CHAIRMAN'S STATEMENT
The most important event in the first half of 2004 was the US Food & Drug
Administration's approval of DepoDur(TM) (the new name for DepoMorphine(TM)) on
18 May. After taking the decision in 2001 to undertake full clinical development
ourselves and completing the clinical studies and regulatory filings for
DepoDur(TM) on time, it is highly gratifying to see this crowned by approval by
the FDA. Importantly this was the first possible date on which the product could
be approved. Few new drugs are approved by the FDA at the first opportunity so
this achievement is a real tribute to both the quality of the product and the
skill of our clinical and regulatory teams. DepoDur(TM) is the first product for
which we have undertaken full development ourselves and we expect it to be a
major contributor to the company's future.
Apart from the exciting news about DepoDur(TM), I am also pleased to report that
Foradil(R) Certihaler(R) has received its first approvals in Europe. Following
the FDA 'approvable' letter issued in October last year, a response has been
filed. Our royalty income continues to grow rapidly, driven by continuing
progress by Paxil CRTM and Xatral(R) OD/Uroxatral(R). Our new partner
Mundipharma launched DepoCyte(R) in Europe and US sales of Solaraze(R) are
expected to benefit from an expanded sales force following the recent
acquisition of Quintiles' Bioglan unit by Bradley Pharmaceuticals. In our
pipeline, the HFA-MDI version of Pulmicort(R) we are developing for AstraZeneca
has now completed its Phase III trials.
We have also completed some important new agreements. We appointed Medeus Pharma
as our European licensee for DepoDur(TM), on excellent terms, and also licensed
to First Horizon a cardiovascular product currently under review by the FDA.
Approval this year would bring us a substantial milestone payment and a very
attractive royalty rate. We entered a collaboration with Critical Therapeutics
to develop a controlled release version of zileuton for asthma. This is a
near-term opportunity, with filing expected in 2005. We also licensed our entire
dermatology portfolio to Trigenesis Therapeutics following a strategic review
that concluded that we could obtain a greater return from this technology if we
licensed the portfolio to a company focused in this therapeutic area.
For our package of pulmonary products, we are seeking to appoint a partner with
proven marketing ability in the respiratory field. We have a short-list of
partners (including our preferred candidate) who are completing their enquiries
in this complex area. Although this has taken longer than we had hoped,
potential partners have required very extensive due diligence investigations to
satisfy themselves fully before committing to the project given the development
cost and timescale involved. We remain confident of completing a satisfactory
agreement.
Our revenues in the first half were 26% above the 2003 level even though, as in
previous years, we expect the majority of our revenues to arise in the second
half of the year. However I must point out that whether we make a profit for the
second half, and for the year as a whole, will depend on the structure and
timing of the signature of the above pulmonary deal and the timing of FDA
approval of the cardiovascular pipeline product.
Finally we are pleased to report that we have recently completed an exchange
offer for our 2005 convertible bonds. Over 80% of holders accepted the offer to
exchange their bonds for new bonds with a higher conversion price of £1.00 and
first conversion in 2009. The remaining £10 million of 2005 bonds will either be
redeemed next year or converted into ordinary shares. We also raised £20 million
of new money in May, also at a conversion price of £1.00. These successful
issues demonstrate belief in the value of Skyepharma and greatly enhance our
financial flexibility.
Ian Gowrie-Smith
Non-executive Chairman
REVIEW OF OPERATIONS
This has been a busy period for SkyePharma. The most important event was the
exciting news of the FDA approval of DepoDur(TM) in May. We have also made
encouraging progress with our other near-term pipeline products and announced a
number of important new agreements. We are still in late-stage discussions with
several parties wishing to license our package of pulmonary products, including
our preferred partner, and remain confident of achieving a satisfactory
agreement. Our total revenues increased by some 26% over the first half of the
previous year and more importantly our royalty income has continued to grow
rapidly, continuing the trend of the past few years.
PRODUCTS ON THE MARKET
Paxil(R) CR, our improved formulation of GlaxoSmithKline's Paxil(R), was
launched in the USA in April 2002 and currently holds just under 8% of all new
US prescriptions for SSRI antidepressants. This share has been largely
unaffected by the onset of US generic competition for the older version
Paxil(R), which started in September last year. GlaxoSmithKline's total sales
of Paxil(R) CR were £196 million ($356 million) in the first half of 2004, up
by 29% in constant exchange rate terms. As disclosed in the 2003 Annual Report,
SkyePharma is in discussions with GlaxoSmithKline over the rate of the royalty
we receive on sales of Paxil(R) CR.
Xatral(R) OD (Uroxatral(R) in the USA), our once-daily version of
Sanofi-Aventis's Xatral(R) (alfuzosin), is a treatment for the urinary symptoms
of benign prostatic hypertrophy. Xatral(R) OD has been on the market outside
the USA since April 2000 and has now largely replaced the older multidose
versions of Xatral(R). Uroxatral(R) was launched in the USA in November 2003
and has already captured just under 10% of the combined new prescriptions
written for it and for its main competitor, an encouraging start. Xatral(R) OD
has now been approved in Europe for a second indication, acute urinary
retention, with Phase III trials ongoing for the USA. Sales of all forms of
Xatral(R) were €138 million in the first half of 2004, up by 35% in constant
exchange rate terms. This included US sales of Uroxatral(R) of €14 million.
Our European partner Mundipharma launched DepoCyte(R) (known as DepoCyt(R) in
the USA) in February at an oncology meeting in Barcelona and has had an
encouraging initial response. Mundipharma shares our view that the market for
DepoCyte(R) is largely under-developed. We have now completed enrolment in the
Phase IV trial that will be used to support a filing for a more common form of
neoplastic meningitis, associated with solid tumours.
Solaraze(R), our topical gel treatment for actinic keratosis, is now marketed
in the US by Bradley Pharmaceuticals. Bradley, a fast-growing US specialty
pharmaceuticals company, acquired the Bioglan dermatology unit of Quintiles in
August 2004. This will more than double the number of sales representatives
detailing Solaraze(R). The transfer of rights to market Solaraze(R) from
Quintiles to Bradley required our consent and in August we received a $5 million
payment from Quintiles as part of this transaction. Solaraze(R) is marketed in
Europe and certain other territories by Shire Pharmaceuticals. In Australia we
have recently completed a clinical trial of patients with multiple actinic
keratoses. This will be used as the pivotal trial for submission to the
Australian regulatory authorities.
PRODUCTS IN LATE-STAGE DEVELOPMENT
On 18 May, we received the exciting news that the US FDA had formally approved
DepoDur(TM), our new injectable analgesic for the treatment of pain after
surgery. DepoDur(TM) is the first product that we decided to develop ourselves.
The recent FDA approval validates that decision and also bodes well for approval
in Europe. Having now completed licensing deals in North America and Europe on
excellent terms, we expect DepoDur(TM) to be a major contributor to the
company's future.
In DepoDur(TM) we have used our DepoFoam(TM) sustained-release delivery
technology to improve morphine for relief of post-surgical pain. Given as a
single epidural injection before or during surgery, DepoDur(TM) provides highly
effective pain relief for the following 48 hours - normally the period of peak
post-operative pain. Our clinical trials, involving more than 1000 patients,
convincingly demonstrated the potential of DepoDur(TM) to improve the treatment
of pain after major surgery. There is widespread recognition that pain relief is
an under-served market and current approaches to control of post-operative pain
leave much to be desired.
We now look forward to the US launch of DepoDur(TM) by our partner Endo
Pharmaceuticals later this year. We are now in the process of supplying full
launch quantities to Endo, which will satisfy the conditions for receipt of a
milestone payment due to us on US approval. DepoDur(TM) was filed with the UK
regulatory authorities in November 2003 and on normal regulatory review
timelines we would expect approval by the end of the year. This will be used as
the basis for approval throughout European Union using the EU's 'mutual
recognition' procedure. Our new European partner Medeus Pharma (appointed in
April) is eagerly awaiting approval of DepoDur(TM) to commence marketing.
Foradil(R) Certihaler(R) is a new version of Novartis' long-acting
bronchodilator Foradil(R) (formoterol). We developed not only the multi-dose
dry-powder inhaler device but also the formulation used in it that ensures dose
consistency regardless of storage conditions. These technologies are also
involved in a new collaboration with Novartis to jointly develop another
bronchodilator, QAB149. Novartis filed Foradil(R) Certihaler(R) with the FDA
and European regulatory authorities in December 2002. The FDA issued an
'approvable' letter in October 2003 and Novartis has filed a response. In March
this year the product received its first European approval, in Switzerland, and
it has since been approved in several other countries. Novartis is responsible
for 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 enrolment of patients for the Phase III trial of our
once daily version of the Parkinson's drug Requip(R) which we are conducting
for our partner GlaxoSmithKline. This is on track for the target filing planned
for next year.
We are developing several other asthma drugs in metered-dose inhalers (MDIs)
powered by a hydrofluoroalkane (HFA) propellant gas. We have now completed the
Phase III trial of an HFA-MDI version of AstraZeneca's inhaled steroid
Pulmicort(R) (budesonide). We expect AstraZeneca to file this for approval in
the first country in Europe around the end of the year. We will receive double
digit royalties on sales of Pulmicort(R) HFA-MDI. Our own HFA-MDI version of
formoterol will commence Phase III trials around the end of this year and our
fixed-dose combination product Flutiform (combining formoterol with the inhaled
steroid fluticasone) will also start its Phase II trial in the autumn.
Propofol IDD-DTM is our novel formulation of propofol, a widely-used injectable
anaesthetic and sedative. Our formulation has been designed not to support
microbial growth, a recognised problem with current versions, and should provide
uninterrupted sedation for 24 hours, ideal for the fast-growing intensive care
market. In April the FDA completed its review of the Phase II trials, triggering
a milestone payment from our North American partner Endo, and we are now in
dialogue with the FDA on the design of the additional trials required for
approval. We are also in current discussion with potential licensees for Europe
and certain other markets.
NEW CORPORATE DEVELOPMENTS
Apart from the European licence for DepoDur(TM) with Medeus referred to above, we
have also licensed a cardiovascular product in the US to First Horizon
Pharmaceutical Corporation. This oral product is currently under review by the
FDA. We will receive up to $50 million in milestone payments, of which up to $20
million is dependent on the timing and conditions of FDA approval, anticipated
by the end of this year. We will also receive 25% of First Horizon's net sales
of this product in the form of royalty income and manufacturing revenues.
In January we announced a collaboration with Critical Therapeutics to develop
zileuton for asthma and COPD. We had developed a twice-daily version for Abbott
Laboratories which completed Phase III development for asthma but has not been
filed. Critical Therapeutics has now licensed zileuton from Abbott. We expect
the controlled release product to be filed with the FDA by the end of next year.
In April we licensed our dermatology products, pipeline and topical delivery
technologies to a US dermatology company, Trigenesis Therapeutics. In a
strategic review last year we concluded that we would gain a greater return by
outlicensing this technology portfolio to a company with a development and
market focus in this area. We retain our existing licences and can also continue
to use the delivery technologies under certain conditions. If all the pipeline
products reach the market, milestone payments will exceed US$20 million.
SkyePharma will also receive a 10% royalty. Trigenesis is now part of the
fast-growing Indian pharmaceutical company, Dr Reddy's Laboratories.
In June we agreed a strategic alliance with the UK company Vectura for pulmonary
delivery technologies. We have obtained certain rights to Vectura's Aspirair(R)
dry-powder inhaler, which is particularly suitable for the delivery of
macromolecules. We invested £2 million for a 4% equity stake in Vectura. Vectura
has recently completed an initial public offering on the AIM market.
Finally King Pharmaceuticals (in the process of being acquired by Mylan
Laboratories, a leading US generic company) has informed us that it wishes to
terminate the agreement signed in May 2003 to develop a modified-release
formulation of Altace(R) (ramipril). This product was in an early stage of
development.
THE FUTURE
We are determined to maximise the long-term return from our products and to move
away from reliance on one-off milestone payments, which historically have made
up the majority of our revenues. This has meant a change in the structure of our
agreements to optimise royalty rates and to make milestone payments more tied to
product revenue targets. Inevitably this will bring a short-term penalty in
terms of revenues and cashflow but we are confident that this is the correct
approach, which will greatly enhance the value of our products to the company.
Michael Ashton
Chief Executive
FINANCIAL REVIEW
TURNOVER
Revenues for the half year were 26% higher at £28.5 million compared with £22.6
million in the same period in 2003. This is primarily due to an increase in
milestone payments as well as higher royalty income. This does not include
milestone payments of £5.5 million received in the first half from Endo and
First Horizon which have been fully deferred. Revenues have increased by a
cumulative annual growth rate of 38% since 1996.
Contract development and licensing revenues increased 26% to £14.4 million for
the period (H1 2003: £11.4 million). Revenues recognised from milestone payments
and payments received on the signing of agreements in the period amounted to
£11.5 million and included revenues from Medeus for the European marketing and
distribution rights for DepoDur(TM) and Trigenesis for the rights to certain
dermatological assets. In addition, £3.5 million of revenue was recognised from
GlaxoSmithKline on the phase III clinical trials of Requip(R) (ropinirole);
AstraZeneca on the phase III clinical trials of Budesonide HFA and Novartis on
the first European approval of Foradil(R) Certihaler(R) and the phase II
clinical trials of QAB 149.
Royalty income, principally from Paxil CRTM, Xatral(R) OD, DepoCyt(R) and
Solaraze(R), increased by 28% to £10.3 million compared with the first half of
2003.
Manufacturing and distribution revenues increased by 22% to £3.8 million for the
period mainly due to higher production of the Foradil(R) Certihaler(R) for
Novartis, compared with £3.2 million in H1 2003.
DEFERRED INCOME
During the period, a further net £1.0 million of turnover and other income was
deferred under SkyePharma's revenue recognition policy. Amounts received
included the milestones from Endo and First Horizon noted above which have been
fully deferred. Total deferred income of £16.9 million as at 30 June 2004
comprised:
31 December 2003 Received * Recognised 30 June 2004
£ million £ million £ million £ million
Contract development and licensing revenue 7.1 16.7 (14.4) 9.4
Other operating income 8.8 (0.3) (1.0) 7.5
15.9 16.4 (15.4) 16.9
* Includes exchange adjustments
Deferred income will be released in subsequent periods as the related costs are
incurred or as any associated obligations under the relevant contracts are
satisfied.
COST OF SALES
Cost of sales comprises research and development expenditures, including the
costs of certain clinical trials incurred on behalf of our collaborative
partners, the direct costs of contract manufacturing, direct costs of licensing
arrangements and royalties payable. Cost of sales increased by 6% to £13.5
million in the first six months of 2004 (H1 2003: £12.7 million). This was
mainly due to an increase of £0.6 million in royalty expenses due under our
agreement with Paul Capital. The resulting gross profit increased 52% to £15.0
million compared with £9.9 million in the first half of 2003.
EXPENSES
Selling, marketing and distribution expenses decreased to £1.1 million (H1 2003:
£2.5 million), reflecting the significant savings resulting from the Group
reorganisation announced last year.
Amortisation of intangible assets decreased slightly by £0.1 million to £3.1
million. Other administration expenses before exceptionals fell to £6.5 million
in the first half, compared with £7.5 million in H1 2003. This reduction is
mainly due to the release of a portion of a provision held against the Group's
investment in GeneMedix plc, as well as the prior year expense of reacquiring
the DepoCyt(R) European rights from Elan. The exceptional charge of £0.5
million relates to the continuing reorganisation of some research and
development operations and other business functions which commenced during 2003.
No further significant reorganisation expenses are anticipated, and the
reorganisation is expected to be completed during 2004.
SkyePharma's own research and development expenses in the period decreased by
£2.1 million to £14.4 million mainly due to a reduction in expenditure on
DepoDur(TM) when compared with the significant expenditure incurred in the prior
period in preparation for its July 2003 filing with the FDA.
OTHER OPERATING INCOME
Under the Paul Capital agreements, other operating income recognised in the
first half was £1.0 million (H1 2003: £4.2 million). All of the income under the
first Paul Capital agreement has now been recognised, and there is £7.5 million
of deferred income under the second Paul Capital agreement as at June 2004.
Royalty payments to Paul Capital of £1.9 million (H1 2003: £1.3 million) were
expensed during the period.
OPERATING RESULTS
The increase in revenue mentioned above is the most significant factor
contributing to the Group's 44% reduction in operating loss after exceptionals
to £9.6 million (H1 2003: £17.0 million) in the first six months of 2004. The
reduction in operating loss before exceptionals amounted to 52%. Other factors,
including the decrease in the Group's own research and development of £2.1
million also contributed to the reduced loss. The Group made an exceptional £2.0
million profit on disposal of its entire holding of Transition Therapeutics
shares. Similarly, the retained loss for the period decreased by 45% to £10.2
million (H1 2003: £18.7 million), after net interest payable of £2.5 million (H1
2003: £1.6 million). Earnings before interest, tax, depreciation and
amortisation ('EBITDA'), a commonly used indicator, improved by 85% to a loss of£1.6 million in the period (H1 2003: £10.5 million loss).
The loss per share for the period was 1.7 pence, which represents a 45%
reduction compared with a loss of 3.1 pence for the same period in 2003.
Foreign currency movements did not have a material impact on the results of
operations in 2004 compared with 2003.
CASH BALANCES AND CASH FLOW
In April 2004 the Group issued £20 million 6% convertible bonds, with a first
right of conversion after five years by the holder of the bonds, and a final
maturity of May 2024. This raised approximately £18.9 million net of expenses.
The bonds are convertible at the option of the holder into SkyePharma Ordinary
Shares at a conversion price of £1.00.
At 30 June 2004 SkyePharma had cash and short-term deposits of £29.9 million and
a bank overdraft of £0.9 million, compared with £23.2 million cash and a £1.2
million bank overdraft at 31 December 2003.
There was a net cash outflow from operating activities of £5.1 million for the
half year (H1 2003: £7.0 million inflow). During the first half of 2004
purchases of tangible fixed assets were £2.8 million. Purchases of intangible
fixed assets of £1.2 million mainly relate to the strategic alliance with
Vectura in the area of pulmonary delivery technologies. The proceeds on disposal
of the Group's holding of Transition Therapeutics shares were £2.6 million. The
resulting cash outflow before financing for the period was £10.4 million (H1
2003: £4.5 million).
BALANCE SHEET
The balance sheet at 30 June 2004 shows shareholders' funds of £77.2 million,
with cumulative goodwill written off to the profit and loss account reserve of
£147.6 million.
In May 2004 SkyePharma issued 3.25 million Ordinary Shares to the Research
Development Foundation as a result of a restructuring of the historic
arrangements with RDF existing at the time of the DepoTech acquisition in 1999.
In addition, the Group settled the £0.5 million Chiron promissory note in June
2004.
In July 2004 the Group exchanged £49.6 million of its convertible bonds due 2005
for convertible bonds due 2024, leaving £9.8 million of the 2005 bonds
outstanding. Accordingly the unamortised issue costs on the exchanged 2005
convertible bonds were written off during the period. In September 2004 the
£49.6 million 2024 convertible bonds were consolidated to form a single series
with the £20 million 2024 bonds issued in May 2004.
Bank and other non-convertible debt amounted to £11.3 million at 30 June 2004,
consisting principally of a £7.2 million property mortgage secured by the assets
of Jago. Net debt amounted to £60.4 million (31 December 2003: £49.5 million).
INTERNATIONAL FINANCIAL REPORTING STANDARDS
SkyePharma will be required to prepare consolidated financial statements under
International Financial Reporting Standards ('IFRS') from 1 January 2005 and torestate the 2004 results for comparison.
The transition to IFRS could have a material impact on the Group's financial
position and reported results from this date. The Group's project team is
managing its conversion to IFRS and is in the process of assessing the potential
impact.
Donald Nicholson
Finance Director
CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the six months ended 30 June 2004
Exceptional
Unaudited items and Unaudited
6 months to amortisation 6 months to
Notes 30 June 2004 (note 4) 30 June 2004
£'000 £'000 £'000
Turnover 2 28,523 - 28,523
Cost of sales 2 (13,507) - (13,507)
Gross profit 15,016 - 15,016
Selling, marketing and distribution
expenses (1,133) - (1,133)
Administration expenses
Amortisation - (3,072) (3,072)
Other administration expenses (6,526) (537) (7,063)
(6,526) (3,609) (10,135)
Research and development expenses (14,362) - (14,362)
Other operating income 3 1,016 - 1,016
Operating loss (5,989) (3,609) (9,598)
Profit on disposal of investment - 2,021 2,021
Loss on ordinary activities before
interest and taxation (5,989) (1,588) (7,577)
Interest receivable 370 - 370
Interest payable (2,554) (338) (2,892)
Loss on ordinary activities before
taxation 2 (8,173) (1,926) (10,099)
Taxation (95) - (95)
Retained loss (8,268) (1,926) (10,194)
Earnings per Ordinary Share 5
Basic (1.4p) (0.3p) (1.7p)
Diluted (1.4p) (0.3p) (1.7p)
There was no material difference between the loss on ordinary activities before
taxation and the historical cost loss before taxation in 2004 and 2003. All
results represent continuing activities.
See Notes to the Interim Financial Statements
CONSOLIDATED PROFIT AND LOSS ACCOUNT continued
for the six months ended 30 June 2004
Exceptional
Unaudited items and Unaudited
6 months to amortisation 6 months to
Notes 30 June 2004 (note 4) 30 June 2004
£'000 £'000 £'000
Turnover 2 22,586 - 22,586
Cost of sales 2 (12,702) - (12,702)
Gross profit 9,884 - 9,884
Selling, marketing and distribution
expenses (2,518) - (2,518)
Administration expenses
Amortisation - (3,226) (3,226)
Other administration expenses (7,478) (1,409) (8,887)
(7,478) (4,635) (12,113)
Research and development expenses (16,420) - (16,420)
Other operating income 3 4,173 - 4,173
Operating loss (12,359) (4,635) (16,994)
Profit on disposal of investment - - -
Loss on ordinary activities before
interest and taxation (12,359) (4,635) (16,994)
Interest receivable 512 - 512
Interest payable (2,131) - (2,131)
Loss on ordinary activities before
taxation 2 (13,978) (4,635) (18,613)
Taxation (76) - (76)
Retained loss (14,054) (4,635) (18,689)
Earnings per Ordinary Share 5
Basic (2.3p) (0.8p) (3.1p)
Diluted (2.3p) (0.8p) (3.1p)
CONSOLIDATED PROFIT AND LOSS ACCOUNT continued
for the six months ended 30 June 2004
Notes Exceptional
Audited items and Audited
12 months to 31 amortisation 12 months to 31
December 2003 December 2003
£'000 £'000 £'000
Turnover 2 53,152 - 53,152
Cost of sales 2 (29,786) - (29,786)
Gross profit 23,366 - 23,366
Selling, marketing and distribution
expenses (4,348) - (4,348)
Administration expenses
Amortisation - (6,669) (6,669)
Other administration expenses (17,987) (9,487) (27,474)
(17,987) (16,156) (34,143)
Research and development expenses (30,520) - (30,520)
Other operating income 3 6,126 - 6,126
Operating loss (23,363) (16,156) (39,519)
Profit on disposal of investment - - -
Loss on ordinary activities before
interest and taxation (23,363) (16,156) (39,519)
Interest receivable 1,029 - 1,029
Interest payable (4,493) - (4,493)
Loss on ordinary activities before
taxation 2 (26,827) (16,156) (42,983)
Taxation (240) - (240)
Retained loss (27,067) (16,156) (43,223)
Earnings per Ordinary Share 5
Basic (4.4p) (2.7p) (7.1p)
Diluted (4.4p) (2.7p) (7.1p)
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
for the six months ended 30 June 2004
Unaudited Audited
Unaudited 6 months to 12 months to
6 months to 30 June 2003 31 December
30 June 2004 2003
£'000 £'000 £'000
Loss attributable to shareholders (10,194) (18,689) (43,223)
Net currency translation effect 75 (37) (175)
Unrealised gain on contract development 128 1,645 2,029
Total recognised gains and losses for the period (9,991) (17,081) (41,369)
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the six months ended 30 June 2004
Unaudited Audited
Unaudited 6 months to 12 months to
6 months to 30 June 2003 31 December 2003
30 June 2004 (restated) (restated)
£'000 £'000 £'000
Shareholders' funds at the beginning of the period
as previously stated 84,870 124,270 124,270
Restatement for UITF Abstract 38; Accounting for
ESOP trusts - (1,028) (1,028)
Shareholders' funds at the beginning of the period
as restated 84,870 123,242 123,242
Total recognised gains and losses for the period (9,991) (17,081) (41,369)
Purchase of own shares for ESOP - (925) (925)
ESOP credit 271 201 558
Equity shares issued, net of expenses 1,869 - 2,560
Exercise of share options, net of expenses 181 61 765
Increase in shares and warrants to be issued - 2,565 -
Issue of warrants - - 39
Net movement in the period (7,670) (15,179) (38,372)
Shareholders' funds at the end of the period 77,200 108,063 84,870
CONSOLIDATED BALANCE SHEET
as at 30 June 2004
Notes Unaudited Unaudited Audited
30 June 2004 30 June 2003 31 December 2003
(restated) (restated)
£'000 £'000 £'000
Fixed assets
Intangible assets 6 94,688 101,572 95,096
Tangible assets 40,349 44,533 42,615
Investments 7 21,563 22,446 22,024
156,600 168,551 159,735
Current assets
Stock 1,372 1,156 1,320
Debtors 16,658 21,973 15,634
Investments 1,625 1,905 981
Cash and short-term bank deposits 29,921 22,181 23,240
49,576 47,215 41,175
Creditors: amounts falling due within one year
Convertible bonds due 2005 8 (59,336) - -
Deferred income (12,705) (17,310) (12,926)
Other creditors (20,627) (18,520) (26,394)
(92,668) (35,830) (39,320)
Net current (liabilities)/assets (43,092) 11,385 1,855
Total assets less current liabilities 113,508 179,936 161,590
Creditors: amounts falling due after more than
one year
Convertible bonds due 2005 8 - (58,584) (58,791)
Convertible bonds due 2024 8 (18,874) - -
Deferred income (4,164) (1,843) (2,948)
Other creditors (11,917) (10,840) (12,860)
(34,955) (71,267) (74,599)
Provisions for liabilities and charges 11 (1,353) (606) (2,121)
Net assets 77,200 108,063 84,870
Capital and reserves
Share capital 12 63,424 62,559 63,067
Share premium 320,916 316,467 319,223
Shares and warrants to be issued - 2,565 -
Other reserves 9,350 9,311 9,350
Profit and loss account (316,490) (282,839) (306,770)
Shareholders' funds
Attributable to equity interests 65,890 96,753 73,560
Attributable to non-equity interests 11,310 11,310 11,310
77,200 108,063 84,870
See Notes to the Interim Financial Statements
CONSOLIDATED CASH FLOW STATEMENT
for the six months ended 30 June 2004
Notes Unaudited Unaudited Audited
6 months to 30 6 months to 30 12 months to 31
June 2004 June 2003 December 2003
(restated) (restated)
£'000 £'000 £'000
Net cash (outflow)/inflow from operating activities 9 (5,084) 6,975 6,615
Returns on investments and servicing of finance
Interest received 316 473 1,047
Interest paid (4,107) (3,752) (4,013)
Interest element of finance lease payments (5) (15) (70)
(3,796) (3,294) (3,036)
Taxation (95) (5) (227)
Capital expenditure and financial investment
Purchase of intangible fixed assets (1,168) (2,239) (2,530)
Purchase of tangible fixed assets (2,760) (2,385) (4,021)
Purchase of fixed asset investments (168) (3,573) (4,749)
Disposal of fixed asset investments 2,650 - -
(1,446) (8,197) (11,300)
Cash outflow before use of liquid resources and
financing (10,421) (4,521) (7,948)
Management of liquid resources
Net (increase)/decrease in amounts held on
short-term bank deposit (598) 1,734 183
Financing
Issue of Ordinary Share capital 181 61 1,437
Issue of 2024 convertible bonds 20,000 - -
Expenses of convertible bonds issue (1,135) - -
Issue of warrants - 672 39
Purchase of own shares - (925) (925)
Debt due within one year:
Inception of new loan - - 770
Repayment of Chiron promissory note (549) - -
Debt due beyond one year:
Inception of new loan - - 1,936
Repayment of loans (592) (137) (286)
Capital element of finance lease payments (176) (550) (1,078)
17,729 (879) 1,893
Increase/(decrease) in cash 10 6,710 (3,666) (5,872)
See Notes to the Interim Financial Statements
NOTES TO THE INTERIM FINANCIAL STATEMENTS
for the six months ended 30 June 2004
1 ACCOUNTING POLICIES AND THE BASIS OF PREPARATION
The interim financial statements have been prepared using accounting policies
consistent with those adopted by the Group in its financial statements for the
year ended 31 December 2003 except as noted below.
During 2004 the Group has implemented UITF Abstract 38; Accounting for ESOP
trusts and related amendments to Abstract 17; Employee share schemes. UITF 38
changes the presentation of an entity's own shares held in an ESOP trust from
requiring them to be recognised as assets to requiring them to be deducted in
arriving at shareholders' funds. UITF 17 (revised) requires that the minimum
expense recognised in respect of an award should be the difference between the
fair value of the shares at the date of award and the amount that an employee
may be required to pay for the shares (i.e. the intrinsic value of the award).
The prior year comparatives have been restated for the adoption of UITF Abstract
38. The effect of adoption of UITF 17 is not material.
The interim report is unaudited and does not constitute statutory financial
statements within the meaning of section 240 of the Companies Act 1985. The
results for the period to 30 June 2004 have been formally reviewed and
reported upon by the auditors on page 21 to this report. The figures for the
year ended 31 December 2003 are an extract from the audited financial statements
for that period which have been delivered to the Registrar of Companies and on
which the auditors have issued an unqualified report which contained no
statement therein under section 237(2) or section 237(3) of the Companies Act
1985.
CONSOLIDATION
The consolidated financial information includes the financial statements for the
Company and its subsidiary undertakings. Intra-group sales and profits are
eliminated fully on consolidation. The results of subsidiaries sold or acquired
are included in the consolidated profit and loss account up to the date of their
sale or from their date of acquisition respectively.
REVENUE RECOGNITION
Turnover comprises contract development and licensing, royalty and
manufacturing and distribution income. Contract development and licensing income
represents amounts invoiced to customers for services rendered under development
and licensing agreements, including milestone payments and technology access
fees. Contract revenue is recognised when earned and non-refundable and to the
extent that there are no future obligations pursuant to the revenue, in
accordance with the contract terms. Refundable contract revenue is treated as
deferred until such time as it is no longer refundable. Royalty income
represents income earned as a percentage of product sales. Advance royalties
received are treated as deferred income until earned, when they are recognised
as income. Manufacturing and distribution revenues principally comprise
contract manufacturing fees invoiced to third parties and income from product
sales.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged as an expense in the period in
which they are incurred.
INTANGIBLE FIXED ASSETS
Intangible fixed assets comprise goodwill, intellectual property and
capitalised development costs. Goodwill, being the difference between the fair
value of the purchase consideration and the Group's share of the fair value of
the net assets acquired, is capitalised and amortised over a period of 20 years
or less in line with the Directors' view of its useful economic life. Prior to
the introduction of FRS 10; Goodwill and intangible assets, the policy adopted
was to write off goodwill to reserves. As permitted by FRS 10 goodwill written
off to reserves in previous years has not been reinstated on the balance sheet
and adjustments to such goodwill have been taken directly to reserves. Goodwill
previously written off to reserves is charged to the profit and loss account in
the event of disposal of the related business.
Intellectual property comprises acquired patents, trade marks, know-how and
other similarly identified rights. These are recorded at their fair value at
acquisition date and are amortised in equal instalments over their estimated
useful economic lives, from the date when the transfer of technology is
complete. The period over which the Group expects to derive economic
benefits does not exceed 20 years. Costs associated with internally developed
intellectual property are generally treated as research and development costs.
FIXED ASSET INVESTMENTS
Investments that are held for continuing use in the business are classified
as fixed asset investments and recorded in the balance sheet at cost
or Directors' valuation, less provision for permanent diminution in value.
IMPAIRMENT OF FIXED ASSETS
The carrying values of fixed assets are reviewed for impairment when there
is an indication that the assets may be impaired. First year impairment
reviews are conducted for acquired goodwill and intangible assets. Impairment
is determined by reference to the higher of net realisable value and value in
use, which is measured by reference to discounted future cash flows. Any
provision for 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 proceeds after
deducting issue costs. On conversion, the amount recognised in shareholders'
funds in respect of the shares issued is equal to the carrying value at the
date of conversion. Issue costs on convertible debt and any discount on issue
are charged to the profit and loss account at a constant rate over the term of
the debt.
2 SEGMENTAL ANALYSIS
The Group's operations relate wholly to one class of business, pharmaceuticals.
Further analysis of turnover and loss on ordinary activities before taxation by
geographical area is set out below, together with an analysis of cost of sales.
Unaudited Unaudited Audited
6 months to 30 6 months to 30 12 months to 31
June 2004 June 2003 December 2003
£'000 £'000 £'000
(a) Turnover
By class of business:
Pharmaceuticals
Contract development and licensing
Milestone payments 11,511 8,581 24,196
Research and development costs recharged 2,889 2,793 5,456
14,400 11,374 29,652
Royalties receivable 10,271 8,027 18,701
Manufacturing and distribution 3,852 3,185 4,799
28,523 22,586 53,152
By location of customer:
North America 6,129 4,618 10,289
UK 8,489 7,103 21,327
Europe 12,276 8,222 18,027
Rest of the world 1,629 2,643 3,509
28,523 22,586 53,152
By location of operation:
Europe 24,737 19,019 42,503
North America 3,786 3,567 10,649
28,523 22,586 53,152
(b) Cost of sales
By class of business:
Pharmaceuticals
Contract development and licensing (4,529) (4,076) (12,085)
Royalties payable (2,452) (1,737) (4,707)
Manufacturing and distribution (6,526) (6,889) (12,994)
(13,507) (12,702) (29,786)
(c) Loss on ordinary activities before
taxation
By class of business:
Pharmaceuticals (10,099) (18,613) (42,983)
By location of operation:
UK (3,680) (5,198) (5,825)
Europe 4,379 3,317 (3,424)
North America (8,276) (15,113) (30,270)
Loss on ordinary activities before interest (7,577) (16,994) (39,519)
and taxation
Net interest payable (2,522) (1,619) (3,464)
Loss on ordinary activities before taxation (10,099) (18,613) (42,983)
3 OTHER OPERATING INCOME
Paul Capital Royalty Acquisition Fund provided a total of $30 million between
2000 and 2002, in return for the sale of a portion of the potential future
royalty and revenue streams from DepoDur, Xatral OD, Solaraze and DepoCyt.
Income of £Nil million (2003: £1.2 million) was recognised as Other operating
income under this agreement on a cost to complete basis. All of the income
under this agreement has now been recognised. Royalty payments to Paul
Capital of £0.5 million (2003: £0.4 million) have been expensed during the
period.
Under a second transaction Paul Capital provided a further $30 million during
2002 and 2003, in return for the sale of a portion of the potential future
royalty and revenue streams from nine products from the Group's drug pipeline.
Income of £1.0 million (2003: £3.0 million) was recognised as Other operating
income under this agreement on a cost to complete basis. Royalty payments to
Paul Capital of £1.4 million (2003: £0.9 million) have been expensed during the
period.
4 EXCEPTIONAL ITEMS
Exceptional items include a charge of £0.5 million relating to the
reorganisation of some research and development operations and other business
functions commenced during 2003. The reorganisation is expected to be completed
during 2004 (note 11; Provisions for liabilities and charges). In addition, £2.0
million relates to the profit on disposal of the Group's investment in
Transition Therapeutics (note 7, Fixed asset investments). A further £0.3
million relates to the write off of unamortised issue costs on the 2005
convertible bonds on exchange for 2024 bonds (note 8; Convertible bonds).
5 EARNINGS PER ORDINARY SHARE
Unaudited Unaudited Audited
6 months to 30 6 months to 30 12 months to 31
June 2004 June 2003 December 2003
£'000 £'000 £'000
Attributable loss before exceptional items and
amortisation (8,268) (14,054) (27,067)
Exceptional items 1,146 (1,409) (9,487)
Amortisation (3,072) (3,226) (6,669)
Attributable loss (10,194) (18,689) (43,223)
'000 '000 '000
Basic and diluted weighted average number of
shares in issue 614,209 609,177 609,855
Earnings per Ordinary Share before exceptional
items and amortisation (1.4p) (2.3p) (4.4p)
Exceptional items 0.2p (0.2p) (1.6p)
Amortisation (0.5p) (0.6p) (1.1p)
Basic earnings per Ordinary Share (1.7p) (3.1p) (7.1p)
Diluted earnings per Ordinary Share (1.7p) (3.1p) (7.1p)
There is no difference between basic and diluted earnings per Ordinary Share
since in a loss making period all potential Ordinary Shares are anti-dilutive.
Shares held by the SkyePharma PLC General Employee Benefit Trust are excluded
from the weighted average number of shares.
6 INTANGIBLE FIXED ASSETS
Intellectual Development
Goodwill property costs Total
£'000 £'000 £'000 £'000
Cost
At 1 January 2004 82,730 36,127 1,712 120,569
Exchange adjustments - (396) (62) (458)
Additions - 2,859 - 2,859
At 30 June 2004 82,730 38,590 1,650 122,970
Amortisation
At 1 January 2004 14,025 10,436 1,012 25,473
Exchange adjustments - (233) (30) (263)
Charge for the period 2,067 907 98 3,072
At 30 June 2004 16,092 11,110 1,080 28,282
Net book value at 31 December 2003 68,705 25,691 700 95,096
Net book value at 30 June 2004 66,638 27,480 570 94,688
7 FIXED ASSET INVESTMENTS
Unlisted
investments
Cost £'000
At 1 January 2004 22,024
Additions 168
Disposals (629)
At 30 June 2004 21,563
ASTRALIS LIMITED
In January 2004 SkyePharma converted all of its 2 million series A convertible
preferred shares into 25 million common shares, 12.5 million of these being held
in escrow. The resulting holding represents approximately 35.7% of the common
shares. The investment is not regarded as an associated undertaking as the
Directors have concluded that the Group does not exert significant influence.
TRANSITION THERAPEUTICS
In May 2004 SkyePharma disposed of its investment in Transition Therapeutics for
£2.6 million, resulting in a profit on disposal of £2.0 million (note 4;
Exceptional items).
8 CONVERTIBLE BONDS
In April 2004 the Group issued £20 million 6% convertible bonds, with a first
right of conversion after five years by the holder of the bonds, and a final
maturity of May 2024. The bonds are convertible at the option of the holder
into SkyePharma Ordinary Shares at a conversion price of £1.00. Unless
previously redeemed or converted, the bonds will be redeemed by the Group at
their principal amount in May 2024.
In July 2004 the Group exchanged £49.6 million convertible bonds due 2005 for
bonds due 2024 in the same amount, leaving £9.8 million 2005 bonds outstanding.
The unamortised issue costs on the exchanged 2005 convertible bonds have been
written off accordingly (note 4; Exceptional items). In September 2004 the
£49.6 million 2024 convertible bonds were consolidated to form a single
series with the £20 million 2024 bonds issued in May 2004.
As a result of these transactions there are £69.6 million 2024 convertible
bonds and £9.8 million 2005 bonds outstanding.
9 RECONCILIATION OF OPERATING LOSS TO NET CASH (OUTFLOW)/INFLOW FROM
OPERATING ACTIVITIES
Unaudited Unaudited Audited
6 months to 30 6 months to 30 12 months to 31
June 2004 June 2003 December 2003
£'000 £'000 £'000
Operating loss (9,598) (16,994) (39,519)
Depreciation 2,929 3,225 6,294
Amortisation 3,072 3,226 6,669
Increase in stock (52) (100) (64)
(Increase)/decrease in debtors (1,024) 13,234 19,573
Increase/(decrease) in deferred income excluding 1,123 2,769 (126)
unrealised gain on contract development
(Decrease)/increase in other creditors (393) 953 4,734
(Decrease)/increase in provisions (768) 405 1,920
Impairment of intellectual property - - 2,673
Impairment of tangible fixed assets - - 1,324
Write down of fixed asset investments - - 1,599
Other (373) 257 1,538
Net cash (outflow)/inflow from operating
activities (5,084) 6,975 6,615
10 ANALYSIS OF NET DEBT
At 1
January Non-cash Exchange At 30 June
2004 Cash flow changes movements 2004
£'000 £'000 £'000 £'000 £'000
Cash at bank and in hand 3,052 6,441 - (78) 9,415
Bank overdraft (1,198) 269 - 35 (894)
Short-term bank deposits 20,188 598 - (280) 20,506
22,042 7,308 - (323) 29,027
Debt due within one year (3,172) 549 - (58) (2,681)
Debt due after one year (9,195) 592 - 205 (8,398)
Convertible bonds due 2005 (58,791) - (545) - (59,336)
Convertible bonds due 2024 - (18,865) (9) - (18,874)
Finance leases (366) 176 - 19 (171)
(71,524) (17,548) (554) 166 (89,460)
Total (49,482) (10,240) (554) (157) (60,433)
Cash at bank and in hand and short-term bank deposits are aggregated on the
balance sheet. Debt includes bank loans, a secured mortgage and convertible
bonds.
Non cash changes relate to the amortisation of the issue costs on the
convertible bonds.
11 PROVISIONS FOR LIABILITIES AND CHARGES
National
Restructuring Pension Insurance Total
£'000 £'000 £'000 £'000
At 1 January 2004 1,829 285 7 2,121
Exchange adjustments (69) (23) (2) (94)
Charge for the period 537 52 5 594
Utilised (1,268) - - (1,268)
At 30 June 2004 1,029 314 10 1,353
Restructuring Provision
The restructuring provision relates to the reorganisation of research and
development operations and other business functions involving reductions in
staff at most sites. The remaining provision of approximately £1.0 million is
expected to be fully utilised in 2004 (note 4; Exceptional items).
12 SHARE CAPITAL
EQUITY SHARE CAPITAL
Ordinary Shares
of 10p each Nominal value
Number £'000
Issued, allotted and fully paid
At 1 January 2004 618,669,940 61,867
Exercise of share options 323,597 32
Issue of shares to Research Development Foundation 3,250,000 325
At 30 June 2004 622,243,537 62,224
During the period the Group issued 3,250,000 Ordinary Shares to Research
Development Foundation as a result of a restructuring of the arrangements with
RDF existing at the time of the DepoTech acquisition in 1999.
Non-equity share capital
Deferred Nominal value
'B' Shares
of 10p each
Number £'000
Authorised and issued
At 1 January 2004 and 30 June 2004 12,000,000 1,200