SkyePharma : Annual Financial Report

FOR IMMEDIATE RELEASE   

1 April 2014

Skyepharma PLC - Annual Report and Accounts 2013

In accordance with the Listing Rules, a copy of the Annual Report and Accounts 2013 has been submitted to the National Storage Mechanism.

Copies of the printed Annual Report and Accounts together with the Notice of Annual General Meeting and Form of Proxy are expected to be posted to shareholders on 16 April 2014.

The Annual Report and Accounts will shortly be available for inspection at the National Storage Mechanism athttp://www.morningstar.co.uk/uk/NSM.

Copies of the Notice of Annual General Meeting and Proxy will be submitted to the National Storage Mechanism at the time of posting and a copy of the Notice of Annual General Meeting will be added to the Company website at that date.

The Annual General Meeting will be held at 10.30 a.m. on Thursday 22 May 2014 at the offices of FTI Consulting, 200 Aldersgate, Aldersgate Street, London EC1A 4HD.

In accordance with DTR 6.3.5, this announcement contains information in the attached Appendix of the principal risk factors, a responsibility statement and details of related party transactions which has been extracted in full unedited text from the Annual Report and Accounts 2013.  Where page numbers and note numbers are mentioned in the Appendix these refer to page numbers and notes to the financial statements in the Annual Report and Accounts 2013.  A condensed set of financial statements was appended to Skyepharma PLC's Statement of Annual Results issued on 31 March 2014.

For further information please contact:

Skyepharma PLC

Peter Grant, Chief Executive Officer +44 207 881 0524

Andrew Derodra, Chief Financial Officer +44 207 881 0524

FTI Consulting

Julia Phillips/Stephanie Cuthbert/Natalie Garland-Collins  +44 203 727 1000

About Skyepharma PLC

Skyepharma combines proven scientific expertise with validated proprietary drug delivery technologies to develop innovative oral and inhalation pharmaceutical products. The Group is eligible for revenues from 15 approved products in the areas of inhalation, oral, topical and injectable drug delivery as well as generating income from the development of further products and technology licenses. The products developed by the Group are marketed throughout the world by big pharma as well as speciality pharmaceutical companies. For more information, visit www.skyepharma.com

APPENDIX

UNEDITED EXTRACT FROM ANNUAL REPORT AND ACCOUNTS 2013

Principal risks and uncertainties

Pharmaceutical development is inherently expensive and risky as the development cycle for new products is long and uncertain and the regulatory environment is complex and subject to change. In common with all businesses in the sector, the Group is exposed to a range of risks, some of which are not wholly within its control or capable of complete mitigation or protection through insurance. Accordingly, stakeholders and prospective stakeholders should be aware that investment in Skyepharma involves a high degree of risk.

The Board has established a continuous process for identifying, evaluating and managing the significant risks the Group faces. The Board regularly reviews the process and a detailed review of risks was undertaken by the Audit Committee during 2013. The Board has identified the following principal risks which could have a material impact on the Group's long-term performance and could cause actual results to differ materially from the expected and historical results.

Risks that flutiform ® may not achieve commercial success

Potential Impact

flutiform ® is a key product for the Group and the Directors believe that successful commercialisation by the Group's partners will lead to significant cash inflows for the Group. Despite significant progress made to date, there can be no assurance that flutiform ®will be commercially successful as this will depend on a range of factors including the competitive environment.

There can be no certainty that flutiform ®will successfully complete development in additional territories, meet regulatory authority requirements or be approved and launched in a timely manner in additional territories. The success of flutiform ®is also dependent on the successful completion of further manufacturing scale-up and process validation and the ability to produce sufficient product to meet market requirements at an economic cost. In addition, significant adverse financial effects could arise if the Group were to be unable to source or obtain timely approvals for key raw materials and components to maintain continuity of supply. Further, any failure by the Group to be able to ensure that contracts with suppliers and customers have back to back terms could lead to operational and financial risks.

Mitigation

In order to mitigate these risks, relevant management and staff are involved on a day-to-day basis in ensuring that the Group is able to provide all necessary support to the development and supply process and participates fully and pro-actively in regular meetings with its suppliers, sub-contractors and licencees in ensuring that appropriate steps are being taken to meet continuing demands for the product. Skyepharma's

regulatory and technical experts also provide support for filings, approvals, and reimbursement, and to maintain the product in compliance with regulatory requirements and changing needs of markets, licencees and regulators.

Risks that cash balances and net cash inflows may be insufficient to pay off long-term debt

obligations

Potential Impact

The Group has obligations under its various financing agreements, including the CRC facility, the Paul Capital Note, the Swiss mortgages and the 2024 Bonds to make scheduled interest payments and capital repayments which, if not met, could result in default under those agreements, triggering cross-defaults under other financial obligations. The obligations under the 2024 Bonds, which are a significant majority of the Group's financial obligations, will no longer exist if the Transactions are completed. Continued growth of sales of flutiform ®and other recently approved products is key to the value and cash-generative potential of the Group. Whilst the Group has sufficient working capital for its present requirements, the ability of the Group to service its medium and long-term debt beyond 12 months is dependent on all factors which might affect the net generation of cash including many of the factors set out in this risk section.

Mitigation

The Group regularly monitors its cash forecast, as well as reviewing, at least annually, the longer-term plans and prospects for repaying long-term debt. As a result of such reviews, potential mitigating actions are identified well ahead of the relevant repayment dates so that debt can be renegotiated or refinanced where necessary.

The Board intends to reduce debt from current levels to reduce this risk further.

Risks that manufacturing, research and development operations and related royalty revenues may be disrupted

Potential impact

Any significant and lengthy disruption to the Group's or third-party research and development and manufacturing operations, or that of its suppliers, could result in a substantial loss of manufacturing and royalty revenues and other liabilities. The Group has insurance, subject to certain exclusions and deductibles, against the usual insurable risks such as property damage and other perils, but it is not possible to insure against all risks and not all insurable risks can be fully insured on an economically feasible basis, such as supplier failures, product recall, industrial action, regulatory sanctions, lack of capacity in manufacturing facilities and negligent manufacturing issues. For example, a significant failure to maintain manufacturing facilities in compliance with required regulatory standards, which are frequently being amended and updated, could result in sanctions by regulators which could require the cessation of manufacture until deficiencies are

rectified.

Potential sources of disruption to supply include, but are not restricted to, the following:

i.  A shortfall of production capacity if plans being implemented to scale up the flutiform ®manufacturing line were unsuccessful.

ii.  Dependencies on a single source of supply for certain of the Group's products or the failure of the Group or its partners to plan the supply of raw materials to meet manufacturing demand.

iii.  Defects in, or lack of supply of, components and raw materials supplied and used in the manufacture of the Group's products.

iv. It is generally not possible to negotiate indefinite terms for manufacturing, sub-contracting or supply and there can be no assurance that a supplier is both willing and able to extend the term of any agreement. If it is necessary to find alternative suppliers, it may not be possible to find exact equivalents and even if it is, significant costs and delays may arise to obtain regulatory consents for the changes.

v. Changes in availability or quality of supplies to the Group's suppliers and sub-contractors, over which the Group may have no direct control or relationship. Such changes can arise at any level of the supply chain (for example at a supplier to a supplier to a sub-contractor).

Any such disruptions to supply could potentially lead to stock shortages and substantial loss of manufacturing, royalty revenues and potentially other liabilities.

Mitigation

To mitigate this, the Group maintains an appropriate system of quality assurance, including regular inspections and reviews of its facilities and certain key suppliers. Group and third-party supplier facilities are also inspected by regulatory authorities in order to maintain their approved status. In preparation for such

audits, external specialist consultants may be used to provide preparatory audits and similar support and any recommendations arising from such audits are acted upon where appropriate. Any issues arising are the

subject of monthly reporting through the management structure and, where appropriate, to the Board.

The Group identifies key suppliers in relation to its business and where possible, alternative sources of supply

are sought although often this is neither possible nor economically feasible. Key direct suppliers are subject to

a quality audit, a requirement of regulatory authorities, to ensure that the manufacturing processes are in

compliance with the appropriate laws and regulations. In addition, insurance is taken out, where appropriate, against insurable perils to help mitigate the consequences of defects in products/raw materials and disruption of supplies and, where possible, contracts are negotiated to include appropriate provisions for replacement of defective goods.

The Group identifies key sub-suppliers where these relate to critical components and endeavours to ensure that its own suppliers and sub-contractors have appropriate plans to ensure long-term supply and quality.

Where supply agreements are approaching the end of their contractual term the Group aims to enter into

discussions to extend the term or make suitable alternative arrangements.

Risks that competition, technological change or lack of innovation may damage prospects for the

business

Potential impact

The Group has a number of pipeline developments and revenue-generating products which are at various stages of their developmental and commercial lives. A significant proportion of its current and future revenues are related to flutiform®and other key revenue streams including the revenues from EXPAREL®, Relvar® Ellipta®/Breo® Ellipta® and Anoro™ Ellipta™. Specific risks relating to flutiform®are listed under the risk

"flutiform®may not achieve commercial success" above. The successful development, commercial success and life of regulated pharmaceutical products depends upon a range of factors, including, but not limited to, having adequate product innovation and development strategies, how successfully products are marketed, the

overall competitive environment, the effectiveness of patent protection and constraints on healthcare spending.

In particular, competition, technological change or lack of innovation may render the Group's products or technologies uncompetitive or obsolete and the time frames involved could be relatively short. For example, where generic products are successful in entering the market this can have a very significant impact on both pricing and market share of existing marketed products, and often heralds a rapid end to the commercial life of the original product. ANDA filings in the United States such as those on Uroxatral®, Requip® Once-a-day,

Sular®, Solaraze® and RAYOS® highlight the risks of potential generic entry.

Mitigation

In order to protect its future prospects, the Group files for and prosecutes patents and creates other forms of

intellectual property to protect its assets and, where appropriate and in conjunction with its partners, takes

steps to enforce these rights. In addition, steps are undertaken both internally and through external service providers to identify the filing and progress of third party rights that may be of interest to and/or have adverse effects on the Group's activities so that these can be taken into account and action can be initiated where appropriate. Revenues derived from royalties or other sales-related payments in respect of licensed

intellectual property may be adversely impacted for a number of reasons. These include amongst other things, patent expiry, scope of granted patents not extending to cover relevant products or processes, patent applications failing to proceed to grant and/or granted patents being held invalid and formulations or

processes changing to fall outside the scope of licensed intellectual property.

Risk that pharmaceutical development will fail or there are issues with safety or efficacy

Potential impact

Pharmaceutical development is inherently expensive and risky as the development cycle for new products is long and uncertain and the regulatory environment is complex and subject to change. In common with all businesses in the sector, the Group is exposed to a range of risks, some of which are not wholly within its control or capable of complete mitigation or protection through insurance.

In addition, pre-clinical testing or clinical testing may not accurately predict safety or effectiveness in broader human use. For a new product, it can be difficult to establish from available data a meaningful and reliable assessment of its eventual efficacy and/or safety in the market.

Mitigation

The Group strives to organise the mix of work undertaken in order to try and balance higher risk development projects against lower risk, but potentially less remunerative work. It remains possible, however, that the Group will remain exposed to a number of such higher risks which may have a material adverse effect on the Group's financial position.

In respect of safety and efficacy, the Group follows the guidelines of the relevant regulatory bodies and conducts trials in accordance with prevailing practice and regulators' requirements.

Risks arising from inability to control or influence commercialisation of products and the income streams related to them

Potential impact

The Group collaborates with partners in developing products. Once the development work is complete and the partners have obtained approval and launched the products (which may contain a formulation inside a third-party device), the Group may be entitled to royalties and/or milestone payments on net sales or share of revenue of these products. In many cases, the Group has no influence over the scale-up, validation, manufacture, sales, marketing and distribution, or knowledge of marketing efforts or plans, or control over the income stream that is derived from these products. This can lead to the unpredictable cessation of part of the Group's royalty/income streams, for example where a product is discontinued by the third party without consultation or prior warning.

Mitigation

The Group tries to mitigate the risk of unexpected shortfalls through regular dialogue with partners and contractual requirements on third-party partners.

Additionally, regular internal reviews are held to analyse performance on a partner-by-partner basis.

Risk that the Group fails to retain key personnel or attract new personnel

Potential impact

The Group relies upon a number of key executives and employees and its ability to retain and attract other qualified management, scientific, technical, marketing and support personnel. Competition for such personnel is intense, and there can be no assurance that the Group will be able to continue to attract and retain such personnel. The loss of the services of any of the Group's key executives or employees could materially adversely affect its business.

Mitigation

The Group has adopted a business continuity plan with deputies identified for all key roles within the business.

The Remuneration Committee review annually the pay of the Directors and management to ensure that remuneration packages remain appropriately competitive. In addition, the Group operates a LTIP retention incentive plan to try to ensure that key members of management are retained.

Risk of dependency on key customers or products

Potential impact

As noted above, the Group has a number of pipeline developments and revenue-generating products which are at various stages of their effective developmental and commercial lives. Although the Group currently generates a significant proportion of its revenue from flutiform®, these pipeline developments will help to balance portfolio risk.

A number of the Group's key partners, such as Kyorin, Mundipharma and Sanofi, are considered to be large pharmaceutical organisations and as such are regarded as low-risk from a credit perspective.

With respect to future revenues of flutiform®, refer to risks relating to flutiform®above.

Mitigation

The Board approves Group strategy on a yearly basis. As part of the review and approval process, the Board will verify that undue dependency is not being placed on one partner or product.

In particular, there is a focus for 2014 on alliance management, in order to build on the relationships with existing partners/suppliers, including through the relevant Steering Committees and day-to-day commercial contacts in addition to technical contacts. The business development plan for 2014 also outlines the approach to identifying and concluding agreements with new partners which would broaden the portfolio.

In terms of dependency on key partners, the Group has a broader base of marketed products, with among other things, the launch of flutiform®in Japan. The Group works with a variety of marketing and distribution partners (particularly for flutiform®, which is marketed by Mundipharma and Kyorin).

However, it should be noted that until the new projects develop, the Group has a dependency on flutiform®and other significant products and the partners involved in them.

Risk that when the Lyon lease terminates, the Lyon Facility may revert to the Group as a loss-making manufacturing facility with surplus capacity

Potential impact

Following an expert determination process, in December 2013, Skyepharma renewed the lease of its Facility with Aenova until 30 June 2016 at a rental of €2.0 million (£1.7 million at current rates) per annum. Aenova continues to be obliged to manage and be responsible for the financial performance of the Facility on a day-to-day basis. Aenova has indicated that it has no current intention to extend the lease beyond 30 June 2016

or make use of the Facility for its business beyond that date.

Unless Aenova and Skyepharma agree otherwise, the lease of the Lyon Facility will expire on 30 June 2016 and, subject to obtaining appropriate consents and consultations, the Facility would revert to the Group. The Facility may not be profitable at that time and Skyepharma may incur significant costs unless additional utilisation can be found for any potential surplus capacity at the facility.

Mitigation

In anticipation of this, and with Aenova's agreement, Skyepharma has initiated a process to identify whether any third party would be interested in making use of surplus capacity at the Facility. However there can be no assurance that this process will be successful or that any third party can be identified which is interested in making use of the Facility on terms acceptable to the Group and to Aenova.

Directors' Responsibility Statement

In accordance with the FCA's Disclosure and Transparency Rules, the Directors listed on pages 38 and 39 confirm, to the best of their knowledge, that:

1.   The financial statements have been prepared in accordance with IFRS as adopted by the European Union and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Company and the undertakings included in the consolidation taken as a whole; and

2.   The management report, which is incorporated into the Report of the Directors, includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties faced by the Group.

RELATED PARTIES

Group

Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.

Refer to Note 10: Staff costs and Directors' emoluments for disclosures in respect of key management personnel of the Group.

Company

The Company has issued share options to employees of subsidiary undertakings and in accordance with

IFRS 2 made a charge of £0.2 million during the year ended 31 December 2013 (2012: £nil).

The Company has charged £1.5 million (2012: £1.0 million) to its subsidiary undertakings and the Company was charged nil (2012: £0.1 million) by its subsidiary undertakings for corporate services provided.

The Company has intercompany loans and accounts with its subsidiary undertakings; details can be found in Note 19: Shares in and loans to Group undertakings, Note 21: Trade and other receivables and Note 23: Trade and other payables. Current intercompany balances are normally settled on a monthly basis, including any interest charged on non-current intercompany balances.

Refer to Note 10: Staff costs and Directors' emoluments for disclosures in respect of key management personnel of the Company.