28th Apr 2005 07:03
Skyepharma PLC28 April 2005 For Immediate Release 28 April, 2005 SkyePharma PLC Preliminary Results Announcement for the year ended 31 December 2004 LONDON, UK, April 28, 2005 - SkyePharma PLC (LSE: SKP; Nasdaq: SKYE) announcesthe Company's preliminary results for the year-ended December 31, 2004. Operating highlights • Agreement with GlaxoSmithKline for Paxil CR(TM) provides a $10 million cash payment and a higher royalty rate and ensures royalty income received even while Paxil CR(TM) remains off the market • Pulmonary package: Heads of Terms with major global pharma company for Flutiform(TM) include up to $160 million in milestone payments and reimbursement of development costs, with double digit royalties. Agreement still subject to contract • Conditional UK marketing authorisation for DepoDur(TM) • DepoBupivacaine(TM) licensed to Mundipharma outside North America and Japan • New agreements with Critical Therapeutics for zileuton and First Horizon for fenofibrate • Two products expected to be launched in 2005, four products to be filed for approval and four products to enter Phase III development Financial highlights • Turnover up by 17% to £62.2m - excludes £5.5m of milestones received during 2004 (2003: £53.2m) • Royalty income increased by 39% to £26.0m (2003: £18.7m) • Gross profit up 33% to £31.0m (2003: £23.4m) • Exceptional items of £3.0m (2003: £9.5m) • Operating loss before exceptionals and amortisation fell by 59% to £9.7m (2003: £23.4m) • Operating loss after exceptionals and amortisation fell by 48% to £20.7m (2003: £39.5m) • Net loss fell by 44% to £24.3m (2003: £43.2m) • Loss per share 3.9p (2003: 7.1p) • End 2004 net cash £15.3m (2003: £22.0m) Ian Gowrie-Smith, Non-executive Chairman, said: "A highly beneficial newagreement with GlaxoSmithKline for Paxil CR(TM), significant advances for bothour marketed products and our pipeline and important progress on thelong-awaited pulmonary deal are the keynotes of our performance. We now havefive key products on the market generating royalty income for us, with two moreexpected to be launched this year, and a well-stocked pipeline of products inlate-stage development. Recent progress on corporate agreements brings usseveral powerful new partners. We face the future with confidence." For further information please contact: SkyePharma PLC Ian 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 5000 Tim Anderson / Mark Court CHAIRMAN'S STATEMENT A highly beneficial new agreement with GlaxoSmithKline for Paxil CR(TM),significant advances for both our marketed products and our pipeline andimportant progress on the long-awaited pulmonary deal are the keynotes of ourperformance. The current year brought an unwelcome surprise with news in March that the USFDA had halted distribution of GlaxoSmithKline's Paxil CR(TM), currently ourmajor source of royalty income. Our partner is working with the FDA to expeditethe return of this product to the market. Meanwhile I can report thatGlaxoSmithKline has now agreed not only to increase the royalty rate due to usand make a $10 million one-off payment but also to ensure that we will continueto receive royalty income even while the product remains off the market. Weacknowledge our partner's willingness to support us in this way, a tribute tothe strength of our relationship. We have made encouraging progress with our pipeline in 2004. We currently havetwo products expected to be launched this year and four products that we expectto file for approval, with another four products poised to enter Phase IIIdevelopment. Our innovative pain control agent DepoDur(TM) was approved in theUSA and launched by our partner Endo Pharmaceuticals. We have just heard that wehave also received marketing authorisation for DepoDur(TM) in the UK (subject tosome conditions), which will be used as the basis for wider approvals in Europe,where the product will be marketed by our partner Zeneus Pharma, appointed in2004. Last year we also concluded new agreements with First HorizonPharmaceuticals for fenofibrate and with Critical Therapeutics for zileuton. Wehave also recently granted Mundipharma (our European marketing partner forDepoCyte(R))the rights outside North America and Japan for another paincontrol product, DepoBupivacaine(TM), in a deal that will bring us up to $80million in milestone payments and a 35% share of sales. Shareholders will be aware that our efforts to licence our package of pulmonaryproducts have taken longer than we had initially hoped. However I am nowdelighted to report that we have negotiated Heads of Terms with a major globalpharmaceutical company to develop and distribute our key pulmonary productFlutiform(TM), a formoterol/fluticasone combination product in an HFA-poweredmetered-dose aerosol inhaler. The company combines strong primary caredistribution in the key US market with the financial resources to commit to aclinical development programme designed to optimise the product profile. Theoutline terms include milestone payments and reimbursement of clinicaldevelopment costs that in total could amount to $160 million. In additionSkyePharma will receive double digit royalties, with an escalating royalty rateas sales achieve certain targets. SkyePharma will execute the clinicaldevelopment programme. The agreement at this stage is non-binding and subject tocontract finalisation and Board approvals. We have now completed Phase II trials for Flutiform(TM), with very encouragingtop line results. We aim to file this product in 2007. Given the high potentialvalue of a late-stage product in an important therapeutic area, we have beendetermined to maximise the return for ourselves. The terms that we havenegotiated for Flutiform(TM) amply justify this policy and we hope thatshareholders agree that it was worth waiting for. Conclusion We now have five key products on the market generating royalty income for us,with two more expected to be launched this year, and a well-stocked pipeline ofproducts in late-stage development. Recent progress on corporate agreementsbrings us several powerful new partners. We face the future with confidence. Ian Gowrie-SmithNon-executive Chairman OPERATIONAL REVIEW Products on the market During 2004, Paxil CR(TM), our improved formulation of GlaxoSmithKline's Paxil(R), held about 6.5% of all new US prescriptions for SSRI antidepressants. Thisshare has been gradually declining through the advent of new SSRIantidepressants but has been largely unaffected by US generic competition forthe older version Paxil(R) from 2003. GlaxoSmithKline's total sales of PaxilCR(TM) were £396 million ($725 million) in 2004, up by 13% in constant exchangerate terms. In March 2005, the FDA halted US distribution of Paxil CR(TM) andanother unrelated product because of manufacturing problems at a GlaxoSmithKlineplant in Puerto Rico. We have recently concluded an agreement withGlaxoSmithKline that not only provides us with a lump-sum payment ofapproximately $10 million and an increased royalty rate on this product but alsoensures that we will continue to receive royalty income while the productremains off the market. Xatral(R) OD (Uroxatral(R) in the USA), our once-daily version ofSanofi-Aventis's Xatral(R) (alfuzosin), is a treatment for the urinary symptomsof benign prostatic hypertrophy. Xatral(R) OD has been on the market outside theUSA since April 2000 and has now largely replaced the older multidose versionsof Xatral(R). Uroxatral(R) was launched in the USA in November 2003 and by theend of 2004 had captured 9% of the combined prescriptions written for it and forits main competitor. Xatral(R) OD has now been approved in Europe for a secondindication, acute urinary retention, with Phase III trials ongoing for the USA.Reported sales of all forms of Xatral(R) were €281 million in 2004, up by 28% inconstant exchange rate terms. Global sales of DepoCyt(R) doubled in 2004. Sales in the USA by our partnerEnzon were $6.6 million, up 61% on the prior year. Our European partnerMundipharma launched the product as DepoCyte(R) in February 2004 and has had anencouraging initial response with full year sales of $1.5 million. Mundipharmashares our view that the market for DepoCyte(R) is largely under-developed. Wehave now completed enrolment in the Phase IV trial that will be used to supporta filing for the most common form of neoplastic meningitis, associated withsolid tumours. We have recently extended our relationship with Mundipharma bygranting rights outside North America and Japan for DepoBupivacaine(TM), along-acting local anaesthetic that we believe complements DepoDur(TM).DepoBupivacaine(TM) is currently in Phase II trials. Solaraze(R), our topical gel treatment for actinic keratosis, is now marketed inthe US by Bradley Pharmaceuticals. Bradley, a fast-growing US specialtypharmaceuticals company, acquired the Bioglan dermatology unit of Quintiles inAugust 2004. This has more than doubled the number of sales representativesdetailing Solaraze(R). Combined sales by both partners in 2004 were $12 million.The transfer of rights to market Solaraze(R) from Quintiles to Bradley requiredour consent and in August we received a $5 million payment from Quintiles aspart of this transaction. Solaraze(R) is marketed in Europe and certain otherterritories by Shire Pharmaceuticals. Total non-US sales were $6 million in2004. In Australia, Shire has now filed for approval using data from a clinicaltrial in patients with multiple actinic keratoses. DepoDur(TM) (formerly known as DepoMorphine(TM)) is our new analgesic for therelief of acute post-operative pain. Our DepoFoam(TM) sustained-releaseinjectable formulation delivers from a single epidural injection administeredimmediately before surgery a therapeutically effective level of morphine for upto 48 hours - covering the typical period of peak pain after a major operation.There is widespread recognition that pain relief is an under-served therapeuticneed and current approaches to control of postoperative pain leave much to bedesired. In the USA, we filed DepoDur(TM) in July 2003. It was formally approvedby the FDA in May 2004 - the fastest approval time possible. Our North Americanpartner Endo Pharmaceuticals launched DepoDur(TM) in the USA in December at asignificant price premium to conventional approaches to post-operative analgesiaand now has a team of 70 specialist sales representatives focused on hospitals.Initial acceptance has been encouraging. DepoDur(TM) was filed with the UK regulatory authorities in November 2003 and wehave recently received marketing authorisation subject to certain conditions.Once these conditions are met, this will be used as the basis for seekingapproval throughout the European Union using the EU's "mutual recognition"procedure. Our European partner Zeneus Pharma (appointed in April 2004) has beeneagerly awaiting approval of DepoDur(TM) to commence marketing. Zeneus has apan-European hospital sales force of approximately 150 representatives. Products in late-stage development Foradil(R) Certihaler(R) is a 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. Novartis filed Foradil(R) Certihaler(R) with the FDA andEuropean regulatory authorities in December 2002. The FDA issued a second "approvable" letter in December 2004 and Novartis is in discussions with the FDAabout the conditions necessary for final approval. The product has now beenapproved in ten European and Latin American countries. Novartis is responsiblefor marketing Foradil(R) Certihaler(R) outside the USA. The US Foradil(R)franchise has been licensed to Schering-Plough Corporation. We have now completed the Phase III trial of our once daily version of theParkinson's drug Requip(R) which we are conducting for our partnerGlaxoSmithKline. The product is expected to be filed later this year. We are developing several other asthma drugs in metered-dose aerosol inhalers(MDIs) powered by a hydrofluoroalkane (HFA) propellant gas. In 2004 we completedthe Phase III trial of an HFA-MDI version of AstraZeneca's inhaled steroidPulmicort(R) (budesonide) and AstraZeneca is about to file for approval of thisproduct in the first country in Europe. We will receive double-digit royaltieson sales of Pulmicort(R) HFA-MDI. Our own HFA-MDI version of the bronchodilator formoterol will commence Phase IIItrials in the autumn. Flutiform(TM) HFA-MDI (a fixed-dose combination offormoterol and the inhaled steroid fluticasone) has now completed its Phase IItrial, with very encouraging headline results. Both products are on track forplanned filing in 2007. As discussed in the Chairman's Statement, we have nownegotiated Heads of Terms with a major global pharmaceutical company to developand distribute Flutiform(TM). The agreement, which is still subject to contract,will provide us with up to $160 million in milestone payments and reimbursementof development costs and we will also be entitled to double-digit royalties onour partner's sales. 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. In April 2004 the FDA completed its review of the Phase II trials,triggering a milestone payment from our North American partner Endo, and we arenow in dialogue with the FDA on the design of the additional trials required forapproval. We are also in current discussion with potential licensees for Europeand certain other markets. New corporate developments In 2004 we licensed fenofibrate, an oral treatment for elevated blood lipiddisorders, in the USA to First Horizon Pharmaceutical Corporation. We willreceive up to $50 million in milestone payments, of which up to $15 million isdependent on the timing and conditions of FDA approval, now anticipated in 2005.We will also receive 25% of First Horizon's net sales of this product in theform of royalty income and manufacturing revenues. We are also developing animproved formulation of First Horizon's lead product, the cardiovascular drugSular (nisoldipine). We also announced a collaboration with Critical Therapeutics to developzileuton, an oral drug for asthma and COPD. We had previously developed atwice-daily version for Abbott Laboratories: this had completed Phase IIIdevelopment for asthma but was not filed. Critical Therapeutics has now licensedzileuton from Abbott. Critical Therapeutics is aiming to file the controlledrelease product with the FDA by the end of this year. In April we licensed our dermatology products, pipeline and topical deliverytechnologies to a US dermatology company, Trigenesis Therapeutics. In astrategic review last year we concluded that we would gain a greater return byout-licensing this technology portfolio to a company with a development andmarket focus in this area. We retain our existing licences and can also continueto use the delivery technologies under certain conditions. If all the pipelineproducts reach the market, milestone payments will exceed US$20 million.SkyePharma will also receive a 10% royalty on sales. Trigenesis is now part ofthe Indian pharmaceutical company, Dr Reddy's Laboratories. In June we agreed a strategic alliance with the UK company Vectura for pulmonarydelivery technologies. We obtained certain rights to Vectura's Aspirair(R)dry-powder inhaler, which is particularly suitable for the delivery ofmacromolecules. We invested £2 million for a 4% equity stake in Vectura. We aregratified that Vectura subsequently completed a successful initial publicoffering on the AIM market and also recently concluded a major pulmonary dealwith Novartis. King Pharmaceuticals (at that time the target of a takeover offer from MylanLaboratories, a leading US generic company) decided to terminate a 2003agreement to develop a modified release formulation of Altace(R) (ramipril).This product was at an early stage of development. In 2004 our partner Astralis initiated US Phase II trials of its novel psoriasistreatment Psoraxine(TM). Preliminary results announced recently weredisappointing, with a placebo-like level of response. We are currently workingwith Astralis to investigate and resolve the possible reasons why the outcome ofthis trial should have been so different from the promising results of previouslarge-scale trials in Venezuela. We have recently acquired shares from twoformer directors of Astralis, taking our equity stake up to just under 50% andenabling us to exercise greater influence. Dr. Gordon Schooley, SkyePharma'sChief Scientific Officer, has also been appointed to the board of Astralis. 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. This has meant a change in the structure of ouragreements to optimise royalty rates and to increase milestone payments that aretied to product revenue targets. Inevitably this has brought a short-termpenalty in terms of revenues and cashflow but we are confident that this is thecorrect long-term approach, which will greatly enhance the value of our productsto the company. Michael AshtonChief Executive Officer FINANCIAL REVIEW Turnover Turnover for the year increased by 17% to £62.2 million, compared with £53.2million in 2003. This is primarily due to higher royalty income together with anincrease in manufacturing and distribution revenues, partly off-set by a fall incontract development and licensing revenues. This increase does not includemilestone payments of £5.5 million ($10 million) received during 2004 from Endoand First Horizon, which have not been included in turnover and have been fullydeferred to later years. In April 2005 SkyePharma announced the licensing ofDepoBupivacaine(TM) for Europe to Mundipharma. Contract development and licensing revenue decreased by 11% to £26.3 million dueprimarily to the deferral of the above milestones received and the absence ofanticipated milestones in the year from the expected approval of fenofibrate andthe licensing of a package of products in the pulmonary field. As discussed inthe review of operations both milestones are still anticipated. Revenuesrecognised from milestone payments and payments received on the signing ofagreements amounted to £20.3 million compared with £24.2 million in 2003. The2004 total included revenue from Endo upon the FDA approval of DepoDur(TM) inthe USA, Zeneus (formerly Medeus) for the European marketing and distributionrights for DepoDur(TM), Dr Reddy's (formerly Trigenesis) for the rights tocertain dermatological assets and Quintiles for consenting to the transfer ofthe US, Canadian and Mexican marketing rights for Solaraze(R) to Bradley. Inaddition, £7.2 million of revenue was recognised from GlaxoSmithKline on thephase III clinical trials of Requip(R) (ropinirole), AstraZeneca on the phaseIII clinical trials of budesonide HFA and Novartis on the first Europeanapproval of Foradil(R) Certihaler(R) and the phase II clinical trials of QAB149. Royalty income increased by 39% to £26.0 million, compared with £18.7 million in2003. Royalty income in 2004 derives principally from Paxil CR(TM), Xatral(R) OD,DepoCyt(R) and Solaraze(R). DepoDur(TM) was launched in December 2004 and isexpected to contribute to royalty income in 2005. Manufacturing and distribution revenues more than doubled to £9.9 million,compared with £4.8 million in 2003, mainly due to increased clinical andpre-launch production of the Foradil(R) Certihaler(R) for Novartis and Corunofor Therabel. Deferred income During 2004, the Group released a net £1.4 million from deferred income underits revenue recognition policy. Amounts received included the milestones fromEndo and First Horizon noted above which have been fully deferred. The totaldeferral of £14.5 million at the end of 2004 comprises: 31 December 31 December 2003 Received * Recognised 2004 £ million £ million £ million £ millionContract development and licensingrevenue 7.1 26.6 (26.3) 7.4Other operating income 8.8 (0.5) (1.2) 7.1 15.9 26.1 (27.5) 14.5 * Includes exchange adjustments Deferred contract development and licensing income will be released in lateryears as the related costs are incurred or as any associated obligations underthe relevant contracts are satisfied. Other operating income deferred will nolonger be recognised under International Financial Reporting Standards ('IFRS'). 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 5% to £31.2million in 2004, compared with £29.8 million in 2003. This was mainly due toincreased manufacturing and distribution costs on the higher production of theForadil(R) Certihaler(R) for Novartis partly offset by a fall in contractdevelopment and licensing cost of sales. The resulting gross profit increased by33% to £31.0 million, compared with £23.4 million in 2003. Expenses Selling, marketing and distribution expenses decreased significantly by 60% to£1.7 million, reflecting the significant savings resulting from the Groupreorganisation announced last year. Amortisation of intangible assets decreasedslightly by £0.4 million to £6.3 million. Other administration expenses beforeexceptionals were £12.2 million in 2004, compared with £18.0 million in 2003, afall of 32%. The decrease was mainly due to one-off charges in 2003, includingthe cost of reacquiring the DepoCyt(R) European rights from Elan and fromadministration savings resulting from the aforementioned reorganisation. The exceptional charge of £4.7 million mainly relates to a write down in thevalue of fixed asset investments, and the continuing reorganisation of someresearch and development operations and other business functions which commencedduring 2003. The reorganisation is expected to be completed during the firsthalf of 2005. SkyePharma's own research and development expenses in the year decreased by £2.6million to £28.0 million, mainly due to a reduction in expenditure on DepoDur(TM) when compared with the significant expenditure incurred in the prior year in preparation for its July 2003 filing with the FDA. Other operating income Under the Paul Capital agreements, other operating income recognised in 2004 was£1.2 million, compared with £6.1 million in 2003. All of the income under thefirst Paul Capital agreement has now been recognised, and there is £7.1 millionof deferred income under the second Paul Capital agreement as at December 2004.Royalty payments to Paul Capital of £3.0 million (2003: £3.2 million) wereexpensed during the year. Operating results The Group's operating loss before exceptionals fell by 59% to £9.7 million,compared with £23.4 million in 2003 due principally to the reduction in otheradministration expenses. The increased turnover and lower selling, marketing anddistribution expenses together with lower research and development expenses havealso contributed to the reduction of the operating loss before exceptionals. Theoperating loss after exceptionals also fell by 48% to £20.7 million. The netloss fell by 44% to £24.3 million in 2004, compared with £43.2 million in 2003.Earnings before interest, tax, depreciation and amortisation ('EBITDA'), acommonly used performance indicator, showed a 76% improvement to a loss of £6.4million in 2004 compared with a loss of £26.6 million in 2003. The loss per share after exceptionals was 3.9 pence, which compares with 7.1pence in 2003. Foreign exchange movements negatively impacted turnover by £2.8million in the year. This was more than offset by exchange benefits in costs,primarily research and development costs. The total impact on the net loss forthe year was a benefit of £1.6 million over 2003. Cash balances and cash flow During 2004 the Group issued £20 million 6% convertible bonds, with a firstright of conversion after five years by the holder of the bonds, and a finalmaturity of May 2024. In addition, the Group exchanged £49.6 million of itsconvertible bonds due 2005 for convertible bonds due 2024, leaving £9.8 millionof the 2005 bonds outstanding. Unamortised issue costs of £0.3 million werewritten off on exchange of the convertible bonds. The £49.6 million 2024convertible bonds were consolidated to form a single series with the £20 million2024 bonds issued in 2004. The bonds are convertible at the option of the holderinto SkyePharma Ordinary Shares at a conversion price of £1.00. This raisedapproximately £16.6 million net of expenses. At 31 December 2004 SkyePharma had cash and short term deposits of £15.3million. This compares with £22.0 million net of overdrafts at 31 December 2003and £29.0 million net of overdrafts at 30 June 2004. In 2004 there was a net cash outflow from operating activities of £10.7 million,compared with a net cash inflow of £6.6 million in 2003. During the year the Group spent £7.9 million on capital expenditure and fixedasset investments, including £4.4 million on tangible fixed assets. The Groupalso recorded fixed asset investments of £2.0 million and intangible assets of£1.0 million relating to the strategic alliance with Vectura in the area ofpulmonary delivery technologies. The proceeds on disposal of the Group'snon-strategic holding of Transition Therapeutics shares were £2.7 million. SkyePharma received £0.3 million of cash during the year from the issue ofOrdinary Shares relating to the exercise of employee share options over OrdinaryShares. During 2004 the Group settled the £0.5 million Chiron promissory note. Balance sheet The Group balance sheet at 31 December 2004 shows shareholders' funds of £63.6million (2003: £84.9 million). Goodwill written off to the profit and lossaccount reserve remained at £147.6 million. At 31 December 2004 SkyePharma had fixed asset investments totalling £20.1million. The investments include Astralis Ltd, a US company; Micap plc, a UKcompany; Vectura Group plc, a UK company and Vital Living Inc, a US company. Theinvestment in Astralis has been treated as an associated undertaking fromDecember 2004, when SkyePharma announced a transaction to acquire a significantequity position and additional Board representation in Astralis so as toinfluence its future strategic direction. This has resulted in goodwill of £13.7million. The Group's fixed asset investments are primarily held in development stagepharmaceutical companies as long term investments associated with collaborationagreements or as part of SkyePharma's long term strategy. The Board continues toreview the underlying performance of the individual companies and theinvestments have been recorded at the lower of cost or net realisable value.Vital Living has been written down by £3.5 million to the Directors' assessmentof its net realisable value based on a number of considerations including theshare price as at 31 December 2004. The Group will continue to monitor itsinvestments and the underlying value of the companies closely. Current asset investments comprise a £3.25 million 5% convertible loan note fromGeneMedix plc. This has been recorded at £1.1 million at 31 December 2004, beingthe lower of cost and net realisable value assuming conversion of the note intoGeneMedix ordinary shares. At 31 December 2004 bank and other non-convertible debt amounted to £11.0million (2003: £12.7 million) consisting primarily of a £7.4 million (2003: £7.5million) property mortgage secured on the Swiss assets. In addition the companyhas 6% Convertible Bonds due June 2005 of £9.8 million (2003: £58.8 million) and6% Convertible Bonds due May 2024 of £66.5 million (2003: £Nil). Net debtamounted to £72.0 million (2003: £49.5 million). Throughout most of 2004 £30 million of the 6% Convertible Bonds were subject toan interest rate swap agreement, swapping a fixed rate obligation of 6% for afloating rate. The weighted average floating rate for the year was 6.82%, andthe floating rate at 31 December 2004 was 7.14%. The swap is cancellable at theoption of the bank. This will terminate in June 2005. During 2004 SkyePharma issued 3.25 million Ordinary Shares to the ResearchDevelopment Foundation as a result of a restructuring of the historicarrangements with RDF existing at the time of the DepoTech acquisition in 1999. International Financial Reporting Standards SkyePharma will be required to prepare consolidated financial statements underIFRS from 1 January 2005 and to restate the 2004 results for comparison. The Group is completing a project to convert its comparative financialinformation from UK GAAP to IFRS and plans to announce the results during thefirst half of 2005. The first SkyePharma financial statements prepared underIFRS will be for the period ending 30 June 2005. The key differences that theCompany expects to arise on the adoption of IFRS are summarised in thisannouncement in the Supplementary Information: IFRS. Subsequent events In April 2005 SkyePharma entered into an amendment agreement withGlaxoSmithKline ("GSK") in respect of Paxil CR(TM). Under the terms of theamendment agreement, GSK will make a one-time payment of approximately $10million. In addition, SkyePharma will also be entitled to an increase in theroyalty rate from 3% to 4% on actual net sales of Paxil CR(TM), with effect from4 March 2005. As GSK has been unable to supply Paxil CR(TM) in the US since 4March 2005, GSK has also agreed to pay SkyePharma the same level royalty onGSK's budgeted sales of Paxil CR(TM) from 4 March 2005 while the product remainsoff the market, subject to other terms of the agreement. Approximately £5.0million has been recorded as royalty income in 2004. Donald NicholsonFinance Director CONSOLIDATED PROFIT AND LOSS ACCOUNT Notes Before Exceptional Year to Before Exceptional Year to exceptional items and 31 exceptional items and 31 December items and amortisation December items and amortisation 2003 amortisation (note 4) 2004 amortisation £'000 £'000 £'000 £'000 £'000 £'000 Turnover 2 62,168 - 62,168 53,152 - 53,152Cost of sales 2 (31,154) - (31,154) (29,786) - (29,786) Gross profit 31,014 - 31,014 23,366 - 23,366Selling,marketing anddistributionexpenses (1,728) - (1,728) (4,348) - (4,348)Administrationexpenses Amortisation - (6,314) (6,314) - (6,669) (6,669)Otheradministrationexpenses (12,226) (4,711) (16,937) (17,987) (9,487) (27,474) (12,226) (11,025) (23,251) (17,987) (16,156) (34,143)Research anddevelopmentexpenses (27,961) - (27,961) (30,520) - (30,520)Otheroperatingincome 3 1,237 - 1,237 6,126 - 6,126 Operating loss (9,664) (11,025) (20,689) (23,363) (16,156) (39,519)Profit ondisposal ofinvestment 7 - 2,021 2,021 - - -Share of loss in associate (10) (6) (16) - - - Loss on ordinaryactivities beforeinterest andtaxation (9,674) (9,010) (18,684) (23,363) (16,156) (39,519)Interest receivable 758 - 758 1,029 - 1,029Interest payable (5,784) (338) (6,122) (4,493) - (4,493) Loss on ordinaryactivities beforetaxation 2 (14,700) (9,348) (24,048) (26,827) (16,156) (42,983)Taxation (248) - (248) (240) - (240) Retained loss (14,948) (9,348) (24,296) (27,067) (16,156) (43,223) Basic and diluted lossper Ordinaryshare 5 (2.4p) (1.5p) (3.9p) (4.4p) (2.7p) (7.1p) There was no material difference between the loss on ordinary activities beforetaxation and the historical cost loss before taxation in 2004 and 2003. Allresults represent continuing activities. See Notes to the Preliminary Announcement. CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Year to Year to 31 December 2004 31 December 2003 £'000 £'000 Loss attributable to shareholders (24,296) (43,223)Net currency translation effect (531) (175)Unrealised gain on contract development 130 2,029Unrealised interest receivable 42 - Total recognised losses for the year (24,655) (41,369) RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS Year to Year to 31 December 31 December 2004 2003 (restated) £'000 £'000 Shareholders' funds at thebeginning of the year aspreviously stated 84,870 124,270Restatement for UITF Abstract38; Accounting for ESOPtrusts - (1,028) Shareholders' funds at thebeginning of the year asrestated 84,870 123,242 Total recognised losses forthe year (24,655) (41,369)ESOP credit 1,278 558Purchase of own shares forESOP - (925)Equity shares issued, net ofexpenses 1,869 2,560Exercise of share options,net of expenses 261 765Issue of warrants - 39 Net movement in the year (21,247) (38,372) Shareholders' funds at theend of the year 63,623 84,870 CONSOLIDATED BALANCE SHEET Notes 31 December 31 December 2003 2004 (restated) £'000 £'000 Fixed assetsIntangible assets 6 91,519 95,096Tangible assets 40,628 42,615Investments 7 20,104 22,024 152,251 159,735 Current assetsStock 1,531 1,320DebtorsDue within one year 19,093 14,832Due after more than one year 770 802Investments 1,093 981Cash and short-term bank deposits 15,337 23,240 37,824 41,175Creditors: amounts falling due withinone yearConvertible bonds due June 2005 (9,774) -Deferred income (14,291) (12,926)Other creditors (24,486) (26,394) (48,551) (39,320) Net current (liabilities)/assets (10,727) 1,855 Total assets less current liabilities 141,524 161,590Creditors: amounts falling due aftermore than one yearConvertible bonds due May 2024 (66,478) -Convertible bonds due June 2005 - (58,791)Deferred income (250) (2,948)Other creditors (10,462) (12,860) (77,190) (74,599) Provisions for liabilities and charges (711) (2,121) Net assets 63,623 84,870 Capital and reservesCalled up share capital 63,440 63,067Share premium account 320,980 319,223Other reserves 9,350 9,350Profit and loss account (330,147) (306,770) Shareholders' fundsAttributable to equity interests 52,313 73,560Attributable to non-equity interests 11,310 11,310 63,623 84,870 See Notes to the Preliminary Announcement CONSOLIDATED CASH FLOW STATEMENT Notes Year to 31 Year to 31 December 2004 December 2003 £'000 £'000Net cash(outflow)/inflow from operatingactivities (b) (10,715) 6,615Returns on investments and servicing of financeInterest received 747 1,047Interest paid (5,880) (4,013)Interest element of finance lease payments (9) (70) (5,142) (3,036) Taxation (248) (227) Capital expenditure and financial investmentPurchase of intangible fixed assets (1,308) (2,530)Purchase of tangible fixed assets (4,432) (4,021)Purchase of fixed asset investments (2,186) (5,674)Disposal of fixed asset investments 2,650 - (5,276) (12,225) Cash outflow before use of liquid resourcesand financing (21,381) (8,873) Management of liquid resourcesNet decrease in amounts held onshort-term bank deposit 19,086 183 FinancingIssue of Ordinary Share capital 261 1,437Issue of warrants - 39Issue of convertible bonds due May 2024 20,000 -Expenses of convertible bonds issue andexchange (3,399) -Debt due within one year:Inception of new loan - 770Repayment of loans (1,260) -Debt due beyond one year:Inception of new loan - 1,936Repayment of loans (264) (286)Capital element of hire purchase and financelease payments (223) (1,078) 15,115 2,818 Increase/(decrease) in cash 12,820 (5,872) NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of movements in net debt Year to 31 Year to 31 December December 2004 2003 £'000 £'000 Increase/(decrease) in cash in the year 12,820 (5,872)Cash inflow from increase in debt andlease financing (14,854) (1,342)Cash inflow from decrease in liquidresources (19,086) (183) Change in net debt resulting from cashflows (21,120) (7,397)Amortisation of issue costs on convertible bonds (522) (414)Write off of issue costs on exchange ofconvertible bonds (338) -New finance leases - (46)Translation difference (489) (24) Movement in net debt in the year (22,469) (7,881)Net debt at beginning of the year (49,482) (41,601) Net debt at end of the year (71,951) (49,482) Net debt is defined as cash and liquid resources less borrowings. (b) Reconciliation of operating loss to net cash (outflow)/inflow from operatingactivities Year to Year to 31 December 2004 31 December 2003 £'000 £'000 Operating loss (20,689) (39,519) Depreciation 5,994 6,294Amortisation 6,314 6,669Increase in stock (211) (64)(Increase)/decrease in debtors (4,207) 19,573Decrease in deferred income excludingunrealised gain on contract development (1,203) (126)Increase in other creditors 28 4,734(Decrease)/increase in provisions (1,410) 1,920Provision for diminution in value offixed asset investments 3,503 1,599Impairment of intellectual property - 2,673Impairment of tangible fixed assets - 1,324Other 1,166 1,538 Net cash (outflow)/inflow from operatingactivities (10,715) 6,615 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT continued c) Analysis of net debt At 1 January Cash Non-cash Exchange At 31 December 2004 flow changes movements 2004 £'000 £'000 £'000 £'000 £'000 Cash at bankand in hand 3,052 11,653 - (18) 14,687Bank overdraft (1,198) 1,167 - 31 -Short-termbank deposits 20,188 (19,086) - (452) 650 22,042 (6,266) - (439) 15,337 Debt due within one year (3,172) 1,260 (1,923) 34 (3,801)Debt due afterone year (9,195) 264 1,923 (92) (7,100)Convertible bonds due June 2005 (58,791) - 49,017 - (9,774)Convertiblebonds due May2024 - (16,601) (49,877) - (66,478)Hire purchaseand financeleases (366) 223 - 8 (135) (71,524) (14,854) (860) (50) (87,288) Total (49,482) (21,120) (860) (489) (71,951) Cash at bank and in hand and short-term bank deposits are aggregatedon the balance sheet. Debt includes bank loans and a secured mortgage. Non-cash changes relate to the exchange of £49.6 million convertible bonds due2005 for bonds due 2024 in the same amount, amortisation of the issue costs onthe convertible bonds, the write off of unamortised issue costs on the 2005convertible bonds on exchange for 2024 convertible bonds and transfers betweencategories. See note 8; Convertible bonds. NOTES TO THE PRELIMINARY ANNOUNCEMENT 1 Accounting policies Accounting convention and presentation The unaudited results for the year ended 31 December 2004 have beenprepared in accordance with the accounting policies applied in 2004. The Grouphas applied one new accounting standard during the period. During 2004 the Grouphas implemented UITF Abstract 38; Accounting for ESOP trusts and relatedamendments to Abstract 17; Employee share schemes. UITF 38 changes thepresentation of an entity's own shares held in an ESOP trust from requiring themto be recognised as assets to requiring them to be deducted in arriving atshareholders' funds. UITF 17 (revised) requires that the minimum expenserecognised in respect of an award should be the difference between the fairvalue of the shares at the date of award and the amount that an employee may berequired to pay for the shares (i.e. the intrinsic value of the award). Theprior year comparatives have been restated for the adoption of UITF Abstract 38.The effect of adoption of UITF 17 is not material. The financial information inthis statement does not constitute statutory accounts within the meaning ofSection 240 of the Companies Act 1985. The financial information for the year ended 31 December 2003 has been extractedfrom the Statutory Accounts for that period which have been delivered to theRegistrar of Companies. The Auditors' Report on these Accounts was unqualifiedand did not contain a statement under Section 237 of the Companies Act 1985. The financial information in this announcement has been prepared on a goingconcern basis which assumes that the Company will continue in operationalexistence for the foreseeable future. The Directors have reviewed the workingcapital requirements of the Group for the next twelve months. The Group'sworking capital requirements are sensitive to the timing and receipt ofmilestone payments and payments received on the signing of new contracts,particularly in the short-term the timing of FDA approval of Fenofibrate and theconclusion of a definitive agreement for the pulmonary licensing. The Directors have a reasonable expectation that appropriate financing will beavailable, if required to cover any shortfall, and have therefore prepared thefinancial information contained herein on a going concern basis. Until the above uncertainties are resolved the auditors have indicated thattheir report may contain a reference to going concern relating to these matters.The financial information in this announcement does not reflect any adjustmentsthat would be required to be made if it was to be prepared on a basis other thanthe going concern basis. Revenue recognition Turnover comprises contract development and licensing, royalty andmanufacturing and distribution income. Contract development and licensing incomerepresents amounts invoiced to customers for services rendered under developmentand licensing agreements, including milestone payments and technology accessfees. Contract revenue is recognised when earned and non-refundable and to theextent that there are no future obligations pursuant to the revenue, inaccordance with the contract terms. Refundable contract revenue is treated asdeferred until such time as it is no longer refundable. Royalty incomerepresents income earned as a percentage of product sales. Advance royaltiesreceived are treated as deferred income until earned, at which time they arerecognised as income. Manufacturing and distribution revenues principallycomprise contract manufacturing fees invoiced to third parties and income fromproduct sales. Sales taxes are excluded from revenue. Research and development costs Research and development costs are charged as an expense in theperiod in which they are incurred. NOTES TO THE PRELIMINARY ANNOUNCEMENT continued 1 Accounting policies (continued) Foreign currency transactions Foreign currency transactions by Group companies are recorded inlocal currency at the exchange rate ruling on the date of transaction. Assetsand liabilities expressed in foreign currencies are translated into sterling atthe exchange rates ruling at the balance sheet date. Exchange differences whichrelate to the retranslation of net assets of overseas companies are takendirectly to reserves. All other foreign exchange differences are taken to theprofit and loss account in the year in which they arise. The Group uses theaverage exchange rates prevailing during the year to translate the results ofoverseas subsidiaries into sterling and year-end rates to translate the netassets of those undertakings. Fixed asset investments - Investments in associates Investments in associated undertakings are recorded in theconsolidated balance sheet at the Group's share of net assets at acquisition andof their post acquisition retained profits or losses, together with any goodwillarising on the acquisition net of amortisation. Goodwill is capitalised andamortised over a period of 20 years or less in line with the Directors' view ofits useful economic life. Fixed asset investments - Unlisted investments Investments that are held for continuing use in the business areclassified as fixed asset investments and recorded in the balance sheet at thelower of cost and net realisable value. Impairment of fixed assets The carrying values of fixed assets are reviewed for impairment whenthere is an indication that the assets may be impaired. First year impairmentreviews are conducted for acquired goodwill and intangible assets. Impairment isdetermined by reference to the higher of net realisable value and value in use,which is measured by reference to discounted future cash flows. Any provisionfor impairment is charged to the profit and loss account in the year concerned. Convertible debt On issue, convertible debt is stated at the amount of net proceedsafter deducting issue costs. On conversion, the amount recognised inshareholders' funds in respect of the shares issued is equal to the carryingvalue at the date of conversion. Issue costs on convertible debt and anydiscount on issue are charged to the profit and loss account at a constant rateover the term of the debt. Future requirements In June 2002, the Council of the European Union adopted a Regulationrequiring listed companies in its Member States to prepare consolidatedfinancial statements in accordance with International Financial ReportingStandards (IFRS) from 1 January 2005. The Group is completing a project to convert its principal financialreporting from UK GAAP to IFRS, and plans to announce the financial effect andstatus of the transition during the first half of 2005. The first SkyePharmafinancial statements prepared under IFRS will be for the interim period ending30 June 2005. NOTES TO THE PRELIMINARY ANNOUNCEMENT continued 2 Segmental analysis The Group's operations relate wholly to one class of business,pharmaceuticals. Further analysis of turnover, loss on ordinary activitiesbefore taxation and net assets by geographical area is set out below, togetherwith an analysis of cost of sales. Year to Year to 31 December 31 December 2004 2003 £'000 £'000(a) Turnover By class of business: Pharmaceuticals Contract development and licensing Milestone payments 20,334 24,196 Research and development costs recharged 6,003 5,456 26,337 29,652 Royalties receivable 25,959 18,701 Manufacturing and distribution 9,872 4,799 62,168 53,152 By location of customer: UK 15,343 21,327 Europe 24,875 18,027 North America 17,195 10,289 Rest of the world 4,755 3,509 62,168 53,152 By location of operation: Europe 47,525 42,503 North America 14,643 10,649 62,168 53,152 Year to Year to 31 December 31 December 2004 2003 £'000 £'000(b) Cost of sales By class of business: Pharmaceuticals Contract development and licensing (10,735) (12,085) Royalties payable (4,503) (4,707) Manufacturing and distribution (15,916) (12,994) (31,154) (29,786) NOTES TO THE PRELIMINARY ANNOUNCEMENT continued 2 Segmental analysis (continued) Year to Year to 31 December 31 December 2004 2003 £'000 £'000(c) Loss on ordinary activities before taxation By class of business: Pharmaceuticals (24,048) (42,983) By location of operation: UK (7,505) (5,825) Europe 687 (3,424) North America Operations (11,856) (30,270) Associated undertakings (10) - Loss on ordinary activities before interest and taxation (18,684) (39,519) Net interest payable (5,364) (3,464) Loss on ordinary activities before taxation (24,048) (42,983) 3 Other operating income The Group entered into two transactions with Paul Capital Royalty AcquisitionFund in 2000 and 2002. Under the first of these transactions Paul Capitalprovided a total of $30 million between 2000 and 2002, in return for the sale ofa portion of the potential future royalty and revenue streams from DepoDur(TM),Xatral(R) OD, Solaraze(R) and DepoCyt(R). No income was recognised under thisagreement during 2004 (2003: £1.1 million) since all of the income had beenrecognised as at 31 December 2003. Royalty payments to Paul Capital of £1.3million (2003: £1.0 million) have been expensed during the year. Under the second transaction Paul Capital provided a further $30 million during2002 and 2003, in return for the sale of a portion of the potential futureroyalty and revenue streams from nine products from the Group's drug pipeline.Income of £1.2 million (2003: £5.0 million) was recognised as Other operatingincome under this agreement on a cost to complete basis. Royalty payments toPaul Capital of £1.7 million (2003: £2.2 million) have been expensed during theyear. NOTES TO THE PRELIMINARY ANNOUNCEMENT continued 4 Exceptional items Exceptional items are categorised as follow:Related Shares:
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