepoBupivacaine(TM) required for regulatory approval in Japan. Additionally, SkyePharma will receive a share of Maruho's sales in Japan, out of which SkyePharma will bear the cost of manufacture. Endo Pharmaceuticals, our North American partner for DepoDur(TM), which had aright of first negotiation for commercial rights to DepoBupivacaine(TM) for North America, has now relinquished this right, thereby providing a buyer of theinjectables business with unencumbered US rights to this product. Subject theterms of this sale, we may seek to retain an economic interest in the sales ofDepoBupivacaine(TM), which we believe has major commercial potential. DepoCyt(R) DepoCyt(R) is an oncology drug for the treatment of lymphomatous meningitis. Itconsists of cytarabine in our proprietary DepoFoam(TM) formulation to avoid theneed for frequent intrathecal (spinal) injections. Sales of DepoCyt(R) in theUSA in 2005 by our partner Enzon were $8 million, up 26% on the prior year. OurEuropean partner Mundipharma, which launched the product as DepoCyte(R) inFebruary 2004, had sales of $6 million (against $1.5 million in 2004) and isforecasting a further substantial increase in 2006. We have completed the PhaseIV trial required by the FDA when granting approval for this product and will besubmitting the results to the FDA shortly. We have also filed in Europe for theadditional indication of the most common form of neoplastic meningitis,associated with solid tumours. A response is expected in mid-2006. DepoDur(TM) In December 2004 our US marketing partner Endo Pharmaceuticals launched DepoDur(TM), our sustained-release injectable version of the analgesic morphine for the treatment of post-operative pain. Sales in 2005 were $4 million, which was a disappointment both to us and to Endo. The product is still in the launch phase but has now been accepted on more than 400 hospital formularies, the firstgateway to routine hospital use. Given the length of time typically needed toestablish hospital products, we are confident that this initial sales level doesnot reflect the full potential of the product. In the UK, we were informed last year by the UK regulatory agency, the CSM, thatit would recommend approval for DepoDur(TM), subject to certain conditions beingsatisfied. We have been in discussions with the CSM about these conditions(which did not require further clinical trials) and final UK approval isexpected shortly. This will be used as the basis for seeking approval throughoutthe European Union under the EU's Mutual Recognition procedure. ZeneusPharmaceuticals, SkyePharma's European licensee for DepoDur(TM), announced on 6December 2005 that it had reached agreement to be acquired by the US companyCephalon Inc. SkyePharma has regained the European rights for DepoDur(TM) and isnow seeking a new sales and distribution partner for the EU and otherterritories outside North America. Propofol IDD-D(TM) Propofol IDD-D(TM) is our novel formulation of propofol, a widely-used injectableanaesthetic and sedative. Our formulation was designed not to support microbialgrowth, a recognised problem with current versions, and to provide uninterruptedsedation for 24 hours. This product has satisfactorily completed Phase IItrials. We are conducting additional toxicology studies as required by the FDAto determine the continued viability of the development programme. Pendingresolution of the Phase III trial design, and a further evaluation of thecommercial potential, this project is under strategic review. The Future In the immediate future, we will be concentrating on two tasks: the divestmentof our injectables business and securing a marketing and co-development partner(or partners) for Flutiform(TM). Once these tasks have been completed, we will be able to focus our management and financial resources on the "new SkyePharma",consisting of our core inhalation and oral product business. We will drive forsustainable profitability. At the same time, however, we will invest in ourinhalation and oral product pipeline to make sure that we bring forward thegrowth drivers of tomorrow. We have a longer term goal of forward integrationinto marketing and sales of our own products in selected specialty therapeuticareas. I believe that this new focus will create exciting opportunities forSkyePharma and increase investor confidence in our future. Frank CondellaChief Executive Financial Review Turnover The Group's revenues continue to be sensitive to the timing and receipt ofmilestone payments and payments received on the signing of new contracts.Revenues for 2005, at £61.3 million, were 18% below the £75.2 million reportedin 2004. This was primarily due to the absence of a licensing transaction onFlutiform, continuing Paxil CR supply problems and slower overall marketpenetration of Triglide and DepoDur by marketing partners, partly offset by anincrease in manufacturing and distribution revenues. In addition the Companyundertook a strategic shift away from licence terms that prioritise upfrontpayments on signature towards deal structures with higher royalty rates andincreased milestone payments tied to product revenue targets. Despite thedecline in 2005, revenues have nevertheless increased at a cumulative annualgrowth rate of 24% since 1996. The absence of a licensing agreement on Flutiform had a double negative impacton SkyePharma in 2005. First, revenues suffered from the absence of theanticipated milestone payment and of a partner's contribution towards continuingdevelopment costs of Flutiform. Secondly, SkyePharma's R&D costs exceeded budgetexpectations because of the need to press ahead with the development programmewithout a partner in order to avoid the risk of impairment to the commercialpotential of this key product if development was delayed. Contract development and licensing revenue decreased 30% to £27.6 million,compared with £39.4 million in 2004. This was primarily due to the absence of ananticipated milestone from the licensing of Flutiform and the change in thestructure of our licence agreements described above. Revenues recognised frommilestone payments and payments received on the signing of agreements amountedto £22.1 million in 2005 compared with £33.4 million in 2004. The 2005 totalincluded revenues from First Horizon for the US marketing and distributionrights for Triglide triggered by FDA approval in May 2005 from Mundipharma forthe licensing of DepoBupivacaine for Europe and from Maruho for the licensing ofDepoBupivacaine for Japan. In addition, £5.7 million of revenue was recognisedfrom GlaxoSmithKline on the phase III clinical trials of Requip (ropinirole),from AstraZeneca on the phase III clinical trials of Pulmicort HFA and fromNovartis on the phase II clinical trials of QAB 149. Research and developmentcosts recharged fell by 8% to £5.5 million, compared with £6.0 million in 2004.This was mainly due to a fall in the costs recharged to Micap plc in respect ofthe development of their microencapsulation technology which has now beencompleted. Royalty income decreased by 16% to £21.7 million, compared with £25.9 million in2004. Royalty income in 2005 derives principally from Paxil CR, Xatral OD,DepoCyt, Solaraze, DepoDur and Triglide. Although the Company was able tonegotiate an increase in the royalty rate it receives on GlaxoSmithKline's salesof Paxil CR from 3% to 4% with effect from March 2005 and also receivedroyalties based on budgeted sales while the product was temporarily off the USmarket, royalties were still negatively impacted by the continuing supplyproblems experienced by GlaxoSmithKline. Excluding Paxil CR, royalties for thebalance of SkyePharma's other products grew by 38%. In addition royalty growthwas less than anticipated due to slower overall market penetration of Triglideand DepoDur by marketing partners during the year. Manufacturing and distribution revenue increased by 21% to £12.0 million,compared with £9.9 million, mainly due to higher production of clinical trialmaterial and launch quantities for Novartis in respect of QAB 149 and ForadilCertihaler. Deferred income During 2005, there was a net reduction in deferred income of £3.5 million underSkyePharma's revenue recognition policy. The movement in deferred income was: 31 December 2004 31 December 2005 Received * Recognised £ m £ m £ m £ mContract development and licensing 14.1 24.1 (27.6) 10.6revenue * Includes exchange adjustments 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 4% to £29.2million in 2005, compared with £28.2 million in 2004. This was mainly due to anincrease in manufacturing and distribution expenses ahead of the approval andlaunch of Triglide. The resulting gross profit decreased 32% to £32.1 million,compared with £47.0 million in 2004. Expenses Selling, marketing and distribution expenses increased significantly to £5.9million, compared with £1.7 million in 2004. This mainly reflected SkyePharma'scontribution towards the initial launch and marketing costs of DepoDur andTriglide. No further marketing contributions are due in respect of DepoDur andcontributions on Triglide will terminate in 2007. The Company's total costs inrespect of Triglide in 2005 amount to approximately £4.6 million. Amortisation of intangible assets decreased slightly to £2.1 million, comparedwith £2.2 million in 2004. Other administration expenses before exceptionals were £13.8 million in 2005,12% lower than the £15.6 million reported in 2004, reflecting the first fullyear of cost savings following the restructuring started in 2004. Theexceptional charge of £21.4 million comprises non-cash impairment charges of£19.4 million and abortive transaction costs of £2.0 million. Following theStrategic Review and the Group's decision to focus on its core oral andpulmonary products and to divest its injectable business, the Group no longerviews its collaborations with Astralis, Vital Living and Micap as strategic andthese investments have therefore been impaired. In addition, as an injectableproject, SkyePharma's entitlement to negotiate for commercial rights forPsoraxine, Astralis' key product, is being offered with the injectable businessinterests. The remaining £2.0 million exceptional charge relates to legal andprofessional fees relating to an aborted transaction, as outlined in theChairman's statement. Other administration expenses including exceptional itemsincreased by £14.9 million to £35.2 million. SkyePharma's own research and development expenses in the year decreased by £2.0million to £26.0 million, mainly due to a reduction in expenditure on PulmicortHFA, DepoDur and other injectable products, partly off set by an increase inexpenditure on Flutiform and DepoBupivacaine in advance of their commencement ofphase III clinical trials. The other expense of £0.4 million comprises a £0.7 million loss due to themovement in the fair value of the Group's investment in GeneMedix plc, partlyoff set by a £0.3 million profit on disposal of part of the Group's holding ofVectura Group plc shares. Results The operating loss before exceptional items was £16.1 million, compared with£0.4 million in 2004, due principally to the reduction in revenue and toincreased marketing contributions. The operating loss after exceptionalsincreased by £34.4 million to £37.5 million, mainly due to the higherexceptional charges and fall in revenue. The finance costs of £22.3 million (2004: £23.9 million) mainly comprisenotional interest on the Paul Capital funding liabilities as well as interest onthe convertible bonds. Finance income includes £9.0 million (2004: £6.0 million)in respect of a change in the estimated future payments to Paul Capital. The Group's share of the losses of Astralis was £0.8 million for 2005, comparedwith £10,000 in 2004. The retained loss after exceptionals increased by £32.3 million to £50.9million, also due to the higher exceptional charges and fall in revenue. Earnings before interest, tax, depreciation amortisation and exceptionals showeda loss of £8.5 million in 2005, compared with a profit of £7.8 million in 2004. The loss per share after exceptionals was 8.1 pence, which compares with 3.0pence in 2004. Foreign currency movements did not have a material impact on the results ofoperations in 2005 compared with 2004. Segment information Segmental information on revenue and operating loss before exceptionals is asfollows: Year ended Year ended 31 December 2005 31 December 2004Revenue £m £mInjectable 10.5 25.6Oral and Inhalation 50.8 49.6 61.3 75.2 Operating loss pre exceptional itemsInjectable (18.6) (1.4)Oral and Inhalation 2.5 1.0 (16.1) (0.4) Business segment data includes an allocation of corporate costs to each segment. Balance sheet The Group balance sheet at 31 December 2005 shows shareholders' equity of £31.9million (2004: £36.5 million). In September 2005 the Group raised £34.8 million net of expenses by means of arights issue of 125,627,357 new Ordinary Shares on the basis of one new sharefor every five held. In July 2004 the Group exchanged £49.6 million of its convertible bonds due June2005 for convertible bonds due May 2024, leaving £9.8 million of the 2005 bondsoutstanding. The £49.6 million 2024 convertible bonds were consolidated to forma single series with the £20 million 2024 bonds issued in May 2004. In 2005 theGroup issued £20 million 8% convertible bonds due June 2025. In June 2005 thecompany repaid the £9.8 million balance on the convertible bonds due June 2005.As a result of these transactions the Group has £69.6 million convertible bondsdue May 2024 and £20 million convertible bonds due June 2025 outstanding as at31 December 2005. On the balance sheet these are reflected as £63.6 million inliabilities and £28.4 million in equity. In addition the Group has Other Borrowings at 31 December 2005 of £44.6 milliondue to Paul Capital Royalty Acquisition Fund. Whilst the contractualarrangements contemplate the payment of royalties to Paul Capital as outlined innote 8, IAS 39 requires the Company to record a liability equal to the netpresent value of the royalties the Company expects to pay Paul Capital over theterm of the agreement. Financial assets held at fair value comprise a £3.25 million 5% convertible loannote from GeneMedix plc. This has been recorded at £0.4 million at 31 December2005, being the lower of cost and net realisable value assuming conversion ofthe note into GeneMedix ordinary shares. Liquidity and capital resources At 31 December 2005 SkyePharma had cash and short term deposits of £34.3 millionand no bank overdraft, compared with £15.3 million net cash at 31 December 2004.Bank and other non convertible debt amounted to £9.9 million at 31 December 2005(2004: £11.1 million), consisting principally of a £6.9 million propertymortgage secured on the assets of Jago (2004: £7.4 million). In addition theCompany has 6% convertible bonds due May 2024 of £69.6 million (2004: £69.6million) and 8% convertible bonds due June 2025 of £20.0 million (2004: £Nil).Net debt (excluding the Paul Capital funding liabilities) amounted to £39.2million (2004: £55.6 million). In 2005 there was a net cash outflow from operating activities of £7.6 million,compared with £3.7 million in 2004. During the year the Group spent £2.6 millionon property, plant and equipment and expenditure on intangible assets of £2.3million mainly relates to the purchase of licenses to intellectual property inthe area of pulmonary delivery. The proceeds on disposal of the Group's nonstrategic holding of Vectura shares were £1.6 million. Cash inflows from financing in were £30.6 million (2004: £2.9 million). TheGroup raised £34.8 million net of expenses by means of a rights issue of125,627,357 new Ordinary Shares. During the year the Group issued £20 million 8%convertible bonds raising £18.8 million net of expenses. In addition the companyrepaid the £9.8 million balance on the convertible bonds due June 2005. Borrowings of £7.4 million were repaid in the period (2004: £8.6 million). Thisprimarily comprises Paul Capital's share of the Company's royalty income. The Group paid £2.0 million of costs relating to an aborted strategictransaction during the year. International Financial Reporting Standards The financial information for the year ended 31 December 2005 has been preparedfor the first time in accordance with IFRS. In preparing the financialinformation certain first-time adoption provisions have been applied. TheGroup's accounting policies and adjustments made on the implementation of IFRSwere disclosed in the interim results announcement issued on 28 September 2005and the IFRS restatement announcement issued on 3 August 2005 and can be foundon the Group's corporate web site (www.skyepharma.com). Since the publicationof these results the Group has changed its interpretation of the application ofIAS 39 to the Paul Capital funding liabilities. The restatement resulted in adecrease in the 2004 net interest expense of £5.2 million and in the liabilityat 31 December 2004 of £4.3 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 this PreliminaryAnnouncement include, without limitation, risks related to the development ofnew products, risks related to obtaining and maintaining regulatory approval forexisting, new or expanded indications of existing and new products, risksrelated to SkyePharma's ability to manufacture products on a large scale or atall, risks related to SkyePharma's and its marketing partners' ability to marketproducts on a large scale to maintain or expand market share in the face ofchanges in customer requirements, competition and technological change, risksrelated to regulatory compliance, the risk of product liability claims, risksrelated to the 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 Preliminary Announcement. Donald NicholsonFinance Director CONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2005 Year to 31 December 2005 Year to 31 December 2004 Pre - Exceptional Pre - Exceptional Exceptional (note 3) Total Exceptional (note 3) Total Notes £m £m £m £m £m £m Revenue 2 61.3 - 61.3 75.2 - 75.2Cost of sales (29.2) - (29.2) (28.2) - (28.2) Gross profit 32.1 - 32.1 47.0 - 47.0Selling, marketing and distribution (5.9) - (5.9) (1.7) - (1.7)expensesAdministration expenses Amortisation of other intangibles (2.1) - (2.1) (2.2) - (2.2) Other administration expenses (13.8) (21.4) (35.2) (15.6) (4.7) (20.3) (15.9) (21.4) (37.3) (17.8) (4.7) (22.5)Research and development expenses (26.0) - (26.0) (28.0) - (28.0)Other expense (0.4) - (0.4) 0.1 2.0 2.1 Operating loss (16.1) (21.4) (37.5) (0.4) (2.7) (3.1)Finance costs 4 (22.3) - (22.3) (17.7) (6.2) (23.9)Finance income 4 10.0 - 10.0 8.6 - 8.6Share of loss in associate 6 (0.8) - (0.8) - - - Loss before income tax (29.2) (21.4) (50.6) (9.5) (8.9) (18.4)Income tax expense (0.3) - (0.3) (0.2) - (0.2) Loss for the year (29.5) (21.4) (50.9) (9.7) (8.9) (18.6) Basic and diluted earnings per share 5 (4.7p) (3.4p) (8.1p) (1.6p) (1.4p) (3.0p) All results represent continuing activities. See Notes to the Preliminary Announcement. CONSOLIDATED BALANCE SHEETas at 31 December 2005 31 December 2005 31 December 2004 Notes £m £mASSETSNon-current assetsGoodwill 68.7 68.7Other intangible assets 26.8 26.7Property, plant and equipment 37.1 40.9Investments in associates 6 0.2 14.3Available for sale financial assets 7 1.6 5.2 134.4 155.8Current assetsInventories 3.6 1.5Trade and other receivables 14.2 18.2Financial assets at fair value through profit or loss 0.4 1.1Cash and cash equivalents 34.3 15.3 52.5 36.1 Total Assets 186.9 191.9 LIABILITIESCurrent liabilitiesTrade and other payables (21.0) (20.6)Convertible bonds 8, 9 - (9.4)Other borrowings 8 (14.3) (10.7)Derivative financial instruments - (0.2)Deferred income (7.7) (11.8)Provisions - (0.3) (43.0) (53.0) Non current liabilitiesConvertible bonds 8, 9 (63.6) (50.4)Other borrowings 8 (40.2) (45.1)Deferred income (2.9) (2.3)Other non current liabilities (3.4) (2.9)Provisions (1.9) (1.7) (112.0) (102.4) Total Liabilities (155.0) (155.4) Net Assets 31.9 36.5 SHAREHOLDERS' EQUITYShare capital 10 76.6 63.4Share premium 345.6 321.0Translation reserve (1.2) (3.3)Fair value reserve 0.2 (0.5)Retained losses (427.1) (376.5)Other reserves 37.8 32.4 Total Shareholders' Equity 31.9 36.5 See Notes to the Preliminary Announcement. CONSOLIDATED CASH FLOW STATEMENTfor the year ended 31 December 2005 Year to Year to 31 December 2005 31 December 2004 Notes £m £m Cash flow from operating activitiesCash used in operations (a) (7.6) (3.7)Income tax paid (0.3) (0.2) Net cash used in operating activities (7.9) (3.9) Cash flows from investing activitiesPurchases of property, plant and equipment (2.6) (4.4)Purchases of intangible assets (2.3) (1.4)Purchase of shares in associates (0.2) -Purchase of available for sale investments - (2.2)Purchase of own shares (0.4) -Proceeds from disposal of available for sale investments 1.6 2.7 Net cash used in investing activities (3.9) (5.3) Cash flows from financing activitiesGross proceeds from rights issue 37.7 -Expenses of rights issue (2.9) -Proceeds from issue of ordinary share capital 0.1 0.3Proceeds from issue of convertible bonds due June 2025 20.0 -Proceeds from issue of convertible bonds due May 2024 - 20.0Expenses of issue of convertible bonds due June 2025 (1.2) -Expenses of issue and exchange of convertible bonds due May2024 - (3.4)Repayment of convertible bonds due June 2005 (9.8) -Repayments of borrowings (7.4) (8.6)Repayment of finance lease principal - (0.2)Interest paid (6.7) (5.9)Interest received 0.8 0.7 Net cash generated from financing activities 30.6 2.9 Effect of exchange rate changes 0.2 (0.4) Net increase/ (decrease) in cash and cash equivalents 19.0 (6.7) Cash and cash equivalents at beginning of the year 15.3 22.0Cash and cash equivalents at end of the year 34.3 15.3 See Notes to the Preliminary Announcement. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Cash flow from operating activities Year to Year to 31 December 2005 31 December 2004 £m £m Loss for the year (50.9) (18.6)Adjustments for: Tax 0.3 0.2 Depreciation 6.2 6.0 Amortisation 2.1 2.2 Impairments 19.4 3.5 Fair value (gain)/ loss on derivative financial instruments (0.3) 0.5 Finance costs 22.3 23.9 Finance income (10.0) (6.8) Share of loss in associate 0.8 - Profit on disposal of available for sale financial assets (0.3) (2.0) Other non-cash changes 3.2 4.0 Operating cash flows before movements in working capital (7.2) 12.9 Changes in working capital Increase in inventories (2.1) (0.2) Decrease/ (increase) in trade and other receivables 4.2 (5.9) Increase in trade and other payables 1.2 4.0 Decrease in deferred income (3.4) (13.0) Decrease in provisions (0.3) (1.5) Cash used in operations (7.6) (3.7) Notes to the Preliminary Announcement 1 Basis of preparation The unaudited preliminary announcement for the year ended 2005 has been preparedin accordance with International Financial Reporting Standards (IFRS) as adoptedby the EU. The Group's accounting policies and adjustments made on theimplementation of IFRS were disclosed in the interim results announcement issuedon 28 September 2005 and the IFRS restatement announcement issued on 3 August2005 and can be found on the Group's corporate web site (www.skyepharma.com).Since the publication of these results the Group has made the following changeto the application of IFRS, reflecting the endorsement by the EU of amendedstandards and emerging industry practice. The Group had previously treated the proceeds received from Paul Capital as afloating rate financial liability in accordance with the guidance in paragraphAG7 of IAS 39; Financial instruments: Recognition and measurement. This was alsoconsistent with the treatment under US GAAP. The Group has now concluded thatthe Paul Capital funding liabilities should be treated in accordance with theguidance in paragraph AG8 of IAS 39, not AG7 as previously used. This has theeffect that the estimated payments to Paul Capital are discounted using eachcontract's original effective interest and any adjustment is recognised asincome or expense in the income statement. Under the previous accounting (and USGAAP) such fluctuations were effectively spread forward and reflected in areduced implicit interest cost in future years. The restatement resulted in adecrease in the 2004 net interest expense of £5.2 million and in the liabilityat 31 December 2004 of £4.3 million. There are no implications for cash flow oroperating loss. The financial information in this statement does not constitute statutoryaccounts within the meaning of Section 240 of the Companies Act 1985. Statutoryaccounts for the year ended 31 December 2004, which were prepared under UK GAAP,have been filed with the Registrar of Companies. The auditors' report on thoseaccounts was unqualified and did not contain a statement under Section 237 ofthe Companies Act 1985. The Company's working capital requirements continue to be affected by the timingand receipt of milestone payments and payments received on the signing of newcontracts. The Company's future cash flows will also be impacted by theCompany's change in strategy as outlined in the EGM notice dated 16 February2006, principally its stated aim of moving to sustainable profitability in theshortest possible time and its refocus to concentrate on oral and pulmonaryproducts. Consequently the Group's near term working capital requirements areuncertain and sensitive to the timing of a number of initiatives required toprovide the financial flexibility to implement the new strategy. Theseinitiatives include the licensing of Flutiform, the divestment of its injectablebusiness interests, which is expected to require shareholder approval, and thedelay of certain licensing discussions, such as US licensing for DepoBupivacainepending the divestment of its injectables business. 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 these initiatives and have therefore prepared the financialinformation contained herein on a going concern basis which assumes that theCompany will continue in operational existence for the foreseeable future. Given the above uncertainties the auditors have indicated that their report maycontain a reference to going concern relating to these matters. The financialinformation in this announcement does not reflect any adjustments that would berequired to be made if it was to be prepared on a basis other than the goingconcern basis. 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: Year ended Year ended 31 December 2005 31 December 2004 £m £m Injectable 10.5 25.6Oral and Inhalation 50.8 49.6 61.3 75.2 Revenue earned can be analysed as: Contract development and licensing Milestone payments 22.1 33.4 Research and development costs recharged 5.5 6.0 27.6 39.4 Royalties 21.7 25.9 Manufacturing and distribution 12.0 9.9 61.3 75.2 Operating profit/ (loss) by business segment: Year ended Year ended 31 December 2005 31 December 2004 £m £m Injectable (18.6) (1.4)Oral and Inhalation 2.5 1.0 Operating loss pre exceptional items (16.1) (0.4) Exceptional items (21.4) (2.7) Operating loss (37.5) (3.1) Share of loss in associate (0.8) -Net interest (12.3) (15.3)Tax (0.3) (0.2) Loss after tax (50.9) (18.6) 3 Exceptional items Year ended Year ended 31 December 2005 31 December 2004 £m £m Impairments (19.4) (3.5)Abortive transaction costs (2.0) -Restructuring costs - (1.2)Profit on disposal of available-for-sale investment - 2.0Convertible bonds exchange (6.2) (21.4) (8.9) Following the Strategic Review and the Group's decision to focus on its coreoral and pulmonary products and to divest its injectable business, the Group nolonger views its collaborations with Astralis, Vital Living and Micap asstrategic and these investments have therefore been impaired resulting in anexceptional charge of £19.4 million. During the year the Group incurred £2.0 million legal and professional feesrelating to an aborted strategic transaction. 4 Finance costs and income Year ended Year ended 31 December 2005 31 December 2004 £m £mInterest and similar expense: Interest:- bank borrowings (0.5) (0.7)- Paul Capital arrangements (12.7) (11.3)- interest on convertible bonds (5.8) (5.7) (19.0) (17.7)Foreign exchange on Paul Capital arrangements (3.3) -Fair value losses on financial instruments: - loss on exchange of convertible bonds - (6.2) Total interest and similar expense (22.3) (23.9) Interest and similar income: Paul Capital change in estimated future 9.0 6.0paymentsOther interest income 1.0 0.8Foreign exchange on Paul Capital arrangements - 1.8 Total interest and similar income 10.0 8.6 5 Earnings per share Year to Year to 31 December 2005 31 December 2004 £m £m Attributable loss before exceptional items (29.5) (9.7)Exceptional items (21.4) (8.9) Basic and diluted attributable loss (50.9) (18.6) Number Number m m Basic and diluted weighted average number of shares in 624.9 615.2issue Loss per Ordinary Share before exceptional items (4.7p) (1.6p)Exceptional items (3.4p) (1.4p) Basic and diluted loss per Ordinary Share (8.1p) (3.0p) There is no difference between basic and diluted loss per share since in a lossmaking year all potential shares from convertible bonds, stock options, warrantsand 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. 6 Investments in associates As at As at 31 December 31 December 2004 2005 £m £m Beginning of the year 14.3 -Reclassification of investment as - 14.2associateAdditions 3.0 0.1Share of loss (0.8) -Impairment (16.3) - End of the year 0.2 14.3 The investment in Astralis Limited was recorded at £0.2 million at 31 December2005 (2004: £14.3 million) and had a market value of £0.4 million (2004: £9.6million). Following the Strategic Review and the Group's decision to focus onits core oral and pulmonary products and to divest its injectable business, theGroup no longer views its collaboration with Astralis as strategic. Thiscombined with the current uncertainties concerning Astralis' financial positionresulted in the Group impairing its investment to its estimated fair value. 7 Available for sale financial assets As at As at 31 December 2005 31 December 2004 £m £m Beginning of the year 5.2 22.0Exchange 0.1 -Reclassification as associate - (14.2)Additions 0.1 2.0Disposal (1.8) (0.6)Impairments (2.6) (3.5)Revaluation surplus/ (deficit) transfer 0.6 (0.5) End of the year 1.6 5.2 Available for sale financial assets comprise the following unlisted securities: Vectura Group plc During 2005 the Group sold 2 million ordinary shares in Vectura for £1.6million. As at 31 December 2005 the remaining holding was 1.2 million ordinaryshares. The investment was recorded at £1.0 million at 31 December 2005 (2004:£2.0 million). In January 2006 the Group sold the remaining 1.2 million ordinaryshares. Vital Living Inc The investment in Vital Living was recorded at £0.4 million at 31 December 2005(2004: £1.7 million). Following the Strategic Review and the Group's decision tofocus on its core oral and pulmonary products and to divest its injectablebusiness, the Group no longer views its collaboration with Vital Living asstrategic and this investment has therefore been impaired. Micap plc The investment in Micap recorded at £0.2 million at 31 December 2005 (2004: £1.5million). Following the Strategic Review and the Group's decision to focus onits core oral and pulmonary products and to divest its injectable business, theGroup no longer views its collaboration with Micap as strategic and thisinvestment has therefore been impaired. 8 Borrowings As at As at 31 December 2005 31 December 2004 £m £mCurrentConvertible bonds due June 2005 - 9.4 Bank borrowings 2.3 3.5Property mortgage 0.3 0.3Paul Capital funding liabilities 11.6 6.8Finance lease liabilities 0.1 0.1 Other current borrowings 14.3 10.7 Total current borrowings 14.3 20.1 Non-currentConvertible bonds due May 2024 50.8 50.4Convertible bonds due June 2025 12.8 - 63.6 50.4 Bank borrowings 0.6 -Property mortgage 6.6 7.1Paul Capital funding liabilities 33.0 37.9Finance lease liabilities - 0.1 Other non-current borrowings 40.2 45.1 Total non-current borrowings 103.8 95.5 Total borrowings 118.1 115.6 Bank Borrowings At 31 December 2005 bank borrowings include two amounts due to theBasellandschaftliche Kantonalbank of £0.9 million (CHF 2 million) and £0.7million (CHF 1.5 million) (2004: £0.9 million (CHF 2 million) and £0.7 million(CHF 1.5 million)). Both loans can be terminated with six weeks notice by eitherparty and bear interest at 6.5% and 6.0% respectively. Both loans are secured onthe assets of Jago and the £0.7 million (CHF 1.5 million) loan is guaranteed bySkyePharma PLC. The Group had a loan as at 31 December 2005 with GE Capital Corp of £1.4 million($2.4 million) (2004: £1.9 million ($3.7 million)). The loan is secured bycertain assets of SkyePharma Inc, SkyePharma US Inc and SkyePharma PLC. The loanbears interest at 8.0% and is repayable by instalments until September 2007. Property Mortgage At 31 December 2005, the Group had a property mortgage facility with theBasellandschaftliche Kantonalbank of £6.9 million (CHF 15.5 million) (2004: £7.4million (CHF 16.1 million)). The mortgage is in two tranches, both secured bythe assets of Jago. The first tranche of £2.7 million (CHF 6.2 million) bearsinterest at 2.75% and is repayable by instalments over 20 years semi-annually.The second tranche of £4.1 million (CHF 9.3 million) bears interest at 2.75% andis repayable by instalments over 50 years 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 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 future payments to Paul Capital arediscounted using each contract's original effective interest and any adjustmentis recognised as income or expense in the income statement 9 Convertible Bonds In June 2005 the Group issued £20 million 8% convertible bonds, with a first putafter five years by the holder of the bonds, and a final maturity of June 2025.The bonds are convertible at the option of the holder into SkyePharma OrdinaryShares at an initial conversion price of 77 pence at any time prior to maturity.The bond contains a price reset feature such that if on 3 June 2006 theCompany's average share price for the preceding 10 days (reset price) is lessthan the conversion price, then the conversion price shall be adjusted to thereset price subject to a maximum reduction of 25% in the conversion price.Unless previously redeemed or converted, the bonds will be redeemed by the Groupat their principal amount in June 2025. The convertible bonds existing at 31December 2005, due in May 2024, were not affected by this transaction. On 19 June 2005 £9.8 million of convertible bonds due June 2005 were redeemed infull by the Company at their principal amount. As a result of these transactions the Group has £69.6 million convertible bondsdue May 2024 at a conversion price of 95 pence, and £20 million convertiblebonds due June 2025 at a conversion price of 77 pence. 10 Share capital Ordinary Shares of Nominal value Deferred 'B' Shares Nominal value Total nominal 10p each of 10p each value Number £m Number £m £m At 1 January 2004 618,669,940 61.9 12,000,000 1.2 63.1Exercise of share options 478,803 - - - -Issue of shares to ResearchDevelopment Foundation 3,250,000 0.3 - - 0.3 At 1 January 2005 622,398,743 62.2 12,000,000 1.2 63.4Rights issue 125,627,357 12.6 - - 12.6Acquisition of shares in 5,482,238 0.6 - - 0.6AstralisExercise of share options 255,808 - - - - At 31 December 2005 753,764,146 75.4 12,000,000 1.2 76.6 The Group raised £34.8 million net of expenses by means of a rights issue of125,627,357 new ordinary shares. The Group also issued 5,482,238 Ordinary Shares to two former Astralis Directorsto acquire 11,160,000 common shares in Astralis. 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 twelve 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. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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