Head Office skyepharma plc 46–48 grosvenor gardens London sw1w 0eb Registered No: 107582 telephone: +44 (0)207 881 0524 Fax: +44 (0)207 881 1199 email: [email protected] Multiple www.skyepharma.com Delivery Technologies Annu a l Repo r t A N D Accounts fo r the ye ar en d e 31 ecembe 2010
creating excellence and innovation
enhancing quality of life for patients
Annual Report AND Accounts for the year ended 31 december 2010 Advisers
auditors ADR Depositary SkyePharma PLC Ernst & Young LLP Bank of New York Mellon Apex Plaza 101 Barclay Stret SkyePharma’s mission is to become Reading New York NY 10286 one of the world’s leading RG1 1YE USA speciality drug delivery companies, Solicitors Registrars Fasken Martineau LLP Capita Registrars powered through excellence in its 17 Hanover Square The Registry London 34 Beckenham Road oral and inhalation technologies. W1S 1HU Beckenham Kent SkyePharma strives to deliver Clifford Chance LLP BR3 4TU clinical benefits for patients 10 Upper Bank Street London Telephone: 0871 664 0300 by using its multiple delivery E14 5JJ (Calls cost 10 pence per minute plus network extras) (from outside the UK: +44 (0) 20 8639 3399) technologies to create Corporate Broker & Financial Adviser enhanced versions of existing Singer Capital Markets Ltd Lines are open Monday – Friday 8:30 a.m. – 5:30 p.m. One Hanover Street Facsimile: +44 (0) 20 8639 2220 pharmaceutical products. London Email: [email protected] W1S 1YZ Website:www.capitaregistrars.com Capita Share Portal: www.capitashareportal.com Bankers Our Business FINANCIAL STATEMENTS HSBC Bank plc Highlights/Key Events 01 Independent Auditors’ Report 56 Group Overview 02 Consolidated Income Statement 58 70 Pall Mall Marketed Products 08 Consolidated Statement of Comprehensive London Our Performance Income/(Expense) 59 SW1 5EZ Chairman’s Statement 10 Consolidated Balance Sheet 60 Business Review 12 Company Balance Sheet 61 Financial Review 20 Consolidated Statements of Changes in Equity 62 Our Governance Company Statements of Changes in Equity 63 Directors and Officers 26 Consolidated Cash Flow Statement 64 Report of the Directors 28 Notes to the Consolidated Cash Flow Corporate Social Responsibility 33 Statement 65 Corporate Governance 35 Company Cash Flow Statement 66 Remuneration Report 44 Notes to the Accounts 67 The Statement of Directors’ Responsibilities 54 Glossary of Terms 111 Shareholder Information 114 Advisers IBC Our Business
Our Performance
Our Governance
Financial statements
Highlights
Total Revenues (£m) R&D Expenditure (£m) Gross net +20% +45% 70 62.2 35 55.9 58.1 60 30 25.1 50 25 23.5 19.6 Gross 40 20 30 15 +4% 17.1 Net 20 10 14.9 10.3 10 5 0 0 2008 2009 2010
Cash Flow (£m) pre-exceptional Operating Profit (£m)
16 15.1 15.3 14 Operational 12 cash flow 26.0 10 8 10.9 6 4 Capex (4.2) 2 +1% 0 2008 2009 2010
Debt repaid (10.3) Cash & Facilities (£m)
Net interest (11.5) 38.0 40 35 29.3 29.7 30 25 Other 1.9 20 15 10 5 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 0 2008 2009 2010
Key events
l Flutiform™ l EXPAREL™ U.S. NDA filed Q3 2010 l MAA filed in March 2010 l Somnus Phase II study met l Launch preparations continue primary endpoints for H2 2011 l Proof-of-principle commenced l Japan Phase III studies on SKP-1052 for diabetes commenced Q4 2010 l Liquidity at 31 December 2010 l Discussion on Latin America was £29.7 million partnership continues
Stock Code: SKP 01
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Group Overview value proposition
Multiple Delivery Technologies
Creating Excellence & Innovation
Partnering with Pharmaceuticals
ENHANCING QUALITY OF LIFE FOR PATIENTS
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VALUE PROPOSITION
Own Products Partners’ Products In house development of Apply SkyePharma own product concepts technology to partners’ products Flutiform™ Triglide™ Xatral® OD/Uroxatral® SKP-1041 (zaleplon) Paxil CR™ 2010 european SKP-1052 Requip® XL respiratory market fac t Sular™ worth ¤6.1 billion* our business proposition in-House product development Contract development SkyePharma develops new products using its proprietary SkyePharma is a specialist in drug delivery and is available to technologies to the proof of concept stage and then seeks to be engaged by other pharmaceutical companies to develop out-license the concept to a development partner which will fund products. SkyePharma offers a full range of contract development the remaining development. In return SkyePharma will receive capabilities including formulation, device development, scale up milestones and royalties on the development and sales. and production, regulatory affairs and clinical development.
Enhancing existing pharmaceuticals Manufacturing Through strategic partnerships, SkyePharma applies its proprietary SkyePharma provides general and specialised manufacturing technologies to existing products to enhance their effectiveness. facilities at its plant in Lyon, France. The Group also has In return for this the Group receives milestones and royalties on considerable experience of transferring and scaling up development and sales of the products. manufacturing to third party plants.
Revenue by income stream Revenue by location OF CUSTOMER
3% 5% 39% 15% n signing and milestone 14% n UK payments £2.8m £1.6m n Rest of Europe 15% n contract research and £38.3m development revenue n north America £8.6m £8.7m n Royalties n Rest of World £25.0m £8.3m n manufacturing and distribution revenues 43% £22.9m 66%
* Source IMS Stock Code: SKP 03
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Group Overview Research and development and Manufacturing
development and commercial production
RANGE OF PROPRIETARY TECHNOLOGIES FULL SERVICE SOLUTION PROVIDER solid dose form manufacturing
Serves the pharmaceutical industry by providing support in bringing high quality drugs to market fast and profitably; Flexibly spans all areas from product innovation to drug development; Employs highly skilled and experienced people.
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SUMMARY Group structure
SkyePharma PLC England Parent company (London)
SkyePharma AG Jagotec AG SkyePharma Production SAS Switzerland Switzerland France Research and Development Exploitation of Intellectual Manufacturing (Muttenz) Property (Muttenz) (Lyon)
research and development Manufacturing facilities
SkyePharma’s research and development facility is based in SkyePharma operates a fully integrated multilevel manufacturing Muttenz, near Basel, Switzerland employing approximately 100 facility in Lyon, France, employing approximately 90 staff. As staff. The majority of these are scientists who are specialists in drug well as standard manufacturing, the facility offers a number of delivery technologies coming from a number of different countries specialised capabilities, including: around the world. Their skills are combined in order to provide innovative research and development services to develop new l Wet and dry granulation – 600 litre (solvent) and 1,200 litre lines technologies and apply them to development projects. l Tablet coating l Tableting/capsule filling SkyePharma has the capability and expertise to provide a full l Dry Powder Inhaler filling and packaging line range of services to its oral and inhalation contract development l High pressure homogenisation partners including: This facility is approved by both the US FDA (inspected 2010) and l Formulation EMA (AFSSAPS inspection 2009). l Device development and commercialisation l Device scale up and production l Analytical development and method transfer l Process scale up and technology transfer PICTURED: SkyPharma’s manufacturing facility in Lyon, France with approximately l Pilot manufacturing and scale up 22,000 sq. m. of floor space. l Project management l Regulatory affairs l Clinical development
The site covers approximately 5,000 square metres over two buildings, and includes laboratories and an approved cGMP pilot manufacturing facility. A successful pre-approval inspection at the site took place in 2009.
£23.5 million spent on research and fac t development in 2010
Stock Code: SKP 05
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Group Overview our technologies
Innovation in Oral and Inhalation Technologies Oral Technologies Oral solubilisation Technologies Inhalation Technologies
Drug delivery technologies to deliver clinical benefits; Technological solutions to formulation and targeted delivery challenges; Generation of new product concepts.
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Oral Technologies Dissocubes™ DissoCubes™ are crystalline nanoparticles of active substance obtained geoclock™ by a liquid state high energy process using a high pressure piston gap homogeniser to reduce the drug particle size in the presence of surface Combining formulation skills with controlled modifiers that associate at the freshly generated drug interface. manufacturing processes, SkyePharma has developed a novel oral drug delivery DissoCubes™ and IDD® technologies are technologies of choice for technology, Geoclock™, which allows the molecules with oral bioavailability issues and/or requiring rapid preparation of chronotherapy-focused press- onset of absorption. coated tablets.
Beside the oral route, these technologies may have applications in Geoclock™ tablets have an active drug other fields such as inhaled formulations, injectable, ophthalmic in an inner layer (core) and an outer and topical products. tablet layer consisting of a mixture of hydrophobic and waxy material in Solid Lipid Nanoparticles (SLN™) order to obtain a pH-independent SLN™ are nanoparticles of drug solid lipid solutions taking lag time prior to core drug delivery advantage of their small size and the presence of lipids to promote at a predetermined release rate. This drug absorption by the gastrointestinal tract. dry coating approach is designed to allow the timed release of the active core. As well as chronotherapy, the Geoclock™ technology has applications for improved colonic drug inhalation Technologies delivery and multiple pulse drug delivery to deliver doses of the Metered dose Inhalers (“MDI”) drug at specific times throughout the day. SkyePharma has developed several enabling formulation technologies to be used within MDI’s. The Group’s MDI formulation Geoclock™ technology is used in Lodotra® and SKP-1041. technologies are: geomatrix™ l SkyeDry™ – Assists in protecting moisture sensitive compounds, The Geomatrix™ technology is a family of eight release mechanisms, helping to maintain stability applied to achieve customised levels of controlled release of l SkyeFine™ – Enhanced fine particle fraction for improved specific drugs. It can achieve simultaneous release of two different lung delivery drugs and different rates from a single tablet, through the use of a l SkyeStabe™ – Improves dose uniformity hydroxypropyl methyl cellulose core containing the active drug(s) surrounded by surface controlling barrier layers. Dry Powder Inhalers (“DPI”) SkyePharma developed the SkyeHaler™ device, with the following Geomatrix™ technology is currently used in nine products features: approved and marketed in the United States and the EU, including Sular® and ZYFLO CR™. l Platform technology – not molecule specific l Suitable for all patients – medium resistance solubilisation Technologies l Robust device l Accurate dose delivery SkyePharma’s range of solubilisation technologies utilise particle l No double dosing possible engineering to enhance the bioavailability of drugs and improve l Number of remaining doses shown their performance. l Minimal sequencing steps l Built-in compliance and safety features Insoluble drug Delivery (IDD®) The IDD® platform is characterised by the coating of the particles The SkyeHaler™ has been through the with phospholipids and consists of 3 major enabling technologies: approval process in 32 countries, including the United States. IDD®-P (MicroParticle) – Pure solid drug in the core of the particle IDD®-D (MicroDroplet) – Liquid core It can utilise the SkyeProtect™ technology, a dry powder formulation IDD®-SE (Self-Emulsifying) – Self generating surface stabilised technology, developed by SkyePharma, droplets which protects the active ingredient from moisture and enhances performance of dry powder inhalers. Stock Code: SKP 07
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mARKETED products
PaXil CR™ Requip® Once-A-Day Madopar DR®
Primary Indication Primary Indication Primary Indication Depression Parkinson’s disease Parkinson’s disease PARTNER PARTNER PARTNER GSK GSK Roche DESCRIPTION DESCRIPTION DESCRIPTION An advanced formulation A once-daily formulation using An oral treatment for Parkinson’s disease, of the anti-depessant Paxil® SkyePharma’s Geomatrix™ using SkyePharma’s Geomatrix™ (paroxetine), using SkyePharma’s technology to provide a smoother technology. Madopar® (levodopa/ Geomatrix™ technology to reduce delivery of ropinirole over 24 hours. benserazide) also treats idiopathic and gastrointestinal side effects. symptomatic restless leg syndrome.
Triglide® Sular® diclofenac-ratiopharm®
Primary Indication Primary Indication Primary Indication Lipid disorders Hypertension Pain/Inflammation PARTNER PARTNER PARTNER Shionogi Pharma Shionogi Pharma ratiopharm DESCRIPTION DESCRIPTION DESCRIPTION An oral treatment for elevated A lower-dose formulation of Sular® A dual release dicolfenac sodium blood lipid disorders using (nisoldipine), a calcium channel formulation developed for the SkyePharma’s IDD® technology to blocker antihypertensive agent, treatment of pain and inflammation aid absorption. utilising SkyePharma’s Geomatrix™ using Geomatrix™ technology. technology.
Disclaimer: The pharmaceutical products described above are available only by prescription. Please consult with your physician or other medical care provider regarding any medical queries.
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ZYFLO CR® (zileuton) Coruno® Xatral® OD
Primary Indication Primary Indication Primary Indication Asthma Angina BPH (urinary symptoms) PARTNER PARTNER PARTNER Cornerstone Therapeutics Therabel sanofi-aventis DESCRIPTION DESCRIPTION DESCRIPTION An extended release formulation Once a day molsidomine A once-daily version of sanofi- of the oral asthma drug zileuton formulation indicated for the aventis’ Xatral® (alfuzosin using the Group’s Geomatrix™ oral treatment of chronic angina hydrochloride), a selective alpha technology. pectoris. It uses SkyePharma’s blocker utilising SkyePharma’s Geomatrix™ technology. Geomatrix™ technology.
Lodotra® (EU) Solaraze® Pulmicort® PMDI
Primary Indication Primary Indication Primary Indication Rheumatoid arthritis Actinic keratosis Asthma PARTNER PARTNER PARTNER Horizon Nycomed/Almirall astraZeneca DESCRIPTION DESCRIPTION DESCRIPTION A novel night-time release A topical gel treatment for actinic An HFA-MDI containing formulation of low dose prednisone, keratosis, using diclofenac and AstraZeneca’s inhaled utilising Geoclock™ technology for SkyePharma proprietary technology corticosteroid Pulmicort™ the treatment of morning stiffness which is designed to hold the active (budesonide), developed for associated with rheumatoid arthritis. ingredient in the epidermis. territories outside the United States.
Stock Code: SKP 09
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chairman’s statement frank condella
“2011 is expected to be an important year for SkyePharma, with Flutiform™ launch in Europe, subject to approval, planned for the second half of the year.”
Overview The full year results for 2010 were in line with the Board’s expectations with revenues up 4 per cent. to £58.1 million, giving Delivering rise to a pre-exceptional operating profit of £15.3 million (2009: £15.1 million).
clinical The Group finished the year with liquidity of £29.7 million compared with £29.3 million in 2009, after meeting scheduled financing commitments for interest and capital repayments benefits for totalling £22.0 million.
In the product pipeline, the review of the European Marketing patients Authorisation Application (“MAA”) for Flutiform™ is progressing as expected and preparations continue for its potential launch in Europe in the second half of 2011. In Japan the development of Flutiform™ is making good progress with recruitment for the Phase III studies well underway.
The Group has increased its investment in business development with the aim of bringing further new products into its early stage pipeline and seeking additional partnership opportunities. Two new partner-funded feasibility projects have commenced in the last three months in undisclosed therapeutic areas.
Financial performance Revenues in 2010 totalled £58.1 million, an increase of £2.2 million compared with 2009. This was primarily due to a substantial increase in manufacturing revenues related to price increases and additional non-recurring volumes to support regulatory and commercial activities. The increase was partly offset by an anticipated decrease in revenues from milestones and royalties.
Pre-exceptional operating profit was £15.3 million in 2010 £29.7 million LIQUIDITY (2009: £15.1 million).
fac t at 31 december 2010
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After benefiting from exchange translation gains on borrowings of £5.6 million (2009: loss of £0.2 million), profit after tax for 2010 was £6.3 million (2009: loss of £1.4 million). Basic earnings per share were 26.3 pence (2009: loss of 6.0 pence).
Pre-exceptional earnings before interest, tax, depreciation and amortisation (“EBITDA”) for the year totalled £18.6 million (2009:£18.6 million) or 32 per cent. of revenues. In 2010 the Group generated sufficient cash to cover all operating and finance costs, including scheduled debt payments.
Board In September 2010 Dr Ken Cunningham stepped down as Chief Executive Officer to focus on a portfolio of non-executive appointments. The Board is grateful to Ken for his excellent stewardship of the Group over the past two years and for his previous services as Chief Operating Officer and wishes him success in his new endeavours.
The Group was pleased to welcome Dr Axel Müller as Chief Executive Officer with effect from 23 August 2010. Axel Müller has more than 25 years of experience in the pharmaceutical industry, If both FlutiformTM and ExparelTM are approved and launched having been Chief Executive Officer of Acino Holding AG, President successfully in their respective markets in 2011, total revenues for of Siegfried Generics, Managing Director and Vice President the year are expected to be higher than in 2010. Notwithstanding International of Aceto Holding GmbH, Head of Life Sciences revenues from the supply of FlutiformTM, total manufacturing practice at management consultants Arthur D. Little, and having revenues are expected to be lower than in 2010 due to the non- held a number of R&D and marketing and sales roles at Novartis. recurring revenues in 2010. Royalty revenues are also expected to be reduced due to generic competition affecting several products In June 2010, Dr Thomas Werner was appointed Chairman of the and the cessation of manufacturing of Pulmicort® pMDI. Costs Remuneration Committee in place of Frank Condella. are expected to be higher than 2010 due to expenditure related to the Flutiform™ supply chain. The Board anticipates that there Financial Advisers will be substantial cash outflows during 2011 due to costs incurred The Company has appointed Jefferies International Limited to on preparing for the launch of Flutiform™. These costs will not be provide financial advice to the Board on the Group’s capital offset by milestones arising from the initial launches of Flutiform™ structure. in Europe as the Group is obliged to apply these milestones as pre- payments of secured debt. Singer Capital Markets Limited was appointed as financial adviser and Corporate Broker to the Company in January 2011. The anticipated approval and launch of Flutiform™ in Europe in the second half of 2011 is pivotal to the value and cash generative Outlook potential of the Group. With the approval of Flutiform™ in Europe 2011 is expected to be an important year for SkyePharma with the Directors believe that the Group would have good growth Flutiform™ currently under consideration by European regulators prospects and further potential to exploit SkyePharma’s proven for the treatment of asthma and the launch, subject to approval, drug delivery capabilities and technologies. planned for the second half of the year. The Group may also receive important milestone payments and potential revenues if Frank Condella EXPAREL™, a long acting anaesthetic/analgesic, is approved in the Non-Executive Chairman United States.
Stock Code: SKP 11
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Business review dr axel MÜller
“2010 was a year of solid progress for SkyePharma, driven by the Group’s portfolio of approved and marketed products and with further advances in the development pipeline.”
CHIEF EXECUTIVE OFFICER’S REVIEW Enhancing 2010 was a year of solid progress for SkyePharma, driven by the Group’s portfolio of approved and marketed products and with further advances in the development pipeline. The Group had the product 12 approved products on the market in 2010 which generated £47.9 million of royalty and manufacturing revenues in 2010 pipeline (2009: £42.6 million). Flutiform™, the fixed dose combination of fluticasone, an inhaled corticosteroid (“ICS”), and formoterol, a long-acting beta agonist (“LABA”) in a Metered Dose Inhaler (“MDI”), continues to be a very important potential value driver for the Group. In Europe, the MAA for Flutiform™ is progressing in line with the Board’s expectations, and preparations continue for its potential launch in the second half of 2011. Substantial investment is being made during 2011 in preparing the Flutiform™ supply chain and supplying product for the launch period. The development of Flutiform™ in Japan is making good progress, with the recruitment for two Phase III studies well underway, and the aim of filing the Japanese NDA by the end of March 2013.
The development programmes for other pipeline products are also moving forward. Top-line results showed that the primary endpoints were met in the Phase II study for the novel sleep therapeutic, SKP-1041, and a proof of concept study commenced in the first quarter of 2011 for SKP-1052, which is being developed to treat a particular aspect of diabetes care. The Group is seeking to further enhance its early-stage product pipeline and has embarked on several development projects for which it is charging partners on a time and materials basis.
The Group has rationalised operations in Muttenz, Switzerland, into two buildings, with the third building (net book value: £4.2 million) now for sale.
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BUSINESS REVIEW – KEY PRODUCTS
MARKETED PRODUCTS Xatral® OD Xatral® OD (Uroxatral® in the United States) is a once-daily version of sanofi-aventis’ Xatral® (alfuzosin hydrochloride), a treatment for the signs and symptoms of benign prostatic hypertrophy (“BPH”). In 2010, reported sales of all forms of Xatral® were ¤296 million (£253.5 million), similar to the total in 2009. In the United States sales of Uroxatral® were ¤155 million (£132.8 million), up 2.7 per cent. from 2009. Western European sales have continued to fall as a result of generic competition, with sales for 2010 of ¤66 million (£56.5 million), a reduction of 14.3 per cent. from the same period in 2009. Sales in other countries were ¤75 million (£64.2 million). The Group earns low single digit royalties on net sales of Xatral® OD (Uroxatral®).
Starting in August 2007, a series of Abbreviated New Drug Application (“ANDA”) certifications relating to Uroxatral® in the United States were received. The actions were consolidated before the United States District Court, District of Delaware. The trial against Mylan (the only remaining defendant) involving a single patent belonging to sanofi-aventis took place in May 2010. The U.S. District Court in Delaware held that Mylan’s generic alfuzosin hydrochloride would infringe the patent and that the prior art references failed to invalidate the patent. This ruling affirmed the validity of the patent, which, after a patent extension was granted, is due to expire in mid-2011.
Solaraze® Requip® Once-a-day Solaraze® (diclofenac), a topical gel treatment for actinic keratosis, Requip® Once-a-day is a once-daily formulation for Parkinson’s is marketed in the United States by Nycomed US, Inc. (“Nycomed”). disease and was developed in collaboration with GlaxoSmithKline The distribution and marketing partner in Europe and certain (“GSK”). The extended release Requip® uses the Group’s other territories is Almirall, S.A. (“Almirall”). The Group earns a low patented Geomatrix™ technology and is designed to provide teens royalty rate on net sales. smoother delivery of ropinirole over 24 hours. It also provides for a convenient, once-daily dosing schedule compared with the Net sales of Solaraze® in the United States in 2010 were U.S.$34.0 immediate-release ropinirole, which is dosed three times a day. million (£22.0 million), 44 per cent. lower than reported in 2009. The decrease is primarily due to a change in the customer mix from The FDA approved Requip® XL™ extended release tablets in 2009. Sales by Almirall increased to ¤25.7 million (£22.1 million) in June 2008 and the product was launched in the United States in 2010 from ¤24.3 million (£21.6 million) in 2009. July 2008. In 2009, a number of ANDAs were filed with the FDA for generic versions of ropinirole extended release tablets. There is SkyePharma and its licensee, Nycomed, received an ANDA data exclusivity in respect of the product until June 2011, which Paragraph IV notice relating to Solaraze® in the United States in may delay any potential generic product entry into the market. April 2010. Nycomed and SkyePharma have filed suit against the ANDA filer and the proceedings are at an early stage. The European brand names for Requip® Once-a-day are Requip- Modutab®, Requip PD, Requip® LP, Requip® XL™, Requip Depot®, Requip Prolib™ and Requip® prolonged release tablets.
Stock Code: SKP 13
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Business review continued
SkyePharma earns low mid single digit percentage royalties on This is likely to adversely impact sales of Sular® and the net sales of Requip® Once-a-day. In 2010 sales of Requip® Once- authorised generic version sold by URL Pharma. Should total net a-day were a total of £148 million, an increase of 22 per cent. (at sales of the lower-dose formulations of Sular® be significantly constant exchange rates) from 2009. £106 million was generated reduced following entry of other generics, the Group’s royalty in Europe, a 23 per cent. increase from 2009 using constant rate would be reduced from a low mid single digit percentage to exchange rates. £37 million arose in the United States, an increase a low single digit percentage on net sales. of 16 per cent. at constant exchange rates. The remaining £5 million arose from emerging markets and Asia Pacific. The Group manufactures the lower-dose formulations of Sular® including the URL Pharma authorised generic at the Group’s Sular® plant in Lyon, France. The Group developed lower-dose formulations of Sular® (nisoldipine), a calcium channel blocker antihypertensive agent, Paxil CR™ for Shionogi Pharma, Inc. (“Shionogi Pharma”) using the Group’s Paxil CR™ is an advanced formulation of the anti-depressant proprietary Geomatrix™ drug delivery system. The products were Paxil® (Paroxetine) and was developed by the Group with GSK launched in March 2008. using the Group’s Geomatrix™ technology. In 2010 reported sales were U.S.$85 million (£54 million), compared with U.S.$77 million Sales of Sular® continue to be affected by a declining market (£48 million) in 2009. and competition including a generic version of the higher-dose formulation of Sular®.
In June 2010, URL Pharma, Inc. (“URL Pharma”) launched an authorised generic version of the lower-dose formulations of Sular® in the United States pursuant to a sub-license agreement with Shionogi Pharma, which is covered by license and manufacturing agreements with SkyePharma. european respiratory Competitive generic versions of the lower-dose formulations of fiXed dose combination Sular® were approved in January 2011 in the United States and fac t market size is ¤3 billion* launched that month.
* Source: IMS
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Triglide® In November 2010, Horizon announced it had signed an exclusive Triglide® (fenofibrate), an oral treatment for elevated blood distribution and supply agreement with Mundipharma for the lipid disorders, is marketed in the United States by Shionogi commercialisation of Lodotra® in Australia, China, Hong Kong, Pharma, and has been sold alongside Fenoglide®, a fenofibrate Indonesia, Korea, Malaysia, New Zealand, Philippines, Singapore, product in-licensed by Shionogi Pharma from LifeCycle Pharma South Africa, Taiwan, Thailand and Vietnam. The Group is entitled AS (“LCP”). Triglide® was launched in 2005 and Fenoglide® was to receive a small share of the signing milestone paid to Horizon. launched in February 2008. Triglide® total prescriptions have continued the decline seen in previous periods due to generic Two pivotal Phase III studies were completed for Lodotra® competition. The Group manufactures Triglide® in its factory in 2009. The first was a 12-week, randomised, double blind, in Lyon, France. It is entitled to receive royalties at a rate of controlled study against marketed immediate-release prednisone 25 per cent. of Shionogi Pharma’s net sales of Triglide® less the to support MAA approval in Europe. To support the submission of cost of manufacture. In 2010 Shionogi Pharma terminated the the NDA for the United States an additional 12-week, randomised, licence agreement for Fenoglide® in the United States, and has double blind, multicentre, placebo controlled study involving 350 ceased selling the product. patients was undertaken with patients in both treatment arms receiving a disease-modifying anti-rheumatic drug (“DMARD”). ZYFLO CR® (zileuton) Extended-Release Tablets Both studies met their primary endpoints. Horizon has advised The Group developed an extended release formulation of the that it intends to submit the NDA for Lodotra® in the United oral asthma drug zileuton for Cornerstone Therapeutics, Inc. States in the second half of 2011. ZYFLO CR® (zileuton) extended-release tablets, taken twice daily, utilise the Group’s proprietary Geomatrix™ technology, and the The Group receives a mid single digit percentage royalty on product was approved by the FDA in May 2007 for the prophylaxis net sales and is manufacturing the product at its plant in Lyon, and chronic treatment of asthma in adults and children aged 12 France. years and older. ZYFLO CR® and ZYFLO® (zileuton tablets) are the only FDA-approved leukotriene synthesis inhibitors. The Group Pulmicort® pMDI receives a high mid single digit percentage royalty on net sales As announced on 7 March 2011, AstraZeneca discontinued of ZYFLO CR® and also manufactures the product at its facility in production of Pulmicort® (budesonide) 100 and 200 ug/dose Lyon, France. HFA pMDI (pressurised metered dose inhaler) due to complex manufacturing issues related to technical aspects of the device. Lodotra® The issues only impact AstraZeneca’s Pulmicort® pMDI device In April 2010, Nitec Pharma AG (the Group’s licensee for which is a unique combination of device components. Supplies Lodotra®) announced that it had merged with Horizon already manufactured or in the supply chain are continuing to be Therapeutics, Inc. The combined entity is known as Horizon distributed until exhausted. Pharma, Inc. (“Horizon”). SkyePharma developed the formulation for Pulmicort® pMDI Lodotra®, the novel programmed release formulation of low using its proprietary formulation technology and earns a mid dose prednisone, utilising SkyePharma’s proprietary Geoclock™ teens royalty on AstraZeneca’s net sales of the product. Royalties technology and developed in collaboration with Horizon, was from this product in 2010 comprised about 5 per cent. of approved in Europe in March 2009 for the treatment of morning SkyePharma’s revenues. stiffness associated with rheumatoid arthritis, under the European decentralised procedure. The first launch was in Germany by AstraZeneca has given notice to terminate the Group’s Merck Serono (Horizon’s licensee for Germany and Austria) in agreements for Pulmicort® pMDI and certain rights for the April 2009. The product is approved in an additional 12 European product will revert or be licensed to SkyePharma. The Company countries and was launched by Mundipharma (Horizon’s will explore whether a sublicense of these rights may be of distribution partner for the rest of Europe) in Italy in January interest to other parties. 2011. The Group received a small share of the milestone payable on launch in Italy, and is entitled to receive a small share of any future milestones received by Horizon for Lodotra®.
Stock Code: SKP 15
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Business review continued
DEVELOPMENT PIPELINE Flutiform™ — Japan Flutiform™ Flutiform™ is licensed to Kyorin Pharmaceutical Company Flutiform™ — Europe Ltd (“Kyorin”) in Japan. Under the agreement with Kyorin Flutiform™ is licensed to Mundipharma in Europe and most the Group has received an upfront milestone and certain other territories outside Japan and the Americas. The MAA was development milestone payments. Further development and accepted for review in May 2010 and preparations continue for its approval milestones worth several million pounds are payable potential launch in the second half of 2011. to SkyePharma under the agreement and there is a high mid single digit percentage royalty on net sales. The development Four Phase III clinical studies (including one high strength study) costs associated with obtaining approval for the Japanese market were carried out in support of the MAA covering approximately are largely being met by Kyorin, which is responsible for clinical 1,200 patients, in addition to the patients enrolled in the studies studies and regulatory submissions. Recruitment for two Phase III to support the NDA. The primary endpoints were met in all of the studies is progressing well. The aim is to file the NDA for Japan by clinical studies. the end of March 2013 and, subject to receiving approval, launch by the end of March 2015. The development and marketing agreement with Mundipharma, as amended, includes milestones of up to ¤73.0 million (£62.5 Flutiform™ — United States million), of which ¤15.0 million (£10.1 million at that time) was Following the Complete Response Letter from the FDA in January paid upfront, ¤3.0 million (£2.9 million at that time) was paid on 2010 and subsequent interactions, the Group has carried out a 31 December 2008, up to ¤15.0 million (£12.1 million) is due on specific amount of chemistry, manufacture and control work launch and up to ¤40.0 million (£34.3 million) is sales-related. to address some of the queries raised by the FDA. Further discussions will be held with the FDA to seek to confirm the scope Mundipharma is funding third party development costs of up of work required to meet the FDA’s requirements for approval to ¤19 million (£16.3 million) related to the development of a and to provide a good understanding of the likely costs which high strength version of Flutiform™. This cap was increased to would have to be met by any potential partner. The Group ¤19 million (£16.3 million) from ¤15 million (£12.8 million) in an continues the process of seeking potential partners to finance the amendment signed in November 2010 in order to cover the third additional work required. party costs of validating the manufacturing line for the high strength product. These costs are initially paid by Mundipharma, Flutiform™ — Other territories which is entitled to recover them out of partial reductions in The out-licensing of Flutiform™ in Latin America continues to be royalties and sales-related milestones due to the Group for up to negotiated. four years following commercial launch in one of Europe’s five largest markets. SKP-1041 Somnus Therapeutics, Inc. (“Somnus”) has successfully completed Under EU regulations there is a requirement to have an agreed two Phase I studies and a Phase II study of the delayed release Paediatric Investigation Plan (“PIP”). The Paediatric Committee sleep maintenance drug SKP-1041. The product is a new has reviewed the plans for Flutiform™ and a double blind study formulation of zaleplon, a non-benzodiazepine hypnotic agent, in children aged 4-12 is required to be completed by December which utilises SkyePharma’s proprietary Geoclock™ technology 2013. Under the agreements with Mundipharma the Group has an for delayed release. The formulation is designed to treat people obligation to bear 50 per cent. of the costs of this study, up to a who have difficulty maintaining sleep but not with sleep onset, maximum of ¤3.5 million (£3.0 million). and is intended to prevent middle-of-the-night awakening while avoiding morning residual effects. Under the development and marketing agreement the Group is entitled to royalties as a percentage escalating upwards from A Phase II study was initiated in June 2010. Top-line results 10 per cent. of net sales. The net royalties received are subject received in February 2011 show that the study met its primary to the reductions noted above for the recovery of high strength endpoints. Somnus plan to present the results of the study at the development costs and also by a cap on the total percentage Sleep Congress in Minneapolis, on 11-15 June 2011. that cost of goods and royalties can represent of net sales of Flutiform™. In February 2010, Somnus announced the completion of a U.S.$15.0 million series A financing agreement with CTI Life Sciences and Care Capital LLC.
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Under the agreement with Somnus, the Group could receive Japan, United Kingdom, France, Germany, Italy and Spain. up to U.S.$35.0 million (£22.6 million) in milestone payments, of EXPAREL™ is a long acting anaesthetic/analgesic for post-surgical which U.S.$4.0 million (£2.0 million at that time) was received pain management. Pacira Pharmaceuticals filed the NDA for on signing and U.S.$1.0 million (£0.7 million at that time) was EXPAREL™ with the FDA in September 2010. The target date for received on completion of the initial Phase I study. A further the completion of the review by the FDA (the PDUFA date) is U.S.$10.0 million (£6.6 million) is payable on product launch, and 28 July 2011. U.S.$20.0 million (£13.3 million) is sales-related. Licence fees SkyePharma is entitled to receive a royalty on future net sales In 2003 SkyePharma signed an agreement with GSK to provide escalating upwards from a high mid single digit percentage. access to one of SkyePharma’s proprietary dry powder formulation technologies for inhalation products. GSK made an SKP-1052 initial payment to SkyePharma on signature. Subsequently two In 2009, the Group commenced formulation work on SKP-1052, further milestone payments of £1.5 million have been received an oral product for the treatment of a particular aspect of in 2009 and 2011 for use of the technology in two development diabetes care, which the Group will seek to out-license following programs. In addition, SkyePharma is entitled to a low single digit a positive proof of concept study. The project applies the royalty on net sales of products using the licensed technology Group’s proprietary technology to a generic compound in an that reach the market, capped at a maximum amount of £3 innovative approach to diabetes care. The proof of concept study million per annum for each chemical entity. commenced in the first quarter of 2011.
EXTERNAL PROGRAMMES EXPAREL™ Under the terms of the sale of the Group’s former Injectables Business to Pacira Pharmaceuticals, Inc. (“Pacira Pharmaceuticals”) in 2007, the Group is entitled to receive a U.S.$10 million (£6.5 million) payment on the first commercial sale of EXPAREL™ in the United States, up to U.S.$52 million (£33.6 million) in other contingent milestone payments and 3 per cent. of net sales of EXPAREL™ in the United States,
Stock Code: SKP 17
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Business review continued
FEASIBILITY STUDIES AND TECHNOLOGY DEVELOPMENT Flutiform™ supply chain The Group continues to seek to strengthen the product Under the agreements with Mundipharma and Kyorin, the Group is pipeline through further early stage feasibility and technology responsible for arranging the manufacture and supply of Flutiform™, development projects, mainly funded, at least in part, on a time and has contracted with sanofi-aventis to manufacture and assemble and materials basis by partners. the product at its factory in Holmes Chapel, UK. The Group has entered into agreements with a number of suppliers in order to SkyePharma continues to seek other applications for its proprietary obtain materials required to manufacture Flutiform™ and have them SkyeHaler™ Dry Powder Inhaler (“DPI”). This is one of only a few supplied to sanofi-aventis. DPI devices which has been incorporated into a product approved by the FDA, and is the only such device which is not proprietary To establish the supply chain the Group has committed to substantial to a major pharmaceutical company. SkyeHaler™ is a multi-dose development expenditure to scale up and validate the manufacturing reservoir device suitable for acute and chronic therapies with a processes, which has inherent risks. The Group has also committed to dose counter and an end of life lockout mechanism. capital expenditure of £13.2 million, of which £12.5 million had been spent as at 31 December 2010. The Group expects to commit a further MANUFACTURING €1.6 million (£1.4 million) during 2011 for additional capital equipment. Lyon A former partner is funding £3.2 million of the expenditure of the The Group’s manufacturing facility is in Lyon, France. At Lyon, the Flutiform™ supply chain, of which £3.0 million had been funded as at Group presently manufactures five Geomatrix™ based products, 31 December 2010, and the Group is obliged to repay this funding by diclofenac-ratiopharm®-uno, Coruno®, ZYFLO CR®, Sular® March 2013, or earlier if the supply chain is outsourced. and Lodotra®, and one other oral product, Triglide®, based The Group is contractually committed to certain minimum volumes on its solubilisation technology. The manufacturing of a further in respect of Flutiform™ from its suppliers from 2011 through to 2015, product, Madopar DR®, is being transferred from the Group’s subject to termination rights if Flutiform™ is not launched by the end R&D centre in Muttenz, Switzerland to Lyon. The Lyon factory has of 2011. cGMP status, with approvals from the European Medicines Agency and United States FDA. During 2010 manufacturing revenues These minimum commitments, along with start-up costs and initial low were significantly boosted by non-recurring volumes to support volumes during the launch phase are expected to delay the profitability regulatory and commercial activities, which have led to a very of the supply chain arrangement for Flutiform™ until the product has significant contribution from products manufactured at Lyon. As been successfully established in most of the major European countries. much of this revenue is non-recurring and the facility in Lyon is substantially under-utilised, the Group continues to seek additional Axel Müller manufacturing opportunities for Lyon. Chief Executive Officer
Development pipeline*
Product name Region Licensee/partner Active Inhalation Flutiform™ Europe Mundipharma formoterol/fluticasone Flutiform™ Japan Kyorin formoterol/fluticasone Flutiform™ United States Available formoterol/fluticasone Oral Lodotra® United States Horizon prednisone SKP-1041 Worldwide Somnus Therapeutics zaleplon SKP-1052 Available Undisclosed Feasibility various Undisclosed SkyePharma Undisclosed External EXPAREL™ United States Pacira Pharmaceuticals bupivacaine Respiratory 1 undisclosed glaxoSmithKline Undisclosed Respiratory 2 undisclosed glaxoSmithKline Undisclosed * As at 22 March 2011. 18 www.skyepharma.com
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EUROPEAN medicines agency de-centralised approval process*
There are two routes by which a product may be granted a licence in the Day 70: The RMS sends their preliminary assessment to the CMS states for EU — either via the centralised or decentralised system. The decentralised review and comment. The applicant may also receive a copy. system allows the application for European Marketing Approval to be Day 100: The CMS send their comments on the preliminary assessment reviewed in detail by one member state (chosen by the applicant) — the report to the RMS. Reference Member State (“RMS”) — who coordinates the review process of applications with the Concerned Member States (“CMS”). Day 105: The RMS provides the applicant with the consolidated list of questions and preliminary assessment report, if not provided earlier in the Applications are filed by the applicant with the RMS and CMS in parallel. procedure. A clock stop is agreed between the RMS and the applicant to After a validation phase, the RMS compiles a preliminary assessment enable work to be performed and answers to be provided. Usually a three report which is then reviewed by the CMS and results in a consolidated list month clock stop is granted, however, in exceptional situations up to six of questions to the applicant. Further evaluation includes review of the months can be agreed. applicant’s responses and update of the preliminary assessment report by the RMS as well as discussion of the responses among the CMS. Day 106: The approval process is restarted following receipt of valid responses from the applicant at the end of the clock stop period. The RMS The decentralised procedure is usually completed within 210 days of the updates the preliminary assessment report and discusses the responses validation of the application — not including the response time of the applicant. with the CMS. At the end of the decentralised procedure the RMS and CMS adopt a Day 150: If consensus is reached the RMS will grant marketing joint opinion on whether the medicine should be granted a marketing authorisation. If consensus is not reached the applicant may receive further authorisation or not. In case of a positive opinion all member states questions from the RMS and/or CMS. included in the procedure should issue the national marketing authorisation within 30 days of completion of the procedure. Day 180: The applicant to respond to any newly raised questions. The main steps in the procedure are as follows: Day 210: Closure of the decentralised procedure with a joint opinion. If consensus has not been reached the application will be referred to the Submission: The Company will submit the file to the RMS and CMS. All Coordination group for mutual recognition and decentralised procedure member states have 14 days to validate the application and accept it for for human medicinal products (“CMD(h)”) for resolution and subsequently review, or refuse if it is incomplete. After acceptance the RMS sets the for arbitration to the EMA should the CMD(h) not achieve consensus either. formal commencement date for the process (day 0). The RMS and the CMS issue the national marketing authorisations within 30 days of the completion of the procedure.
* Source: The Rules Governing Medicinal Products in the European Union.
Product name Region Licensee/partner Active Primary indication Pre-clinical Phase 1 Phase II Phase III filed
Asthma Asthma Asthma
Rheumatoid arthritis sleep maintenance Diabetes
Undisclosed
pain management Undisclosed Undisclosed
Stock Code: SKP 19
20064.04 29/03/2011 Proof 15 SkyePharma PLC Annual Report AND Accounts 2010
Financial Review Peter Grant
“In 2010 the Group had a cash inflow from operating activities of £26.0 million compared with an inflow of £16.8 million in 2009.”
Revenue implemented in 2009 and non-recurring volumes produced to Revenues for 2010 were £58.1 million, an increase of £2.2 million support specific regulatory and commercial activities in 2010. (4 per cent.) on 2009 revenues. Research and development expenses Revenues from signing and milestone payments received in 2010 Research and development expenses incurred in 2010 totalled were £1.6 million compared with £4.0 million in 2009. £23.5 million (2009: £19.6 million). The Group’s net investment in research and development (expenditure, net of contract Contract research and development revenue reduced by 8 per cent. development revenues) was £14.9 million compared with £10.3 to £8.6 million in 2010 (2009: £9.3 million). This was primarily due to million for 2009. This increase has arisen as the Group continues completion of chargeable work for the development of Flutiform™ to incur expenditure related to the Flutiform™ supply chain for Europe, offset by an increase in revenues from the Japanese and costs incurred on a number of early stage feasibility and development of Flutiform™. technology development projects.
Royalty income in 2010 was £25.0 million, a decrease of £3.9 Corporate costs million (13 per cent.) from 2009, which included a one-off catch In January 2011, the Group’s corporate office in London moved up payment of £1.9 million from one partner. The key reasons from 105 Piccadilly to its new offices at 46-48 Grosvenor Gardens. The for the remaining decrease were a reduction in royalties from move is expected to save approximately £0.2 million per annum. Solaraze® in the United States due to a change in the customer mix and the anticipated reduction in Triglide® royalties. Operating Result The operating result before exceptional items was £15.3 million Manufacturing and distribution revenue totalled £22.9 million, an (2009: £15.1 million). Pre-exceptional EBITDA was £18.6 million increase of £9.2 million from 2009 revenues of £13.7 million. This (2009: £18.6 million), as shown below: increase was primarily due to the full year effect of price increases
2010 2009 £m £m Pre-exceptional operating profit 15.3 15.1 pre-exceptional depreciation and amortisation 3.3 3.5 Pre-exceptional earnings before interest, tax, depreciation and amortisation 18.6 18.6
Finance costs and income Finance costs — revaluation consisted of a charge of £1.5 million Finance costs — interest totalled £12.3 million (2009: £13.3 million) arising from the revaluation of the carrying value of the Paul and consisted of £6.1 million (2009: £6.2 million) payable on the Capital finance (2009: charge of £1.4 million) resulting from convertible bonds, £3.0 million (2009: £3.7 million) payable on the revisions made to the forecast payments to be made by Pacira CRC finance, £2.8 million (2009: £3.0 million) of interest attributable Pharmaceuticals to Paul Capital. to the Paul Capital finance and £0.4 million (2009: £0.4 million) on other bank borrowings. Finance income consists of £0.2 million (2009: £0.3 million) of bank interest. 20 www.skyepharma.com
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Foreign exchange Earnings per share Foreign exchange consists of net translation gains and losses on Basic earnings per share amounted to 26.3 pence (2009: loss of 6.0 borrowings and cash denominated in a currency other than an pence) in 2010. Diluted earnings per share in 2010 was 15.3 pence. entity’s functional currency. In 2010 this amounted to a gain of As at 31 December 2010 there were 23,943,162 Ordinary Shares in £5.6 million (2009: charge of £0.2 million). issue.
Result In addition there were outstanding as at 31 December 2010 a The profit for 2010 after exceptional items and taxation was £6.3 number of bond conversion rights and employee share schemes as million (2009: loss of £1.4 million). follows:
Number of Exercise price Description Ordinary Shares (per share) expiry conditions Deferred consideration (Krypton) 375,000 £33.54 None increasing at 10% per annum employee share option schemes 40,753 £23.75–£41.22 various dates 2011 to 2013 employee share schemes* 415,521 Nil various performance and service conditions convertible bonds 2024 16,983,023 £3.71 May 2024 convertible bonds 2025 5,235,602 £3.82 June 2025 Total at 31 December 2010 23,049,899 Total at 31 December 2009 24,853,895
* employee share schemes include the long-term incentive plans, international share purchase plan and one-off share plan.
More details of the convertible bonds and share scheme arrangements are set out in Note 25: Borrowings, Note 30: Share Capital and Note 31: Share-based payments to the accounts. At 22 March 2011, the Company’s mid-market share price was 38 pence.
Cash flows In 2010 the Group had a cash inflow from operating activities of At the beginning of 2011 the Group had liquidity totalling £29.7 £26.0 million compared with an inflow of £16.8 million in 2009. million. The Group is committed to certain minimum volumes in respect of Flutiform™ from its suppliers, and these costs, along The Group has purchased £4.2 million of property, plant and with start-up costs and initial low volumes during the launch equipment, primarily capital expenditure on tooling for the phase are expected to delay the profitability of the supply chain Flutiform™ supply chain. Of this, £1.5 million was funded by a for Flutiform™ until it has been successfully established in most former partner as described in Note 27: Long-term creditors. of the major European countries. Cash will also be used to meet scheduled debt and interest payments. The Group is obliged to Scheduled borrowing repayments of £10.3 million (2009: £7.0 apply milestones arising from the initial launches of Flutiform™ million) were made during the year, primarily to CRC and Paul in Europe as pre-payments of secured debt but the cash outflows Capital. In addition the Group paid £11.7 million of interest in 2010 would be partially offset from a launch milestone of U.S.$10 million (2009: £12.6 million) principally relating to the convertible bonds, (£6.5 million) receivable if EXPAREL™ is approved and launched in CRC and Paul Capital. the United States. As a result of these factors there are likely to be substantial cash outflows from normal trading during 2011. In February 2011, the mortgages totalling £8.6 million on land and buildings in Switzerland were renewed. One of the sites in Switzerland has now been vacated and is up for sale. This has a net book value of £4.2 million and a mortgage of £2.8 million which will be repayable out of any sale proceeds.
Stock Code: SKP 21
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Financial Review continued
Key performance indicators The Board considers the following Key Performance Indicators (“KPIs”) to be the most relevant to the Group’s operations:
Key financial performance indicators 2006 2007 2008 2009 2010 Revenue excluding milestones £m 30.3 31.2 49.8 51.9 56.5 signing and milestone payments received £m 30.0 3.0 3.9 3.0 0.7 Research and development expenditure £m 26.3 30.3 25.1 19.6 23.5 Research and development expenditure net of contract research and development revenue £m 24.7 27.1 17.1 10.3 14.9 Liquidity £m 46.2 33.1 38.0 29.3 29.7 Key non-financial performance indicators 2006 2007 2008 2009 2010 number of approved and marketable products at year end 9 11 12 12 12 manufacturing output Units (millions) 98 94 234 145 142
Description of KPIs incurred on a number of early stage feasibility and technology Revenue excluding milestones development projects. Revenue reflects the level of contract research and development work undertaken for third parties and manufacturing activities, Research and development expenditure net of contract as well as the growth in royalties earned as new products are research and development revenue launched. The £56.5 million for 2010 excludes milestone revenue of This KPI reflects the Group’s expenditure on research and £1.6 million and is shown in Note 5: Revenue by income stream. development expenses net of costs reimbursed by development partners. Expenditure is higher as the Group has spent more on Signing and milestone payments received self-funded projects, including costs related to the Flutiform™ The KPI shows amounts received with respect to pipeline supply chain. products and product sales, £0.7 million represents the cash received in 2010. The amount is less than the prior year as no new Liquidity development agreements were signed in 2010, and no significant This KPI measures the availability of finance to fund current and progress milestones received. future activities and to meet debt servicing requirements. Liquidity consists of cash and cash equivalents of £29.0 million, as per the Research and development expenditure balance sheet and undrawn facilities of £0.7 million. Research and development expenditure reflects the costs, including direct and indirect overheads, of all research and Balance sheet development activities. A breakdown of the 2010 costs is shown At 31 December 2010, the Group balance sheet shows total in Note 7: Research and development. The increase in costs shareholders’ equity of £79.9 million deficit (2009: £79.6 million from 2009 is related to the Flutiform™ supply chain and costs deficit).
Borrowings and liquidity The Group’s total net debt, measured in accordance with IFRS, comprises: 31 December 31 December 2010 2009 £m £m Convertible bonds 59.3 58.5 paul Capital finance 22.0 24.7 CRC finance 35.9 41.6 Property mortgage 8.6 8.0 bank borrowings and overdraft 1.4 1.2 finance lease liabilities 0.1 0.1 Total debt 127.3 134.1 less cash and cash equivalents (29.0) (27.0) Net debt 98.3 107.1
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Total debt has decreased £6.8 million in the year. This is due to Paul Capital finance repayments of £10.3 million, offset by translation and revaluation The Group has a fixed amortisable note (“Note”) of U.S.$92.5 effects. million (£59.8 million) due to Paul Capital finance. The Note is repayable in accordance with an amortisation schedule through Convertible bonds to 2015. At 31 December 2010 a cumulative total of U.S.$46.0 The convertible bonds outstanding at 31 December 2010 million (£29.7 million), has been paid against the Note. The comprise £63.0 million 6 per cent. convertible bonds due May principal outstanding at 31 December 2010 is U.S.$46.5 million 2024 (2009: £63.0 million) and £20.0 million 8 per cent. convertible (£30.2 million). bonds due June 2025 (2009: £20.0 million). The £63.0 million May 2024 bonds are convertible into Ordinary Shares at £3.71 Pacira Pharmaceuticals (previously the Injectable Business) was per share and may be called for repayment by the bondholders sold in 2007 on the basis that it retained responsibility to Paul at par in November 2013, November 2015, November 2017 Capital for its existing obligations to make payments based and November 2020. The £20.0 million June 2025 bonds are on sales of DepoCyt® and DepoDur™ and, to the extent that convertible into Ordinary Shares at £3.82 per share and may be payments are made in respect of these, the Group’s liability called for repayment by the bondholders at par in December under the Note will be reduced accordingly. The amount of the 2014, December 2016, December 2018 and December 2021. Group’s liability therefore depends on estimates of the sales of DepoCyt® and DepoDur™ by Pacira Pharmaceuticals. At 31 No convertible bonds were converted in 2010 (2009: conversions December 2010 a cumulative total of U.S.$6.1 million (£3.9 million) of £6.6 million of the 6 per cent. convertible bonds due 2024 of the Group’s repayments of the Note had been made by Pacira were made). Pharmaceuticals.
Although shown in the balance sheet in accordance with IFRS at a As at December 2010 the net present value of the Note (net of value of £59.3 million (2009: £58.5 million), the convertible bonds anticipated payments by Pacira Pharmaceuticals to Paul Capital) have a face value totalling £83.0 million. The Group’s total net debt discounted at an annual rate of 11.2 per cent. is U.S.$34.1 million with convertible bonds at face value is £122.0 million (2009: £131.6 (£22.0 million) compared with the value of U.S.$39.3 million (£24.7 million). million) at 31 December 2009.
The following amortisation schedule shows the scheduled amounts payable under the Note, including the contributions made and forecast to be made by Pacira Pharmaceuticals:
N notional Repayment Total payment Payment interest of principal — SkyePharma — Pacira Total U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m 2007 (actual) 6.7 2.9 9.6 1.1 10.7 2008 (actual) 5.9 3.1 9.0 1.7 10.7 2009 (actual) 7.4 2.2 9.6 1.7 11.3 2010 (actual) 6.5 5.2 11.7 1.6 13.3 2011 3.4 12.1 15.5 1.6 17.1 2012 1.9 12.5 14.4 1.6 16.0 2013 0.7 8.5 9.2 1.6 10.8 2014 — 1.0 1.0 1.6 2.6 Total 32.5 47.5 80.0 12.5 92.5
The above table: (i) shows payments on a cash basis (no discounting is applied) (ii) includes reductions for past and estimated future sales related payments by Pacira Pharmaceuticals for DepoDur™ and DepoCyt® (iii) includes prepayments of the Note to an aggregate amount of U.S.$10 million out of 50 per cent. of milestones and signing fees received and forecast to be received in respect of Flutiform™
Stock Code: SKP 23
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Financial Review continued
CRC finance The CRC finance was taken out in 2006 and is a 10 year secured amortising loan facility which at inception totalled approximately £35.0 million at the exchange rates prevailing at that time. The facility comprises initial commitments of U.S.$35.0 million and ¤26.5 million repayable over 10 years based on a minimum amortisation schedule.
The following amortisation schedule shows the interest payable and principal outstanding under the CRC finance:
E euro component of loan U.S.$ component of loan interest payment Principal outstanding interest payment principal outstanding in year at end of year in year at end of year ¤m ¤m U.S.$m U.S.$m 2007 (actual) 2.3 26.5 2.8 35.0 2008 (actual) 3.3 26.3 3.3 34.8 2009 (actual) 2.3 24.5 2.4 31.8 2010 (actual) 1.9 21.4 1.9 27.5 2011 1.7 17.5 2.0 18.6 2012 1.4 13.4 1.4 10.7 2013 1.2 9.8 0.6 7.8 2014 1.0 6.5 0.4 5.1 2015 0.7 3.1 0.3 2.5 2016 0.5 — 0.1 — Total 16.3 15.2
The above table: (i) shows interest on a cash basis (no discounting is applied). The interest rates applicable at 31 December 2010 were 6.76 per cent. on the Euro component (plus an additional 5 per cent. on the first ¤7.5 million) and 6.07 per cent. on the U.S.$ component (ii) shows the minimum amortisation schedule assuming the cumulative milestones and royalties from Coruno®, Lodotra® and Requip® Once-a-day are not in excess of the levels triggering the principal to be repaid earlier without penalty (iii) includes prepayments of the Note to an aggregate amount of U.S.$10 million out of 50 per cent. of milestones and signing fees received and forecast to be received in respect of Flutiform™
Other borrowings Going concern Other borrowings amounted to £10.1 million at 31 December 2010 The Group’s business activities together with the factors likely to (2009: £9.3 million), consisting principally of £8.6 million (2009: affect its future development, performance and financial position £8.0 million) of property mortgages secured on the assets of are set out in the Business Review on pages 12 to 19. The financial SkyePharma AG. position of the Group, its cash flows, liquidity position, and debt profile are described in the Finance Review on pages 20 to 25. The principal risks facing the Group’s business are set out in the Liquidity Corporate Governance Report on pages 35 to 43. In addition, in the At 31 December 2010 SkyePharma had liquidity of £29.7 million notes to the financial statements, Note 28: Financial instruments (2009: £29.3 million), comprised as follows: on pages 98 to 100 includes the Group’s objectives, policies and processes for managing its capital, its financial risk management 2010 2009 objectives, details of its financial instruments and hedging £m £m activities, and its exposures to credit risk and liquidity risk. Cash and cash equivalents 29.0 27.0 The Directors have made an assessment of the risks and Overdraft – not utilised 0.7 2.3 uncertainties inherent in the business, as disclosed in this Annual Liquidity 29.7 29.3 Report and Accounts and of the working capital requirements of the Group for the next 12 months. COMMITMENTS The anticipated approval and launch of Flutiform™ in Europe in To establish the Flutiform™ supply chain the Group has committed the second half of 2011 is pivotal to the value and cash generative to substantial development and capital expenditure to scale up potential of the Group. Over the next two years, a large part of and validate the manufacturing process, as detailed in Note 33: the Group’s net cash of £28.9 million as at 31 December 2010 is Commitments. earmarked to fund the Flutiform™ supply chain, including the
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validation of the manufacturing line, and to meet scheduled being December 2014 (collectively “Convertible Bonds”). Even debt and interest payments to the extent not covered by cash with the expected approval and launch of Flutiform™ in 2011 it is generated from normal operations. The successful validation of unlikely, based on current financing and licensing agreements, the manufacturing line and anticipated approval and launch of that the Group will generate sufficient cash from normal trading Flutiform™ in 2011 will not significantly enhance liquidity in the to meet the earliest possible bond Puts if the Convertible Bonds are next two years, as the Group is obliged to apply milestone receipts not converted prior to those dates. However, the Board believes arising from the initial launches of Flutiform™ in Europe as pre- that the approval of Flutiform™ should enable the Group’s capital payments of secured debt. However, the approval and launch of structure to be strengthened well ahead of the bonds’ earliest Flutiform™ would underpin management’s current operating Put dates. In anticipation of this the Board has appointed Jefferies strategy, including ongoing and expected contract R&D income International Limited to advise the Board on the Group’s capital from projects such as Flutiform™ product line extensions and the structure. ability of the Group to address any working capital needs arising from the normal volatility of trading. Foreign exchange — risks Almost all the of the Group’s operations are based overseas in In its cash flow projections for the next 12 months, the Board has Continental Europe and licence royalty payments are typically anticipated receipt of non-Flutiform™ milestones totalling £9.0 denominated in various currencies, with sales-related payments million, including a launch milestone of $10 million (£6.5 million) based on underlying sales in local currencies. This gives rise to due from Pacira if EXPAREL™ is approved and launched in the direct and indirect exposures to changes in foreign exchange United States. If these milestones are not received or their receipt rates notably the Swiss Franc, Euro and U.S. Dollar. To minimise is significantly delayed beyond 2011, the Board believes that there the impact of any fluctuations, the Group’s policy has historically are a number of steps which could be taken to appropriately been to maintain natural hedges by relating the structure of manage the resulting working capital position of the Group. borrowings to the underlying trading cash flows that generate them. Exchange translation gains and losses relating to funding IAS 1: “Presentation of Financial Statements” requires the (cash and debt) are included in foreign exchange gain or loss on Directors to disclose “material uncertainties related to events net debt, other realised exchange gains and losses and exchange or conditions that may cast significant doubt upon the translation gains and losses are included within the revenue or Group’s ability to continue as a going concern”. After careful expense line to which they most closely relate. Where subsidiaries consideration of IAS 1 and the Financial Reporting Council’s are funded centrally, this is achieved by the use of capital Going Concern and Liquidity Risk: Guidance for Directors of UK injections or long-term intercompany loans. Where settlement Companies 2009, the Directors consider that, taken together, of such intra-Group loans is neither planned nor likely to occur the uncertainties described above are “material uncertainties”. in the foreseeable future, they are treated as part of the net Nevertheless, the Board has reasonable expectations that investment and exchange differences are taken to reserves. No Flutiform™ and EXPAREL™ will be approved and launched use has been made of currency options and forward currency successfully in their respective markets and that the Group will contracts in 2010. have adequate resources to continue in operational existence for the foreseeable future. Accordingly the Board considers that Forward looking statements the business is a going concern and continues to adopt the going The foregoing discussions contain certain forward looking concern basis in preparing the Annual Report and Accounts. The statements. Although SkyePharma believes that the expectations financial statements do not contain the adjustments that would reflected in these forward looking statements are reasonable, it result if the Group was unable to continue as a going concern. can give no assurance that these expectations will materialise. Because the expectations are subject to risks and uncertainties, The Auditors’ report on the financial statements for 2010 actual results may vary significantly from those expressed or includes an emphasis of matter paragraph to draw attention implied by the forward looking statements based upon a number to the disclosures made in Note 2 to these financial statements of factors. Such forward looking statements include, but are indicating material uncertainties about the Group’s ability not limited to, the timescales for approval, launch or regulatory to continue as a going concern. The Auditors’ opinion is not filings for Flutiform™, the statements under “Outlook”, the modified in this respect. The Auditors’ report for 2009 and the forecast sales of Flutiform™, the development of new products, Auditors’ conclusion on the unaudited statements for the first risks related to obtaining and maintaining regulatory approval half of 2010 did not contain any emphasis of matter paragraph for existing, new or expanded indications of existing and new and also included unmodified audit opinions. products, risks related to SkyePharma’s ability to manufacture products on a large scale or at all, risks related to SkyePharma’s Whilst not a material uncertainty affecting the Directors’ and its marketing partners’ ability to market products on a large assessment of going concern for the purpose of these financial scale to maintain or expand market share in the face of changes statements, as set out in Note 25: Borrowings, the Group has in in customer requirements, competition and technological issue £63.0 million of bonds which may be converted into Ordinary change, risks related to the ownership and use of intellectual Shares at £3.71 per share and may be called for repayment (“Put”) property, and risks related to SkyePharma’s ability to manage on various dates, the earliest being November 2013, and £20.0 growth. SkyePharma undertakes no obligation to revise or million of bonds which may be converted into Ordinary Shares update any such forward looking statement to reflect events or at £3.82 per share and may be Put on various dates, the earliest circumstances after the date of these Financial Statements.
Stock Code: SKP 25
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directors and officers Executives
Dr Axel Müller Chief Executive Officer Axel Müller (age 54) was appointed Chief Executive Officer on 23 August 2010. He is a non-executive director of Euroderm AG. Previously, he was with Acino Holding AG, a Swiss-based specialist pharmaceutical manufacturer, from 2005 having been appointed Chief Executive Officer in 2008. Prior to this he was President of Siegfried Generics, part of Siegfried AG, Switzerland, from 2004 to 2005. He has held various senior appointments with Aceto Holding GmbH, Germany, Schweizerhall Pharma, Switzerland, management consultants Arthur D. Little and a number of R&D, marketing and sales roles at Novartis. He is a German citizen and holds a BS in Pharmacy and a PhD in Pharmacology from Tübingen University.
Peter Grant Chief Financial Officer Peter Grant (aged 55) joined the Company and was appointed to the Board as Chief Financial Officer in November 2006. Previously, he was Interim Chief Executive Officer of Voice Commerce Group, Group Finance Director at Eurodis Electron PLC, Chief Financial Officer at WorldPay plc and Group Finance Director, then Group Chief Executive at Molins PLC. Prior to this he held a variety of senior commercial, financial and general management roles in the General Electric Company plc group of companies. Peter Grant was previously a Non-Executive Director of ShipServ, Inc. He holds an MA in Mathematics from Oxford University and is a chartered accountant.
John Murphy General Counsel and Company Secretary John Murphy (aged 57) joined the Company as General Counsel in March 2006 and was appointed as Company Secretary in September 2006. He is a lawyer with extensive experience in legal and company secretarial roles in listed pharmaceutical and biotechnology companies including Medeva PLC, Celltech Group PLC and Pharmagene PLC (now Asterand PLC). He is Chairman of the BIA Intellectual Property Advisory Committee and a member of the EuropaBio Intellectual Property Working Group. He holds a BSc in Aeronautical Engineering from Bristol University and is a qualified solicitor.
Key A Member of the Audit Committee N Member of the Nomination & Governance Committee R Member of the Remuneration Committee
Additional information regarding Directors’ roles and membership of Board Committees is set out in the Corporate Governance Report on pages 35 to 43.
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Frank Condella R Non-Executive Chairman Frank Condella (aged 56) became Non-Executive Chairman on 1 January 2010, having originally joined the Company as Chief Executive Officer in March 2006. He was first appointed to the Board in April 2006, stepping down as Chief Executive Officer on 1 September 2008, remaining on the Board as an Executive Director until 1 November 2008 when he became a Non-Executive Director. He is a member of the Remuneration Committee and was Chairman of that Committee up to June 2010. He is President, Chief Executive Officer and a Director of Columbia Laboratories, Inc. Previously, he was President of European Operations at IVAX, Chief Executive Officer of Faulding Pharmaceutical Co., Vice-President of the Specialty Care Products business at Roche and Vice-President and General Manager of the Lederle unit of American Home Products. He is a US citizen and holds a BS in Pharmacy and an MBA from Northeastern University.
Alan Bray A N R Senior Independent Director Alan Bray (aged 66) was appointed to the Board as a Non-Executive Director in September 2004. He became Senior Independent Director in June 2006 and is Chairman of the Audit Committee. He is a member of the Nomination & Governance and Remuneration Committees. He is a Director of Tavistock & Summerhill School. Previously, he was a Senior Partner at Deloitte LLP in their financial services practice. He has worked with retail and investment banks, insurance companies and asset management firms and was seconded for a time to the Department of Trade and Industry. He was responsible for Deloitte LLP’s risk management policies and procedures in its financial services practice and was a serving member on a DTI Supervisory Board and Audit Committee. He is a chartered accountant.
Jean-Charles Tschudin A N R Non-Executive Director Jean-Charles Tschudin (aged 68) was appointed to the Board as a Non-Executive Director in July 2007. He is Chairman of the Nomination & Governance Committee. He is a member of the Audit and Remuneration Committees. He is a Non-Executive Director of Sinclair Pharma PLC. Previously, he was President and Chief Operating Officer for Yamanouchi Europe (now Astellas Europe) and a senior executive at Cardinal Health, Johnson & Johnson and Schering-Plough. He is a Swiss citizen, holds an Economics Business Degree from Georgetown University and is a Chartered Director.
Dr Thomas Werner A N R Non-Executive Director Dr Thomas Werner (aged 54) was appointed to the Board as a Non-Executive Director in May 2009. He was appointed Chairman of the Remuneration Committee in June 2010 and is a member of the Audit and Nomination & Governance Committees. He is a senior-level pharmaceutical executive with over 28 years’ experience in the pharmaceutical industry, most recently as Managing Director and Senior Vice-President of GlaxoSmithKline Germany. Prior to that, he held senior positions at Glaxo Wellcome Germany, Bristol-Myers Squibb Germany and Convatec Germany (a medical devices subsidiary of Bristol-Myers Squibb). He is a member of the Board of Accera, Inc., a Non-Executive Director of Medigene AG and a member of the Supervisory Board of 4SC AG. Dr Werner sits on the Board of Trustees of the Paul Ehrlich Association. He is a German citizen and holds a PhD in Chemistry from the University of Göttingen.
Stock Code: SKP 27
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report of the directors
The Directors present their annual report on the affairs of the Capital structure Group, together with the consolidated accounts and Auditors’ Details of the share capital, together with details of the movements report for the year ended 31 December 2010. The Corporate in the Company’s issued share capital during the year, are shown Governance Statement set out on pages 35 to 43 and the in Note 30: Share capital. The Company has one class of Ordinary Statement of Directors’ Responsibilities set out on pages 54 and Shares referred to as “Ordinary Shares” which carry no right to 55 form part of this report. fixed income. Each Ordinary Share carries the right to one vote at general meetings of the Company. The Company’s Ordinary Principal activities Shares are listed on the London Stock Exchange. The Company also The principal activities of the Group during the year continued has Deferred “B” Shares and Deferred “C” Shares. Further details of to be the research and development, manufacture and sale of these are shown in Note 30: Share capital. prescription pharmaceutical products. The Company maintains an American Depositary Receipt (“ADR”) Business review facility on an over the counter basis via Pink Sheets. Each ADR The Company is required by the Companies Act 2006 to include represents 1 Ordinary Share. a business review in this report. The information that fulfils the requirements of the business review can be found in the Pursuant to the general provisions of the Articles of Association following sections, which are incorporated in this report by and prevailing legislation, there are no specific restrictions on reference. the size of a holding. The Directors are not aware of any other restrictions on the transfer of Ordinary Shares in the Company business Review on pages 12 to 19 other than certain restrictions which may from time to time be financial Review on pages 20 to 25 imposed by law and regulations, e.g. insider trading laws, and principal risks and uncertainties on pages 41 to 43 pursuant to the Listing Rules of the Financial Services Authority Key performance indicators on page 22 whereby certain employees of the Company require the approval environmental, employee and social and community matters of the Company to deal in the Company’s securities. on pages 33 and 34 significant contractual or other arrangements on page 31 The Company is not aware of any agreements between Research and development activities on pages 5 and 20 shareholders that may result in restrictions on voting rights and the transfer of securities. Information about the use of financial instruments by the Company and its subsidiaries is given in Note 28: Financial Details of employee share schemes are set out in Note 32: Share- instruments. based payments. Shares held by the General Employee Benefit Trust and the Employee Benefit Trust are able to be voted by the Details of significant events since the balance sheet date are Trustees of each Trust. contained in Note 37: Post-balance sheet events. No person has any special rights of control over the Company’s Results and dividends share capital and all issued shares are fully paid. The Group made a profit for the year to 31 December 2010 of £6.3 million (2009: loss of £1.4 million). The Directors do not propose to Directors recommend payment of a dividend. The Directors who served throughout the year, except as noted, were as follows:
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Directors frank Condella non-Executive Chairman (from 1 January 2010) M member of the Remuneration Committee (Chairman of the Remuneration Committee up to 21 June 2010) axel Müller Chief Executive Officer (from 23 August 2010) peter Grant Chief Financial Officer alan Bray Senior Independent Director, Chairman of the Audit Committee, Member of the Nomination & G governance and Remuneration Committees Jean-Charles Tschudin non-Executive Director, Chairman of the Nomination & Governance Committee (from 1 January 2010), M member of the Audit and Remuneration Committees Thomas Werner non-Executive Director, Chairman of the Remuneration Committee (from 22 June 2010), Member of the A audit and Nomination & Governance Committees Ken Cunningham chief Executive Officer (until 22 August 2010, resigned as a Director on 30 September 2010)
The Director retiring by rotation at the 2011 Annual General Fixed assets Meeting is Frank Condella who, being eligible, offers himself for The Directors estimate that the market value of land and re-election. Axel Müller, having been appointed since the last buildings is in excess of book value. Annual General Meeting, offers himself for election. Biographical details of the Directors are available on pages 26 and 27. Charitable and political donations No contributions were made to charities (2009: £Nil). Directors’ interests Details of Directors’ interests in the share capital of the Company No contributions were made to political organisations (2009: together with details of the share incentives granted to them are £Nil). disclosed in the Remuneration Report on pages 44 to 53. Substantial shareholdings As at the date of this report, the Directors of the Company had As at 17 March 2011, the Company had been notified, in an interest, beneficially and non-beneficially, in an aggregate accordance with chapter 5 of the Disclosure and Transparency of 65,064 Ordinary Shares, representing 0.27 per cent. of the Rules (“DTR”), of the following voting rights of shareholders of Company’s total voting rights. the Company:
Directors’ indemnities The Company did not make any qualifying third party indemnity provisions for the benefit of its Directors during the year and none are in force at the date of this report.
Supplier payment policy The Group’s policy is to agree terms of payment with suppliers when agreeing the terms of each transaction, ensure that suppliers are made aware of the terms of payment and abide by the terms of payment. Trade creditors of the Company at 31 December 2010 were equivalent to 44 days’ purchases (2009: 22 days’ purchases), based on the average daily amount invoiced by suppliers during the year.
Stock Code: SKP 29
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report of the directors continued
Major shareholders Percentage of voting N no. of rights and Ordinary issued share name of the holder Shares capital hbm BioVentures (Cayman) Ltd 4,976,806 20.79 orbiMed Advisors LLC 2,747,242 11.47 aviva plc and subsidiaries 2,037,992 8.51 ubs (as principal) 1,318,203 5.51 Barclays Stockbrokers 1,133,104 4.73 TD Waterhouse Stockbrokers 1,044,375 4.36 Dr J Gonella 959,990 4.01 ubs and its subsidiaries 843,381 3.52
Acquisition of the Company’s own shares Additional information for shareholders The Company made no purchases of its own shares in the period With regard to the appointment and replacement of Directors, under review. As at 31 December 2010 authority given by the the Company is governed by its Articles of Association, the 2008 shareholders at the 2010 Annual General Meeting for the Company Combined Code, the Companies Act 2006 and related legislation. to make market purchases of up to £2,394,316 nominal value of its Ordinary Shares at a price of not more than 105 per cent. of the The Articles themselves may be amended by special resolution current market price was still in force. Whilst this authority is being of the shareholders. The matters reserved for the Board are proposed for renewal at the 2011 Annual General Meeting, as the described in the Main Board Terms of Reference, copies of which Company has no retained profits, the authority cannot currently are available on request, or on the Company’s website, be utilised and the Directors do not currently intend to make any www.skyepharma.com. market purchases of Ordinary Shares. The Articles provide that Directors may be appointed by an Disabled employees ordinary resolution of the Company’s members or by a resolution Applications for employment by disabled persons are always of the Directors, provided that, in the latter instance, a Director fully considered, bearing in mind the aptitudes and qualifications appointed in this way retires and stands for election at the first of the applicant concerned. In the event of members of staff Annual General Meeting following his appointment. becoming disabled every effort is made to ensure that their employment with the Group continues and that appropriate The Articles also provide that at every Annual General Meeting training is arranged. at least one-third of the Directors retire by rotation and set out the circumstances in which and how they may be re-elected. It is the policy of the Group that the training, career development The Company’s members may remove a Director by passing an and promotion of disabled persons should, as far as possible, be ordinary resolution of which special notice has been given. The identical to that of other employees. office of a Director shall be vacated in any of the following events, namely if (i) (not being an Executive Director whose contract Acquisitions and disposals precludes resignation) he resigns his office by notice in writing, There were no disposals or acquisitions during the year (2009: (ii) he becomes bankrupt or has a receiving order made against None). him or compounds with his creditors, (iii) he becomes of unsound
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mind or a patient for any purpose of any statute relating to Contracts mental health and the Directors resolve that his office should be The most significant contracts affecting the business are vacated, (iv) he is absent from meetings of the Directors for six the development, licensing and manufacturing and supply months without leave, and his alternate Director (if any) does not agreements for the key products described in the Business Review during that period attend in his stead, and the Directors resolve on pages 12 to 19 as well as the convertible bonds and financing that his office should be vacated, (v) he is removed or becomes agreements with Paul Capital and CRC, which are described in prohibited from being a Director under any provision of the Note 25: Borrowings. statutes, or (vi) he is requested in writing by all other Directors to resign his office. Directors’ and Officers’ liability insurance During the period under review, the Company and the Group The powers of the Directors are determined by applicable maintained insurance policies for its Directors and Officers in legislation and the Company’s Articles of Association. As provided respect of liabilities which could arise in the discharge of their in those Articles, the Directors may exercise all the Company’s duties. powers provided that the Articles or applicable legislation do not stipulate that any such powers must be exercised by the Close Company provisions Company’s members. The Directors have been authorised to The Company is not a “close” company within the meaning of the issue and allot Ordinary Shares, pursuant to the Articles and have Income and Corporation Taxes Act 1988, and there have been no authority to make market purchases of shares. These powers changes to this status during the year under review or since the are referred to shareholders at each Annual General Meeting end of the year. for renewal. Any shares purchased may be cancelled or held as treasury shares. Annual General Meeting The 2011 Annual General Meeting of the Company will take Compliance with the Combined Code place at the offices of Financial Dynamics, Holborn Gate, The statements of compliance with the principles of the 26 Southampton Buildings, London, WC2A 1PB at 10.30 a.m. Combined Code on Corporate Governance published by the FSA on Thursday 12 May 2011. Please refer to the Notice of Annual in June 2008 are set out on page 35. General Meeting (separate document) for details of the business to be transacted at the meeting. Change of control The Company, and various subsidiaries, are party to a number Ordinary resolutions 1 to 6 constitute the ordinary business of of agreements which have change of control clauses. If triggered, the meeting: to receive the annual report and accounts, appoint these could lead to the acceleration of payments and make- Directors and Auditors and determine their remuneration and to whole charges under financing facilities, trigger put options at approve the Directors’ Remuneration Report. par value for the convertible bonds and lead to delays in product development programmes and/or product commercialisation, Resolutions 7 to 10 constitute special business. Ordinary resolution where they relate to product supply chains. There are no 7 authorises the Directors to issue Ordinary Shares up to an agreements between the Company and its Directors or Officers aggregate nominal value of £15,962,108 being two-thirds of the providing for compensation for loss of office or employment issued share capital as at 22 March 2011. (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. Special resolution 8 authorises the Directors to issue Ordinary Shares for cash without applying the pre-emption rights set out in section 561 of the Companies Act 2006. It authorises the Directors to make rights issues and issue shares up to a total nominal value of £1,197,158, being 5 per cent. of the issued share capital as at 22 March 2011. The authority expires at the conclusion of the next following Annual General Meeting of the Company.
Stock Code: SKP 31
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report of the directors continued
Special resolution 9 sets out the framework in which the Company may purchase its own shares. It limits a purchase to a maximum aggregate value of £2,394,316 being 10 per cent. of the issued share capital as at 22 March 2011, and sets out the minimum and maximum prices to be paid.
Special resolution 10 authorises that a general meeting other than an Annual General Meeting may be called on not less than 14 clear days’ notice.
Events since the balance sheet date As disclosed in Note 25: Borrowings, in February 2011 the Group renewed its two new mortgage agreements with the Basellandschaftliche Kantonalbank. The first is for £2.8 million (CHF 4.2 million), which bears interest at a variable rate (currently 3.875 per cent. per annum) and is repayable with three months’ notice from either party. The second is for £5.8 million (CHF 8.3 million), which bears interest at 3.6 per cent. per annum and is fully repayable in 2016.
As announced on 7 March 2011, AstraZeneca discontinued the production of Pulmicort® pMDI due to complex manufacturing issues related to technical aspects of the device. The issues only impact AstraZeneca’s Pulmicort® pMDI device which is a unique combination of device components. Royalties from this product in 2010 comprised about 5 per cent. of SkyePharma’s revenues.
46–48 Grosvenor Gardens By order of the Board London SW1W 0EB John Murphy General Counsel and 22 March 2011 Company Secretary
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Mission It is Group policy to offer the same opportunity to disabled SkyePharma’s mission is to become a leading speciality people as to all others in matters of recruitment and career drug delivery Company, powered through excellence in advancement, provided they have the ability to perform the its oral and inhalation technologies. SkyePharma strives to tasks required. Training is considered where appropriate, and deliver clinical benefits for patients by using its multiple drug retraining, where practical, in cases where disability has occurred delivery technologies to create enhanced versions of existing during employment with the Group. pharmaceutical products. Health and safety Stakeholders SkyePharma recognises that a safe, secure and healthy working The Group recognises that, although its prime responsibility under environment contributes to productivity and improved UK corporate law is to its shareholders, it also has responsibilities performance. The health and safety of all of our employees, towards its employees, partners, debtholders, suppliers and also, contractors and visitors are serious matters and are ultimately the ultimately, those patients who benefit from its products. responsibility of the Chief Executive Officer. Formal safety reports from France and Switzerland, our manufacturing and research Each stakeholder has different interests, some of which are listed and development sites, are reviewed at each Board meeting and below: Health and Safety is a standing item on each Board and Executive agenda. The Group has an excellent safety record and there have shareholders — SkyePharma seeks to increase shareholder been no incidents to report to the Health and Safety Executive value over the long term. in the United Kingdom or to the equivalent bodies in France and employees — SkyePharma acknowledges its responsibilities Switzerland. for the health and safety of its employees, for communications and training. Further information about its Employee communication and involvement employment policies is outlined below. The Group is committed to a policy of promoting employees’ partners — SkyePharma is responsible for the quality of its awareness of its activities, encouraging employees’ participation products and research and development; and for timely and in the growth of the Group and welcoming staff input at all levels. effective communications with its partners. Senior management meetings are held regularly and information Debtholders — the Company needs to comply with its is cascaded down to employees as necessary. Given the small size financing agreements and ensure that interest and capital of the Group, it is recognised that by far the most important form payments are paid on time. of communication between management and employees takes suppliers — the Company needs to make payments in place during informal daily discussions. accordance with the terms of its agreements. patients — whilst the Company does not directly market its Consultations occur to allow employee opinions to be heard products to patients, ultimately its aim is to deliver benefits to when making decisions affecting their interests and a formal those patients using its products. works council is operated in France. Communication also takes place via the Group intranet. The Group is a member of the BioIndustry Association (“BIA”), the UK-based trade body for the biotechnology sector. The Remuneration is determined on an annual basis by the Company’s General Counsel and Company Secretary is Chairman Remuneration Committee and Executive Committee as of the BIA Intellectual Property Advisory Committee. appropriate. The Group attracts and retains employees of high calibre by offering remuneration that is in line with that offered Equal opportunities policy by industry competitors and local practice in the countries in SkyePharma is committed to a policy of equal opportunities which it operates. All employees are encouraged to participate in in its employment practices. The Company believes that the the Group’s share purchase scheme. contribution an employee can make should not be affected by factors such as gender, age, marital status, disability, sexual orientation, race, colour, religion, ethnic or national origin or any other conditions not relevant to the performance of the job. The formal Equal Opportunities Policy is reviewed annually and is available on the Group website at www.skyepharma.com or upon request from the Company Secretary.
Stock Code: SKP 33
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corporate social responsibility continued
Ethical Issues CFC gases, used in some types of asthma inhaler as the SkyePharma aims to demonstrate and promote high standards propellant, are being replaced by more environmentally friendly of honest and ethical conduct throughout the Group. Formal HFA propelled versions. CFC gases are understood to contribute policies and procedures include the Code of Ethics for Senior to ozone depletion and global warming. Their replacement with Officers, the Code of Business Conduct and Ethics and the HFAs means that the ozone depletion effects have been removed Complaints and Whistleblowing Procedure. All of these policies and the impact on global warming more than halved. Flutiform™ are reviewed annually and are available on the Group’s website is also being developed as an HFA propelled inhaler. at www.skyepharma.com or upon request from the Company Secretary. The Group’s oral technologies also enable companies to reduce their environmental impact by reducing the number of tablets to Environment be taken per day. This reduces the number of tablets that need SkyePharma is committed to protecting the environment in to be produced, bottled or packed and transported, reducing which activities are conducted. The Group’s Environmental the environmental impact of the tablets themselves as well as Policy, which is reviewed annually, is available on the Group reducing cardboard, plastic and/or glass packaging needs and website at www.skyepharma.com or upon request from the transportation requirements over the longer term. Company Secretary, aims to foster a positive attitude towards the environment and to raise the awareness of employees to The Community responsible environmental practices at all sites operated by the The Group aims to be a “good neighbour” wherever it has Group. The Group endeavours to ensure compliance with all business units and to be an active participant in the community. relevant legislation and regulatory requirements and where Whilst the Group does not believe that it has a mandate from practical and economically viable standards are developed in shareholders for the Company to make charitable donations, it excess of such requirements. The Chief Executive Officer has does encourage its employees to support charitable causes of responsibility for reporting on relevant environmental matters their choosing. to the Board. There have been no reportable incidents in 2010 at any of our sites.
Shareholders and other interested parties are encouraged to use the online PDF of the annual report and accounts rather than hard copies. The interim report is no longer printed on paper, and interested parties are encouraged to visit the Group’s website or use the regulatory news services instead. Employees are also encouraged to recycle paper, plastic, glass, cardboard and cans wherever possible.
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This section contains the Group’s reporting disclosures on corporate feels that the skills and experience which he brings to the role governance required by the Companies Act 2006, the 2008 Combined are of more importance than independence at the present Code on Corporate Governance of the Financial Reporting Council time, and that the number and degree of independence of (the “Code”) and the UKLA’s Disclosure and Transparency Rule 7 the other Non-Executive Directors on the Board is sufficient to including the required statement of compliance. ensure that the Board functions effectively. b.2.1 — Frank Condella was Chairman of the Remuneration The Board is committed to ensuring that high standards of Committee up to 22 June 2010 and, as disclosed above, he corporate governance appropriate for the Group’s size are was not considered to be independent. Thomas Werner was maintained by SkyePharma. appointed Chairman in place of Mr Condella and therefore the Company has been in compliance with this provision of Statement of Compliance with the Code the Code since 22 June 2010. Throughout the year ended 31 December 2010, the Company has been in compliance with provisions set out in Section 1 of the SkyePharma has applied the principles set out in Section 1 of the Code except A.3.1 relating to independence of the Non-Executive Code, including both the main and the supporting principles, by Directors, A.4.6 relating to the method of appointment of a Non- complying with the Code as reported above. Further information Executive Chairman and B.2.1 relating to membership of the on our compliance is set out below. Remuneration Committee. The Board and its processes a.3.1 — Frank Condella was not considered to be Board Membership independent due to his previous role as Chief Executive The Board currently comprises two Executive and four Non- Officer. Executive Directors, whose biographical details are listed under a.4.6 — Whilst the Company would normally use an executive “Directors and Officers” on pages 26 and 27. Ken Cunningham search agency for all executive appointments, it chose not resigned as Chief Executive Officer on 22 August 2010 and from to do so in respect of the search at the end of 2009 for a new the Board on 30 September 2010. Axel Müller was appointed to Non-Executive Chairman given the short period of time the Board as Chief Executive Officer on 23 August 2010. available for selecting a new Non-Executive Chairman at that time and the costs involved in so doing. The Executive and Non-Executive Directors are subject to b.2.1 — Frank Condella is a member of the Remuneration retirement by rotation and re-election by shareholders in Committee. The Code recommends that the members of the accordance with the Articles of Association whereby one-third of Remuneration Committee be independent Non-Executive the Directors retire by rotation each year. In accordance with the Directors. For the reasons given above Mr Condella was Code, all Directors are subject to election by shareholders at the not considered to be independent. However, given the first Annual General Meeting following their appointment and are number of independent Non-Executive Directors on the re-elected within intervals of no more than three years. Committee together with his knowledge of the business and industry and his judgement and integrity, the Board strongly The Director retiring by rotation at the Annual General Meeting is believes he continues to make a valuable contribution to the Frank Condella who, being eligible, offers himself for re-election. Committee’s deliberations. Axel Müller, having been appointed during the year, will offer himself for election at the Annual General Meeting. From 1 January 2010, the Company has been in compliance with the provisions set out in Section 1 of the Code except A.2.2 Board Balance and Independence relating to the independence of a Non-Executive Chairman Frank Condella was not considered to be independent at the upon appointment and B.2.1 relating to the membership of the time of his appointment as Chairman due to his previous role Remuneration Committee. as Chief Executive Officer of the Company. The Board considers that the other Non-Executive Directors are independent in both a.2.2 — Frank Condella was appointed Non-Executive judgement and character, and that they carry out their duties in Chairman with effect from 1 January 2010. He was not an independent manner. considered to be independent upon his appointment due to his previous role as Chief Executive Officer. However, in light of his deep understanding of the business and the strong sense of continuity he brings to the Company, it was felt that he was the most suitable candidate to become Chairman. The Board
Stock Code: SKP 35
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The Board believes that all Non-Executive Directors rigorously changes to the structure, size and composition of the Board, analyse management reports; provide constructive challenge to following the guidance of the Nomination & Governance decisions; robustly defend their own points of view; and critically Committee; evaluate the pharmaceutical industry and the Group itself. appointments to the Board, selection of the Chairman, Chief Executive Officer, Senior Independent Director, Company The Role of the Board Secretary and membership and Chairmanship of the The Board of SkyePharma is responsible for the Group’s Board Committees, following the recommendations of the system of corporate governance and internal control and is Nomination & Governance Committee, where appropriate; accountable for all its activities. The Board reviews the operational determining the remuneration of the Chairman, Executive performance of the Group on a regular basis and also exercises a Directors, Company Secretary and senior management, on number of reserved powers. The terms of reference include: the advice of the Remuneration Committee (Non-Executive Directors only); responsibility for the overall management of the Group; determining the remuneration of the Non-Executive approval of the long-term objectives and strategy of the Directors (Chairman and Executive Directors only); Group; approval of the terms of reference of the Board Committees; approval of the annual operating and capital expenditure and budgets and any material changes to them; undertaking a formal and rigorous review annually of its major changes to the Group’s structure, capital and long- own performance and that of its Committees and Directors. term debt; approval of the half-yearly report, interim management This list is not exhaustive. The full terms of reference are available statements, any preliminary announcement of results and via the Company’s website, www.skyepharma.com. the annual report and accounts; approval of major capital projects, material contracts, or Board Meetings those not in the ordinary course of business, and major The Board meets formally at least seven times a year and ad hoc investments; as required. In 2010, in addition to seven scheduled formal Board approval of resolutions and corresponding documentation meetings which were held, there were additional meetings held in to be put to shareholders at a general meeting, circulars, order to discuss matters such as the development of Flutiform™. prospectuses and listing particulars; Attendance at formal pre-scheduled Board and Committee meetings is set out in the table opposite:
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Board Meetings Nomination & Audit governance Remuneration board Committee Committee Committee meetings1 meetings2 meetings3 meetings4 non-Executive Chairman frank Condella 7/7 4/4 (Chair) Executive Directors axel Müller 2/2 peter Grant 7/7 Senior Independent Director alan Bray 7/7 6/6 (Chair) 5/5 4/4 Non-Executive Directors Jean-Charles Tschudin 7/7 6/6 5/5 (Chair) 4/4 Thomas Werner 7/7 5/6 5/5 1/1 (Chair) Former Executive Director Ken Cunningham 5/5
1 The Company Secretary also attended all Board meetings. 2 at the invitation of the Chairman of the Audit Committee, the Chief Executive Officer, Chief Financial Officer, Company Secretary and external Auditors were also invited to attend the Committee meetings. 3 at the invitation of the Chairman of the Nomination & Governance Committee, the Company Secretary was also invited to attend meetings of the Committee. 4 Thomas Werner succeeded Frank Condella as Chairman of the Remuneration Committee on 22 June 2010. At the invitation of the Chairman of the Remuneration committee, the Chief Executive Officer and Company Secretary were also invited to attend the Committee meetings except when their remuneration was discussed. Representatives from Hewitt New Bridge Street were invited to attend some meetings.
note: The maximum number of Board and/or Committee meetings that could be attended by each Director varies as Directors joined and departed at various times during the year.
Directors are fully briefed following any meetings which they are The Non-Executive Directors meet independently of management unable to attend. The Directors intend that normally one visit on a regular basis. In 2010, they met after each formal meeting each year is held at one of the Group’s overseas operating sites. and informally on an ad hoc basis as required. In addition, they In 2010 no visit took place due to logistical reasons; however, met on one occasion for a routine meeting led by the Senior certain senior executives from the Muttenz facility gave Independent Director to review the performance of the Chairman. presentations at a number of Board meetings. The Board has access to the advice and services of the Company Each formal Board meeting considers, as a matter of course, Secretary and is able in the course of its duties, if necessary, to the operational performance of the Group against its strategic take independent professional advice at the Company’s expense plan and annual budget; reports from the Chairs of the within preset limits with prior written approval. Committees have Audit, Nomination & Governance and Remuneration access to such resources as are required to fulfil their duties. Committees (if applicable); important forthcoming events; and reports on investor relations, legal affairs and environment, Insurance and Indemnification health & safety. The Company maintains Directors’ and Officers’ insurance cover in respect of legal actions taken against the Directors Additionally, Directors are required to confirm their interests in connection with their duties. Additionally, to the extent in the Company, any potential conflicts of interest arising from permitted by law, the Company indemnifies Directors for claims the proposed business of the meeting and any changes in made against them in connection with their duties, except those their commitments or other appointments. Certain key senior resulting from their wilful negligence. management members are invited to give presentations at Board and Committee meetings where appropriate.
Stock Code: SKP 37
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RoleS of Chairman and Chief Executive Board Evaluation The roles of Chairman and Chief Executive are distinct and The Board conducts an annual formal evaluation of its own are held by different people to ensure a clear division of performance and that of its Committees and of individual responsibility. The Chairman, Frank Condella, is responsible Directors. This is conducted via an anonymous questionnaire for running the Board including ensuring the timely flow of devised in accordance with the Higgs Report, and in respect information to Board members and overseeing its development, of individual Directors, discussion directly with the Chairman. whilst the Chief Executive Officer, Axel Müller, is responsible for Feedback on collective performance is collated and presented the day-to-day running of the Company and reporting upon this to the Board. If any actions to improve are identified, they are to the Board. discussed and appropriate actions taken to implement them.
Role of Senior Independent Director Directors are invited to focus specifically on areas requiring The Senior Independent Director, Alan Bray, is available to priority action and to give honest and constructive comments shareholders if they request a meeting, or have concerns which so that the Board can review its performance in a thorough and contact through the normal channels has failed to resolve thoughtful manner. or where such contact is inappropriate. He also provides a communication channel between the Chairman and the Non- Board Committees Executive Directors. In addition, he chairs the Audit Committee There are three main Committees, all of which operate within and also leads the annual performance review of the Chairman. written terms of reference. The terms of reference are available on the Company website (www.skyepharma.com) and upon Role of the Non-Executive Directors request from the Company Secretary. Details of Committee The role of the Non-Executive Directors is to bring independent membership can be found in the table on page 37 which shows judgement to Board deliberations and decisions and to supervise attendance at Board and Committee meetings in 2010. the corporate governance of the Group. The Non-Executive Directors are all experienced and influential individuals whose Register of Conflicts blend of skills and international business experience contributes The register of conflicts is maintained by the Company to the proper functioning of the Board and its Committees, Secretary. Situational conflicts must be notified to the Board ensuring that matters are fully debated and that no individual or for authorisation as and when they arise, notwithstanding group dominates the Board’s decision making processes. a Director’s general duty to avoid such situational conflicts. Transactional conflicts must be notified to the Board in person Induction and Development or in writing at the next meeting, where the Board can decide New Directors receive formal induction training, including site whether or not to authorise such conflict in the absence of the visits and meetings with the Company’s advisers, brokers, Auditors Director concerned. If such conflict is approved, the Director and major shareholders, and ongoing training is provided as concerned may not receive related Board papers, be present in appropriate. This training is customised for each Director and the Board meeting for any related discussion or participate in any varies depending upon their skills, experience and background. vote on the matters concerned.
Directors also receive regular updates on changes and Audit Committee developments in the business, legislative and regulatory The Audit Committee currently consists of three Non-Executive environments. Such updates during the year included the Directors: Alan Bray, Jean-Charles Tschudin and Thomas Werner, changes made to the Takeover Code, along with the final all of whom the Board has determined to be independent. The changes under the Companies Act 2006 and the forthcoming Committee is chaired by Alan Bray, a chartered accountant who, implementation of the Bribery Act. as a retired senior partner of Deloitte LLP, has recent and relevant financial experience as recommended in the Code. Directors are able to identify and suggest any further training requirements which they feel are needed during the annual The external Auditors, Chief Executive Officer and Chief Financial performance evaluations. During the year, Directors undertook Officer are normally invited to attend meetings and, at least additional training as necessary including courses run by audit once per annum, the Audit Committee and external Auditors firms and the Institute of Directors. meet with no Executive Directors present. The members of the Audit Committee routinely met with the external Auditors independently of management on one occasion in 2010.
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The Audit Committee’s terms of reference include: Remuneration Committee The Remuneration Committee currently consists of Thomas monitoring the integrity of the financial statements of the Werner, who chairs the Committee, Alan Bray, Frank Condella, Group, including the annual and half-yearly reports, interim who was also Chairman of the Committee up to 22 June 2010, management statements and preliminary announcement of and Jean-Charles Tschudin. Thomas Werner, Alan Bray and results; Jean-Charles Tschudin have been determined by the Board keeping under review the effectiveness of the Group’s to be independent. Frank Condella is not considered to be internal controls and risk management systems (including independent due to his previous role as Chief Executive Officer. reports on these in the annual report); reviewing annually the Group’s arrangements for its The Chief Executive Officer may be invited to attend employees to raise concerns, in confidence, about possible Remuneration Committee meetings, other than when his own wrongdoing in financial reporting or other matters; remuneration is discussed. No Director is involved in deciding his considering annually whether the Group should have an own remuneration. internal audit function and reviewing the required annual report statement; The Remuneration Committee’s terms of reference include: considering and making recommendations to the Board, to be put to shareholders, in relation to the appointment, re- determining and agreeing with the Board the framework or appointment and removal of the Group’s external Auditors; broad policy for the remuneration of the Executive Directors, overseeing the relationship with the external Auditors; Chairman, Company Secretary and such other members of reviewing the effectiveness of the audit; and the senior management as it is designated to consider; approving the supply of non-audit services, including the approving the design of, and determining targets for, any selection of the service provider. performance related pay schemes operated by the Company and approving total annual payments made under such This list is not exhaustive. The full terms of reference are available schemes; via the Company’s website, www.skyepharma.com. determining the policy for, and scope of, pension arrangements for each Executive Director; During the year, in addition to their usual work outlined above, ensuring that contractual terms on termination, and any the Audit Committee also closely monitored the levels of payments made, are fair to the individual and the Company, professional fees authorised; undertook a detailed review of that failure is not rewarded and that the duty to mitigate the the Group’s risk policy; oversaw the implementation of a new loss is appropriately considered; software system to enhance and integrate the Group’s financial being exclusively responsible for establishing the selection and project management controls; and considered the proposed criteria, selecting, appointing and setting the terms of changes to the Combined Code. reference for any remuneration consultants who advise the Committee; and Policy on Non-Audit Services ensuring that all provisions regarding disclosure of The guidelines set out in the Group’s policy on engaging remuneration, including pensions, are fulfilled. the external Auditors to provide non-audit services include ascertaining that: This list is not exhaustive. The full terms of reference are available via the Company’s website, www.skyepharma.com. the skills and experience of the external Auditors make them a suitable supplier of the non-audit services; The Remuneration Committee’s full report appears on pages 44 adequate safeguards are in place so that the objectivity and to 53. Their work during the year included: reviewing the pay independence of the audit is not compromised; and of the Executive Directors, including the remuneration package the fee levels relative to the annual audit fee are within the for the appointment of the new Chief Executive Officer; setting guidelines set by the Audit Committee. the performance targets for the Executive Directors for the year ended 31 December 2010; determining the extent to which the Other services were provided during the year by Ernst & Young performance targets for the year ended 31 December 2010 had been LLP, the external Auditors — reviewing the interim management achieved and the level of bonus to be paid to the Executive Directors; statements, providing a principal subsidiaries’ report to Bank and reviewing long-term incentive plan arrangements. of New York Mellon and providing United Kingdom and United States corporation tax compliance services.
Stock Code: SKP 39
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The Remuneration Committee has appointed Hewitt New Bridge Policy on Other Appointments Street as independent advisers on executive compensation. The Board believes that Directors should be able to accept other Hewitt New Bridge Street (and Hewitt Associates) provided only appointments where no significant actual or potential conflicts of remuneration advice to the Committee during the year. interest arise and provided that the Director is able to maintain his time commitments to the Company. These other appointments Nomination & Governance Committee enable Directors to accrue further skills and experience from The Nomination & Governance Committee currently consists of which the Company benefits. This policy is reviewed annually. Jean-Charles Tschudin, who chairs the Committee, Alan Bray and Thomas Werner. Details of any other appointments held by each Non-Executive Director are listed under “Directors and Officers” on pages 26 and The Nomination & Governance Committee’s terms of reference 27. There are no significant actual or potential conflicts of interest include: arising from any appointments held by a SkyePharma PLC Director. Directors’ commitments are reviewed at each Board meeting. regularly reviewing the structure, size and composition (including the skills, knowledge and experience) of the Internal control framework Board, and making recommendations to the Board; Internal Accountability and Risk Management giving full consideration to succession planning for Directors The Board, as advised by the Audit Committee, believes that and other senior management; the Group maintains a sound system of internal control with a being responsible for identifying and nominating candidates view to safeguarding shareholders’ investment and the Group’s for the approval of the Board to fill Board vacancies as and assets. The Board is responsible for the Group’s system of internal when they arise; control and for reviewing its effectiveness. Such a system is reviewing annually the time required from Non-Executive designed to manage rather than eliminate the risk of failure to Directors for Board and Committee business; achieve business objectives, and can only provide reasonable and making recommendations to the Board regarding succession not absolute assurance against material misstatement or loss. plans, candidates for the role of Senior Independent Director, membership of the Board Committees, the reappointment of The Audit Committee reviews the effectiveness of the system any Director upon retirement whether by virtue of rotation at least annually, and reports to the Board that it has done so. or length of service; and In accordance with the Turnbull Guidance there is an ongoing assisting the Board in its oversight of the Group’s corporate process for identifying, evaluating and managing the significant governance practices and procedures. risks faced by the Group that has been in place for the year under review and up to the date of the annual report. No significant This list is not exhaustive. The full terms of reference are available failings or weaknesses were identified in the most recent review, via the Company’s website, www.skyepharma.com. although some minor follow-up actions have been identified and communicated as appropriate. No significant problems are The Nomination & Governance Committee’s work during the required to be disclosed in this annual report and accounts. year included considering and recommending Axel Müller for the position of Chief Executive Officer. SkyePharma operates, and attaches importance to, clear principles and procedures designed to achieve the accountability The Nomination & Governance Committee is pleased to be able and control appropriate to a science based business operating to recommend Frank Condella for re-election and Axel Müller internationally in a highly regulated business sector. SkyePharma for election to the Board of SkyePharma PLC at the forthcoming has established an organisational structure with clearly drawn Annual General Meeting. lines of accountability and delegation of authority.
Reappointment Financial results and key operational and financial performance Non-Executive Directors are appointed for an initial term of three indicators are reported regularly throughout the year and years and are subject to election by shareholders at the next variances from plans and budgets are investigated and reported. Annual General Meeting following the date that they join the The Group has a system of high level financial control procedures Board. All Directors must stand for reappointment every three which are supplemented by detailed procedures at each years or every year if they have served on the Board for more operating entity. Compliance with these procedures is monitored than nine years. by the Audit Committee.
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In 2006, following the divestment of the Injectable Business, up and validation and the ability to produce sufficient product to SkyePharma took the opportunity to review its policy in relation meet commercial requirements at an economically viable cost. If to its internal audit function and it was decided that, in common manufacturing validation failed on one or more batches this could with many other companies of its size and reduced complexity, lead to additional costs and delay or prevention of launch, with an internal audit function was no longer required. Internal audit significant consequences for the Group. In order to mitigate these reviews have since been carried out by a qualified member of the risks, the management of SkyePharma is very much involved on a Head Office team and appropriate assistance with internal audit day-to-day basis in ensuring that the Group is able to provide all will be obtained on a consultancy basis as required. necessary support to the development process and that senior management participate fully and pro-actively in regular joint Disclosure and Transparency Rule 7 steering committee meetings with its suppliers, sub-contractors This statement complies with sub-sections 2.1; 2.2(i); 2.3(i); 2.5; 2.7 and licensees in developing and preparing for the launch of the and 2.10 of Rule 7 of the UK Listing Authority Disclosure Rules. The product. information required to be disclosed by sub-section 2.6 of Rule 7 is shown in the Statement of Directors’ Responsibilities on page 54 Risks that manufacturing and R&D operations and related and is incorporated in this corporate governance statement by royalty revenues will be disrupted reference. Any significant and lengthy disruption to the Group’s or third party research and development and manufacturing operations Principal risks and uncertainties could result in a substantial loss of manufacturing and related Pharmaceutical development is inherently expensive and risky royalty revenues. The Group has insurance against the usual as the development cycle for new products is long and uncertain insurable risks such as fire and other perils, but it is not possible and the regulatory environment is complex and subject to to insure on an economically feasible basis certain risks, such change. In common with all businesses in the sector, the Group as supplier failures, industrial action, regulatory sanctions and is exposed to a range of risks, some of which are not wholly negligent manufacturing issues. For example, a significant within its control or capable of complete mitigation or protection failure to maintain manufacturing facilities in compliance with through insurance. Accordingly, stakeholders and prospective required regulatory standards could result in sanctions by stakeholders should be aware that investment in SkyePharma regulators which could require the cessation of manufacture until involves a high degree of risk. deficiencies are rectified. To mitigate this, the Group maintains a comprehensive system of quality assurance, including regular The Board has established a continuous process for identifying, inspections and reviews of its facilities and certain key suppliers. evaluating and managing the significant risks the Group faces. Group facilities are also inspected by regulatory authorities The Board regularly reviews the process and a detailed review in order to maintain its approved status for manufacturing. of risk was undertaken by the Audit Committee during 2010. The In preparation for such audits, external specialist consultants Board has identified the following principal risks which could may be used to provide preparatory audits and similar support have a material impact on the Group’s long-term performance and any recommendations arising from such audits are acted and could cause actual results to differ materially from the upon where appropriate. Any issues arising are the subject of expected and historical results: monthly reporting through the management structure and, where appropriate, to the Board. Disruption could also arise due Risks that Flutiform™ will not achieve commercial success to dependency on single sources of supply for certain of the Flutiform™ is a key pipeline development product and the Group’s products. In addition, components and defects in raw Directors believe that approval and a successful launch by the materials supplied and used in the manufacture of the Group’s development partners will lead to significant cash inflows for the products could adversely affect the Group. The Group seeks to Group. Progress with the development of Flutiform™ is described in identify key or critical suppliers in relation to its business. Where detail in the Business Review on pages 12 to 19. There can be no possible, alternative sources of supply are sought, although absolute certainty that Flutiform™ will successfully complete often this is not possible or economically feasible. Suppliers are development, meet regulatory authority requirements or be subject to a quality audit, a requirement of regulatory authorities, approved and launched in a timely manner in any or all of the to ensure that the manufacturing processes are in compliance. major territories. Even if approved and launched, there can be no In addition, insurance is taken out to protect against certain assurance that it will be commercially successful, as this will depend aspects of defects in products/raw materials and disruption of on a range of commercial factors including the competitive supplies and, where possible, contracts are negotiated to include environment following launch. The success of Flutiform™ is also appropriate provisions for replacement of defective goods. dependent on the successful completion of manufacturing scale
Stock Code: SKP 41
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Risks that cash balances and inflows will be insufficient to the filing and progress of third party rights that may be of interest pay off long-term debt obligations to and/or have adverse effects on the Group’s activities so that The Group has obligations under its various borrowing these can be taken into account and action can be initiated where agreements to make scheduled interest payments and capital appropriate. repayments which, if not met, could result in default under those agreements. The anticipated approval and launch of Flutiform™ Risk arising from inability to control or influence products in Europe in the second half of 2011 is pivotal to the value and and the income streams related to them cash generative potential of the Group. Even with the approval The Group helps third parties in developing their products. Once and launch of Flutiform™ in 2011 it is unlikely, based on current the development work is complete and the third parties have financing and licensing agreements, that the Group will generate obtained approval and launched their products (which may sufficient cash from normal trading to meet the earliest possible contain a formulation inside a third party device), the Group bond puts if the convertible bonds are not converted prior to may be entitled to royalties and/or milestones on net sales of those dates. If Flutiform™ were not approved and launched these products. In many cases, the Group has no influence over successfully in a timely manner in Europe this could significantly the scale up, validation, manufacture, sales and marketing and undermine the possibilities of refinancing or recapitalising the distribution as well as the income stream that is derived from Group. The Board has appointed Jefferies International Limited products. This can lead to unpredictable cessation of part of the to advise the Board on the Group’s capital structure. The Board Group’s royalty revenue streams, for example where a product is regularly monitors its cash forecasts, as well as reviewing, at discontinued without consultation or prior warning by the third least annually, the longer term plans and prospects for repaying party. Management tries to mitigate this risk through regular long-term debt. As a result of such reviews, potential actions are dialogue with third parties and clauses in contracts to ensure identified well ahead of the relevant repayment dates so that timely disclosure. debt can be renegotiated or refinanced where necessary. Risk that external capital requirements under local law Risks that competition, technological change or lack of cannot be complied with innovation will damage prospects for the business Certain of the Group’s subsidiaries are subject to capital The Group has a number of pipeline developments and 12 maintenance requirements under local laws. If these approved and marketable products, which are at various stages requirements were to be breached, and the over-indebtedness of their effective commercial lives and, as such, the Group is not is not covered by the value of assets on a going concern or dependent on any one product for the majority of its revenues. liquidation basis, steps would need to be taken to rectify such However, the successful development and commercial success over-indebtedness. If this was not achieved in a timely manner, and life of regulated pharmaceutical products depends upon a insolvency proceedings may have to be initiated. Any long-term range of factors, such as having adequate product innovation and delay or failure to launch Flutiform™ could lead to a capital development strategies, how successfully products are marketed, maintenance issue in one or more subsidiaries. the overall competitive environment, the effectiveness of patent protection and constraints on healthcare spending. In particular, In order to mitigate this risk, Management is pro-actively competition, technological change or lack of innovation may managing the progress of Flutiform™. In addition to this, render the Group’s products or technologies uncompetitive or regular reviews take place of the impairment head room and obsolete and the time frames involved could be relatively short. contingency plans if a recapitalisation would be needed. For example, where generic products are successful in entering the market this can have a very significant impact, especially for oral Risks arising from current difficult global economic products, on both pricing and market share of existing marketed conditions and adequacy of financial resources products, and often heralds a rapid end to the commercial life The Board has given careful consideration to the potential impact of the existing product. ANDA filings in the United States on of the economic outlook on its business activities. It recognises Uroxatral®, Requip® XL™, Sular® and Solaraze® highlight the risks that, in times of economic uncertainty, development budgets of potential generic entry. In order to protect its future prospects, will be under pressure and sources of funding may be difficult the Group files for and prosecutes patents and creates other forms to obtain and this can affect current business and future growth of intellectual property to protect its assets and, where appropriate opportunities. The Business Review and Financial Review on and in conjunction with its collaboration partners, takes steps to pages 12 to 25 set out the steps taken to reduce the Group’s cost enforce these rights. In addition, appropriate steps are undertaken base to ameliorate this risk. both internally and through external service providers to identify
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The Group is exposed to the effects of exchange rate fluctuations Ethics and, as set out in the notes to the accounts in Note 28: Financial All Group employees are required to adhere to specified codes of instruments, the Group aims to maintain natural hedges to conduct, policies and procedures, including, but not limited to: ameliorate the effects of these. Actual and potential exposures are regularly reviewed and professional advice is taken in code of Business Conduct and Ethics considering hedging strategies. The key focus is to ensure that code of Ethics for Senior Officers the Group is not exposed to very significant cash effects from complaints and Whistleblowing Procedure foreign exchange movements. The Group’s results and balance equal Opportunities Policy sheet carrying values may be materially affected, as they were in environmental Policy 2010, by exchange translation effects. Copies of the above are available on the SkyePharma website, The Board has reviewed the Group’s dependency on key suppliers www.skyepharma.com. These policies are all reviewed annually. and customers for existing products and continues to monitor the financial strength and integrity of its business partners. Relations with shareholders SkyePharma recognises the importance of good and timely As regards the financing of the businesses, the Directors have communication. Its primary communication channel is the explained in Note 2: Accounting policies that after careful Internet. All press releases are published on the website as soon consideration of IAS 1 and the Financial Reporting Council’s as they are issued via the regulatory news service in the United Going Concern and Liquidity Risk: Guidance for Directors of UK Kingdom; with the most important releases highlighted on the Companies 2009 the Directors consider that, taken together, front page of the website and also emailed to all those who have the uncertainties described in Note 2: Accounting policies are registered an email address with the Company. “material uncertanties”. Nevertheless, the Board has reasonable expectations that FlutiformTM and ExparelTM will be approved and The majority of both ordinary shareholders and ADR holders launched successfully in their respective markets and that the receive most of their information about the Company, including Group will have adequate resources to continue in operational the annual and half-yearly reports, via email or the website. existence for the foreseeable future. Accordingly the Board Shareholders may opt to receive hard copies of the annual considers that the business is a going concern and continues to report by contacting Capita (the Company’s Registrar). Nominee adopt the going concern basis in preparing the annual report holders who wish to receive email alerts or hard copies of the and financial statements. The financial statements do not contain annual report should contact their provider in the first instance the adjustments that would result if the Company was unable to or may contact the Company directly. continue as a going concern. In addition, the Company webcasts its twice yearly analyst Other risks presentations/conference calls and, whenever possible, its Although the above items represent the principal risks which the presentations at investor conferences. All shareholders are Board considers are specific to SkyePharma, many of the general encouraged to attend the Annual General Meeting and talk to the industry and sector risks could also result in material adverse Directors there. In addition, shareholders are able to contact the effects on the business and its future prospects. Some of these Company via email at [email protected]. risks are mitigated by insurance which the Group maintains in line with normal industry practice. Other risks are mitigated by The Board takes steps to ensure that the views of major management vigilance, regular reviews and reporting, taking shareholders are considered. This is achieved through feedback appropriate professional advice in a timely manner, careful from meetings with significant shareholders and feedback from assessment of potential new developments involving technical the Company’s brokers. and commercial appraisals, and monitoring industry trends. United States The Company maintains an ADR facility on an over the counter basis via Pink Sheets.
Alan Bray Chairman of the Audit Committee 22 March 2011
Stock Code: SKP 43
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remuneration report
Introduction This report has been prepared in accordance with Schedule 8 to the Accounting Regulations under the Companies Act 2006. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to Directors’ remuneration in the 2008 Combined Code. As required by the Act, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements are approved.
The Act requires the Auditors to report to the Company’s members on certain parts of the Directors’ Remuneration Report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Accounting Regulations. The report has therefore been divided into separate sections for audited and unaudited information.
Unaudited information Remuneration Committee During 2010 the Remuneration Committee comprised the following Non-Executive Directors:
Thomas Werner (Remuneration Committee Chairman from 22 June 2010) frank Condella (Member, also Remuneration Committee Chairman up to 22 June 2010)) alan Bray Jean-Charles Tschudin
As disclosed in the Corporate Governance Report, the Remuneration Committee met four times in the year.
Thomas Werner was appointed Chairman of the Remuneration Committee on 22 June 2010 in place of Frank Condella, who is not considered to be an independent Non-Executive Director in accordance with the recommendations of the Code. Mr Condella remains a member of the Committee. From 1 January 2010 up to 22 June 2010, the Board acknowledges that it was non-compliant with the recommendation in the Code that the Chairman of the Board should not be the chair of the Remuneration Committee; however, given the small number of Non-Executive Directors on the Board, and the period for which some of them had served on the Board as at January 2010, it was agreed that Frank Condella was the most suitable candidate for the position during that time. The Board acknowledges that Frank Condella’s membership of the Committee is outside the recommendations of the Code, however, the Board strongly believes his knowledge of the business and industry, judgement and integrity continues to make him a valuable member of the Remuneration Committee.
During the period under review, the Remuneration Committee requested the assistance of the Chief Executive Officer on matters relating to Directors’ performance and remuneration. No Director takes part in discussions on his own remuneration.
The Remuneration Committee received advice from Hewitt New Bridge Street as independent advisers on executive compensation and remuneration issues during the year.
The Remuneration Committee is formally constituted with written terms of reference. The full terms of reference are available via the Company’s website, www.skyepharma.com or on request from the Company Secretary. The Committee determines specific remuneration arrangements for the Executive Directors and monitors arrangements for selected other senior executives. The Committee also oversees the general operation of share plans throughout the Group.
Remuneration policy for the Executive Directors The remuneration policy is designed to attract, retain and motivate Executive Directors and other senior executives of the calibre required to deliver the business strategy. Individual remuneration packages are structured to align rewards with the performance of the Group and the interests of shareholders. No Director is involved in setting his own remuneration. The main principles of the policy are to:
ensure that salaries are set at a market competitive level by benchmarking against appropriate external comparators; support a strong pay for performance culture by providing the Executive Directors and other senior executives with the opportunity to earn competitive levels of reward provided that challenging short and long-term performance conditions which drive returns to shareholders, and which are consistent with a level of business risk approved by the Board, have been achieved; maintain an appropriate balance of fixed and performance related pay which delivers over the short, medium and long term, with the balance becoming more long-term and more highly performance related with seniority;
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align long-term rewards with shareholders by taking account of measures that reflect shareholder interests and by expecting Executive Directors to build up a significant holding in Company shares equivalent to 100 per cent. of salary over time; and ensure that the overall package reflects market practice, is equitable, and takes account of levels of remuneration elsewhere in the Group.
In addition, the Remuneration Committee is committed to balancing the overall cost of fixed remuneration of the Board having regard to the current market capitalisation of the Company and its current stage of development whilst also bearing in mind both the complexities of and risks faced by the Group.
A significant proportion of the remuneration packages of Executive Directors is linked to short and long-term performance. In 2010 the proportions (with 2009 figures in brackets) were:
Fixed vs. variable remuneration
Fixed Variable axel Müller 63% (N/A%) 37% (N/A%) peter Grant 75% (43%) 25% (57%) Ken Cunningham (up to 30 September 2010) 100% (42%) Nil (58%)
The following table summarises the different elements of remuneration that the Remuneration Committee has typically used in recent years to deliver the remuneration policy outlined above:
Remuneration policy Element Purpose Operation overall To provide competitive fixed remuneration Reviewed every 12 months. Benchmarked against policy that will attract and retain key employees appropriate market comparators. and reflect their experience and position linked to individual performance and contribution. in the Company. annual Incentivises achievement of annual Maximum bonus potential is set at a market bonus objectives which support the short to competitive level. Bonus is based on a mixture of medium-term strategy of the Company. financial and time-constrained operational targets. long-term share performance share plan incentivises Share awards are usually made annually to incentives Executive Directors and other senior Executive Directors and other senior executives and executives to achieve superior returns to are based on a share price target over three years. shareholders over a three year period. Retain key individuals and align interests with shareholders. pension Provide competitive post-retirement benefits. executive Directors receive defined contributions into personal pension plans. benefits Provide competitive benefits in kind. executive Directors receive usual market practice benefits including car allowance and private medical insurance.
In 2010, the Committee concluded that there were significant difficulties with setting robust three year targets during this particular period in the Company’s development and no awards were made. The Committee is keeping the position of long-term share awards under the LTIP for 2011 under review. For 2010, the Committee introduced a one-off additional element to the 2010 annual bonus. This was linked entirely to a highly challenging share price growth target and, if paid, would have been delivered entirely in deferred shares. However, the share price did not reach the appointed target and, accordingly, no shares were awarded. In the medium-term, the Committee remains committed to the use of performance related pay in the form of LTIP awards and intends to keep the use of long-term share awards under review.
Stock Code: SKP 45
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Remuneration policy Comparator Group The primary UK based comparator group for remuneration benchmarking consists of fully listed and AIM quoted Pharmaceutical and Biotechnology Companies. For 2010 the comparator group consisted of the following companies, which were selected on the basis of industry, size (market capitalisation, turnover and employees) and listing environment:
Comparator Group abcam PLC Allergy Therapeutics plc antisoma Plc ark Therapeutics plc Axis-Shield Plc BTG PLC Dechra Pharmaceuticals Plc genus Plc Goldshield Group Plc gw Pharmaceuticals PLC Oxford Biomedica Plc ProStrakan Group plc Renovo Group plc Silence Therapeutics plc sinclair Pharma plc vectura Group PLC Vernalis PLC
BaSE salary Base salaries are reviewed by the Committee, taking into account:
relevant comparator group data; individual performance; the pay and conditions throughout the Group; and any exceptional circumstances.
For the 2011 salary review, the Committee decided it was not appropriate to undertake a review of comparator group remuneration given the current economic conditions but will consider doing so next year. No salary rises were implemented for the Executive Directors in 2009 or 2010 due to the economic environment and in order to preserve cash. For 2011, the Committee has agreed a salary increase of 2.1% for Peter Grant. Axel Müller will not receive any increase for 2011 in view of his joining the Group in August 2010.
Benefits and expenses Directors are entitled to receive reimbursement for out of pocket expenses incurred on Company business. Where tax is payable in respect of expenses incurred by Directors wholly and necessarily for business purposes the Board has agreed that the relevant tax will be paid by the Company.
The Company provides benefits such as car allowance and private medical insurance for Executive Directors at a normal level for a company of this size. Axel Müller also receives a fixed monthly expense allowance of CHF 2,000 per month to cover specific small out of pocket expenses below a de minimis threshold. Business expenses not covered by Dr Müller’s expense allowance and all those of Peter Grant are reimbursed subsequently on submission of an authorised expense claim.
Annual cash bonus payments Annual cash bonus payments are paid at the discretion of the Remuneration Committee and are subject to achievement of time constrained individual and Group objectives set at the beginning of the year. For 2010, bonus payments have been calculated by assessing:
percentage level of attainment of objectives for the year; a Group-wide financial factor which is based primarily on operating result and use of cash; the Committee’s view of the overall performance of the Group during the year; maximum bonus potential for the relevant individual; and base pay for the relevant individual.
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The objectives for 2010 included progress with the US, European and Japanese development work and regulatory submissions for Flutiform™, control of costs and efficiency improvements, price increases for manufactured products and business development targets. These various objectives were reviewed by the Committee to assess the extent to which they were wholly or partially met or not met at all. As a result, Peter Grant has been awarded a bonus of 33 per cent. of base salary. Ken Cunningham resigned as Chief Executive Officer during the year and Axel Müller was appointed Chief Executive Officer in his place and neither of them has been awarded any bonus in respect of 2010.
For the year ended 31 December 2010, the maximum cash bonus for the Executive Directors was 100 per cent. of salary, with the actual bonuses awarded shown below:
Annual bonus payments Maximum cash bonus potential Cash bonus payment in respect of Director (% of salary) 2010 & 2011 2010 (% of salary in brackets) axel Müller (appointed 23.8.10) 100 (2011 only) Nil peter Grant 100 £79,200 (33.0) Ken Cunningham (resigned 30.9.10) 100 Nil
The cash bonus potential will remain the same for 2011 with the maximum cash bonus remaining at 100 per cent. of salary.
Deferred share bonus awards As outlined below, in place of long-term incentive (“LTIP”) awards, the Executive Directors and other selected senior executives were eligible to receive an additional one-off bonus of deferred shares worth up to 50 per cent. of salary based on share price performance in 2010. The maximum bonus required an average mid-market closing share price (in December 2010) of at least £1.50. As this share price was not achieved no deferred share bonus awards were made for 2010. It is not proposed to award any similar deferred share bonus in 2011.
Long-term incentives Long-term incentives for the Executive Directors and other selected senior executives have been provided in the form of conditional share awards under the SkyePharma PLC 2007 Long-term Incentive Plan. The aim of these LTIP awards is to focus on long-term value creation for all shareholders.
The Remuneration Committee determines which senior executives will participate in the LTIP on an annual basis and the level of award granted. Participation is highly selective and will only include those senior executives who can have a significant impact on driving shareholder value. In respect of any financial year the maximum face value LTIP award which can be granted to an employee is 100 per cent. of salary. LTIP Awards are not pensionable and may not be assigned or transferred.
The Remuneration Committee made awards under the LTIP in 2009 worth 60–75 per cent. of salary at grant to the Executive Directors. The Remuneration Committee did not grant any LTIP awards to the Executive Directors and other senior executives in 2010 and is keeping the position under review in 2011.
Performance conditions The release of LTIP awards is contingent on the achievement of stretching absolute share price targets at the end of a three year performance period. These targets, which are set at the start of the performance period, take into account the prospects of the Group, general market conditions and the views of key institutional shareholders.
Stock Code: SKP 47
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The Remuneration Committee believes, following consultation with key shareholders at the scheme’s inception in 2007, that an absolute share price target remains an appropriate performance condition as it is a transparent and accurate measure of the Group’s performance over the medium to long-term. The calibration of the targets also ensures that participants only derive value from the LTIP where significant value is generated for shareholders. In addition, the Remuneration Committee will ensure that the underlying financial performance of the Group is consistent with its share price performance and will set out in its relevant Remuneration Report the reasons behind their conclusion.
For LTIP Awards granted in 2007 and 2009 the performance conditions to be met at the end of the performance period were set as follows:
LTIP awards — performance conditions
2007 Awards share price targets* below £18.64 £18.64† £29.29† % of award released 0 10 100 2009 Awards share price targets below £2.40 £2.40† £3.60† £5.80† % of award released 0 20 50 100
* The share price targets in respect of the 2007 awards stated above are the revised prices adjusted as a result of the share capital reorganisation that took place in September 2008. 2007 awards lapsed on 4 May 2010 as the share price targets had not been achieved. † straight-line release between these targets.
Shareholding guideline The Remuneration Committee believes that Executive Directors should be required to own shares in the Company to further align their interests with shareholders. The Committee’s shareholding guideline requires Executive Directors to build a significant shareholding (of 100 per cent. of salary) in the Company over time and expects that this will be achieved principally through shares acquired from the LTIP.
All-Employee Share Arrangements The SkyePharma PLC International Share Purchase Plan (the “Plan”) is open to all employees of the Group including the Executive Directors. In the UK, the Plan gives employees the opportunity of purchasing up to £1,500 worth of shares a year out of pre-tax salary and the Company giving additional matching shares on a 1:1 ratio. These matching shares will normally be released three years after they have been awarded provided that the associated shares purchased by the employee have been retained and provided the employee is still employed by a Group company at this time. Matching shares are free but subject to tax and social security costs if they are withdrawn from the Plan before the end of a three year holding period. Equivalent plans have been introduced in Switzerland and France.
Dilution The Company complies with the relevant ABI guidelines on employee share plans.
Pensions The Company makes contributions into individual personal pension schemes for the Executive Directors. The contributions are CHF 100,000 per year for Axel Müller (equal to 20 per cent. of his current salary) and 17.5 per cent. of salary for Peter Grant. Their dependants are eligible for dependants’ pensions from their personal pension schemes and the payment of a lump sum in the event of death in service.
Performance graph The following graph shows the Company’s performance measured by total shareholder return (“TSR”), compared with the performance of the FTSE Pharmaceutical and Biotechnology Index also measured by TSR over the past five years. The Remuneration Committee has used the FTSE Pharmaceutical and Biotechnology Index as a relevant index for the total shareholder return comparison disclosure required under the Companies Act 2006, as representing a broad range of UK quoted pharmaceutical companies.
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Total shareholder return Source: Thomson Reuters
15.7 20 11.8 2.1 -2.4 -9.1 0
-20
-44.7 -40
-60 -75.4
-80 -94.7 -96.7 -98.8
-100 31 Dec 05 31 Dec 06 31 Dec 07 31 Dec 08 31 Dec 09 31 Dec 10
SkyePharma PLC FTSE All-Share Pharmaceutical and Biotechnology Sector Index
Directors’ contracts All Executive Directors’ contracts are for a fixed period of one year from date of appointment, and will continue thereafter unless terminated by at least 12 months’ written notice. This arrangement is in line with best corporate practice for UK listed companies. In the event of the termination of an Executive Director’s contract, salary and benefits will be payable during the notice period. However, consideration is given to requiring Executive Directors to mitigate any loss, in accordance with general legal principles, in the event of their cessation of employment. The Remuneration Committee will consider applying phasing of payments on notice of cessation in line with the combined ABI and NAPF guidelines, subject to existing contractual constraints. In its considerations, the Remuneration Committee will take into account the need to avoid making payments for failure on an Executive Director’s termination of employment. There are no special provisions in the contracts of employment extending notice periods on a change of control, liquidation of the Company or cessation of employment.
Ken Cunningham resigned as Chief Executive Officer on 22 August 2010 and resigned as a Director on 30 September 2010. He received no payment on cessation of employment.
Executive contracts Unexpired term notice period of of contract/ Director contract (months) effective date termination date Ken Cunningham 12 months 24 April 2006† 30 September 2010 axel Müller 12 months 23 August 2010 Rolling Contract* peter Grant 12 months 14 November 2006 Rolling Contract*
† as amended on 1 September 2008. * contract will continue until terminated on notice by either the Company or the Executive Director.
The Company recognises that Executive Directors may be invited to become Non-Executive Directors of other companies and that this can help broaden the skills and experience of a Director. Executive Directors are normally permitted to accept external appointments and may retain fees for such appointments where no significant actual or potential conflict of interest arises and provided that the Director is able to maintain his time commitments to the Company, subject to the approval of the Board.
Stock Code: SKP 49
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Axel Müller’s employment contract is with SkyePharma AG and he is based in Switzerland. There is a secondment agreement between SkyePharma AG and SkyePharma PLC covering Axel Müller’s services to the Company carried out in the UK as Chief Executive Officer of the Group, for which SkyePharma PLC pays SkyePharma AG a monthly secondment fee calculated on the basis of time spent. Axel Müller was appointed Non-Executive Director of Euroderm AG on 11 March 2011. This appointment is not connected to his position at SkyePharma PLC.
Ken Cunningham received and retained a fee of £11,250 (2009: £13,000) from Xention Limited for acting as a Non-Executive Director of that company and £20,000 (2009: Nil) from PolyTherics Limited for acting as Chairman of that company. These appointments were not connected to his position at SkyePharma PLC.
Peter Grant did not hold any external appointments in 2010 and so neither received nor retained any fees (2009: £Nil).
Chairman and Non-Executive Directors All Non-Executive Directors including the Chairman have specific terms of engagement and their remuneration is determined by the Executive Directors based on independent surveys of the Pharmaceutical and Biotechnology Sector and the wider market for Non- Executive Directors. The basic fee paid to each Non-Executive Director in the year was £33,000 (2009: £33,000) except for the Chairman who received £80,000 (2009: £80,000). The Non-Executive Directors receive further fees for additional work performed for the Company in respect of membership of one of the Board Committees, for chairing one of the Committees and for acting as Senior Independent Director, except for the Chairman who receives his basic fee only. Non-Executive Directors cannot participate in any of the Company’s share schemes and are not eligible to receive either pension contributions or bonuses. No increase in the rate of Non-Executive Director fees has been awarded since 2007.
All Non-Executive Directors’ letters of appointment are for a period of three years from the date of appointment, unless terminated by at least one month’s written notice from either party. There is no compensation for loss of office.
Non-Executive fees Committee Additional basic fees fees responsibilities Total Director (p.a.) (p.a.) (p.a.) (p.a.) Alan Bray £33,000 £11,000 £3,000 £47,000 Frank Condella £80,000 — — £80,000 Jean-Charles Tschudin £33,000 £8,000 — £41,000 Thomas Werner £33,000 £5,500 — £38,500
Audited information Directors’ remuneration
Non-Executive contracts Unexpired term of notice period Effective contract (months) Director of contract date as at 22 March 2011 frank Condella 1 month 1 November 2008* 7 alan Bray 1 month 29 September 2010 30 Jean-Charles Tschudin 1 month 1 July 2010 27 Thomas Werner 1 month 16 May 2009† 14
* as amended on 10 December 2009. † as amended on 28 June 2010.
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The table below sets out details of the Directors’ emoluments for the years ended 31 December 2010 and 31 December 2009.
Directors’ emoluments
Fees & Total Total salary benefits Bonuses7 2010 2009 Notes £’000 £’000 £’000 £’000 £’000 executive Directors axel Müller 1 110 13 — 117 — peter Grant 240 13 79 332 433 non-Executive Directors frank Condella 2 80 — — 80 37 alan Bray 47 — — 47 47 Jean-Charles Tschudin 41 — — 41 38 Thomas Werner 3 39 — — 39 22 former Directors executive Director Ken Cunningham 4 262 16 — 278 589 non-Executive Directors Jeremy Scudamore 5 — — — — 80 Jerry Karabelas 6 — — — — 14 Total 934 1,260
Notes: 1 axel Müller was appointed as Chief Executive Officer on 23 August 2010 and receives a base salary of CHF 475,000 per annum. 2 frank Condella was appointed as Non-Executive Chairman on 1 January 2010, having been a Non-Executive Director throughout 2009. 3 Thomas Werner was appointed as a Non-Executive Director on 16 May 2009. 4 Ken Cunningham stepped down as Chief Executive Officer on 22 August 2010 and resigned as a Director on 30 September 2010. 5 Jeremy Scudamore stepped down from the Board on 31 December 2009. 6 Jerry Karabelas stepped down from the Board on 15 May 2009. 7 payable in 2011 in respect of performance in 2010.
Pensions Contributions made to defined contribution pension schemes on behalf of the Executive Directors are set out below:
Pensions 2010 2009 £’000 £’000 axel Müller (from 23 August 2010) 23 — Peter Grant 42 42 Ken Cunningham (up to 30 September 2010) 46 61
Directors’ interests The following tables set out the interests of those Directors who were Directors at the year end (including the interests of their immediate families and persons connected with the Directors) as at both 31 December 2010 and 31 December 2009. All interests are beneficial unless otherwise stated. Interests in Ordinary Shares include shares acquired by the Executive Directors under the Company’s share plans:
Stock Code: SKP 51
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Directors’ interests Ordinary Shares ordinary Shares Director 31 December 20101 31 December 2009 executive Directors Axel Müller — — Peter Grant 14,599 10,865 non-Executive Directors Frank Condella 31,115 31,115 Alan Bray 6,163 6,163 Jean-Charles Tschudin 12,578 12,578 Thomas Werner — —
Note: 1 There have been no changes in Directors’ interests between 31 December 2010 and 22 March 2011, apart from Peter Grant acquiring a further 609 Partnership Shares from monthly share purchases under the International Share Purchase Plan.
Holdings under the SkyePharma PLC International Share Purchase Plan The following table sets out details of Matching Shares held under the International Share Purchase Plan as at 31 December 2010 and as at the date of this report:
Share purchase plan Matching Shares 1 January 31 December as at 22 Director 2010 granted Released lapsed 2010 march 2011 peter Grant 1,791 3,598 136 — 5,253 5,862
Matching Shares awarded under the International Share Purchase Plan were awarded on a monthly basis (the share price range at award over the year was between 32.5 pence and 79.0 pence in conjunction with the monthly share purchases). On the date of award of Matching Shares an equivalent number of Partnership Shares was acquired by the individuals. Between 1 January and 22 March 2011 the share price range at award was between 38.5 pence and 44.0 pence in conjunction with the monthly share purchases.
LTIP Awards Face value as a % Share price of salary end of at date face value at date max. no. of performance Director Date of grant of grant £’000 of grant shares period† Ken Cunningham 04/05/07 £12.25 750 300 61,224 Lapsed (on 04/05/10) 02/06/09 £1.74 263 75 150,862 forfeited (on 30/09/10) Peter Grant 04/05/07 £12.25 630 300 51,428 Lapsed (on 04/05/10) 02/06/09 £1.74 144 60 82,758 02/06/12 frank Condella 04/05/07 £12.25 1,350 300 54,900* lapsed (on 04/05/10)
* pro rata. † The performance conditions to be met prior to release of awards are fully described on page 48.
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Frank Condella was awarded LTIPs in 2007 whilst acting as Chief Executive Officer of the Company. These were reduced on a pro rata basis following his move to Non-Executive Director in November 2008 and while outstanding remained subject to performance conditions.
Share award granted to Chief Executive Officer
Axel Müller was appointed Chief Executive Officer after a significant portion of the 2010 financial year had already elapsed. The Remuneration Committee, therefore, felt it was inappropriate for him to participate in the annual cash bonus scheme for 2010. Instead of participation in the cash bonus scheme during 2010, Axel Müller was granted a special one-off award over shares to the value of CHF 100,000 (approximately 22% of salary) at grant. This non-pensionable award was granted in reliance of Listing Rule 9.4.2(2) and was required to facilitate his recruitment at the earliest possible opportunity.
In order to provide alignment with shareholders, the award is over SkyePharma shares and was granted on 3 September 2010 and will vest on 3 September 2012 (the second anniversary of grant). To the extent that SkyePharma pays any dividends over the two year period between grant and vesting, he will be entitled to receive the value of those dividends in cash or shares at the Committee’s discretion in respect of any vested shares at the end of the vesting period.
The shares will not be subject to any performance conditions but will normally require Axel Müller’s continued employment until the second anniversary of grant. If he is a “good leaver” (leaving as a result of death, injury, ill health, following a change of control or in other circumstances at the Remuneration Committee’s discretion) prior to that date then the shares will vest at his date of termination. Otherwise any early departure prior to the second anniversary of grant would result in the award lapsing.
The award will be satisfied using existing company shares sourced from the Employee Benefit Trust and certain amendments to the award as prescribed by the Listing Rules cannot be made without shareholder approval. Full details of the award are available for inspection by shareholders at the Company’s registered office and at the Annual General Meeting.
One-off share award Face value as Share price % of salary No. at date of date face at date of vesting Director shares grant of grant value grant date axel Müller 169,841 £0.3775 03/09/10 £64,115 21.1 03/09/12
As at 31 December 2010, none of the Directors had any interests in shares of any other Group company. The market value of Ordinary Shares at 31 December 2010 was 31.5 pence. The market value of Ordinary Shares during 2010 ranged from the lowest closing mid-price of 27.0 pence to the highest closing mid-price of 101.0 pence.
On behalf of the Board
Thomas Werner Chairman of the Remuneration Committee 22 March 2011
Stock Code: SKP 53
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the statement of directors’ responsibilities in relation to the accounts
The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards (“IFRS”) adopted by the European Union.
Under Company Law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group and the Company for that period. In preparing the financial statements the Directors are required to:
select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance; state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and make judgements and estimates that are reasonable and prudent.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The financial statements for the year ended 31 December 2010 are included in the annual report 2010, which is published by the Company in hard copy printed form and available to download on the Group’s website on the internet. The maintenance and integrity of the SkyePharma website is the responsibility of the Directors; the work carried out by the Auditors does not involve consideration of these matters and, accordingly, the Auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors’ remuneration The Remuneration Report on pages 44 to 53 sets out the remuneration policies operated by the Company and disclosures on Directors’ remuneration and other disclosable information relating to Directors and officers and their interests.
Internal control The Board, through the Audit Committee, has reviewed the assessment of risks and the internal control framework that SkyePharma operates and has considered the effectiveness of the system of internal control in operation in the Group for the year covered by this Report and up to the date of its approval by the Board of Directors.
The 2008 Combined Code The Board considers that the Group applies the principles of the 2008 Combined Code on Corporate Governance of the Financial Reporting Council, as described under “Corporate Governance” on pages 35 to 43 and has complied with all relevant principles and provisions of the Code except as specifically described in that report. As required by the Listing Rules of the Financial Services Authority, the Auditors have considered the Directors’ statement of compliance in relation to those points of the 2008 Combined Code which are specified for their review.
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Auditors Each of the persons who is a Director at the date of approval of this annual report confirms that:
so far as the Director is aware, there is no relevant audit information of which the Group’s Auditors are unaware; and The Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Group’s Auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s.418 of the Companies Act 2006.
Ernst & Young LLP have expressed their willingness to continue in office as Auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.
Directors’ Responsibility Statement In accordance with the FSA’s Disclosure and Transparency Rules, the Directors listed on page 29 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.
Annual Report The annual report for the year ended 31 December 2010, comprising the Report of the Directors, the Remuneration Report, the Financial Statements and additional information for investors, has been approved by the Board of Directors.
By Order of the Board
John Murphy General Counsel and Company Secretary 22 March 2011
Stock Code: SKP 55
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independent auditorS’ report to the members of skyepharma plc
We have audited the financial statements of SkyePharma PLC for the year ended 31 December 2010 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income and Expense, the Consolidated and Company Balance Sheet, the Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Cash Flow Statements, and the related notes 1 to 37. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 54, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.
Opinion on financial statements In our opinion:
The financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2010 and of the Group’s profit for the year then ended; The Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; The parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
EMPHASIS OF MATTER — GOING CONCERN In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of disclosures made in Note 2 to the consolidated financial statements concerning the Group’s ability to continue as a going concern, which indicates the existence of material uncertainties which may cast significant doubt about the Group’s ability to continue as a going concern. The consolidated financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.
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Opinion on other matters prescribed by the Companies Act 2006 In our opinion:
The part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; The information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and The information given in the corporate governance statement set out on pages 35 to 43 with respect to internal control and risk management in relation to financial reporting processes and about share capital structures is consistent with the financial statements.
Matters on which we are required to report by exception We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
Adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or The parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or Certain disclosures of Directors’ remuneration specified by law are not made; or We have not received all the information and explanations we require for our audit; or A corporate governance statement has not been prepared by the Group
Under the Listing Rules we are required to review:
The Directors’ statement set out on page 24 and 25 in relation to going concern; The part of the Corporate Governance Statement on page 35 relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and Certain elements of the report to shareholders by the Board on Directors’ remuneration.
David Hales (Senior Statutory Auditor) For and on behalf of Ernst & Young LLP, Statutory Auditor Reading 22 March 2011
Stock Code: SKP 57
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CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2010
(Restated) Year ended Year ended 31 December 31 December 2010 2009 Continuing operations Notes £m £m Revenue 5 58.1 55.9 Cost of sales 6 (14.1) (15.0) Gross profit 44.0 40.9 Selling, marketing and distribution expenses (2.1) (1.9) Research and development expenses 7 (23.5) (19.6) Corporate costs (2.5) (3.2) Amortisation of intangible assets 17 (0.7) (0.6) Share-based payment charge 32 (0.3) (0.8) Other income/(expense) 8 0.4 0.3 Pre-exceptional operating profit 9 15.3 15.1 Exceptional credits 11 0.2 9.8 Exceptional charges 11 (1.0) (11.2) Operating profit 14.5 13.7 Finance costs: Interest 12 (12.3) (13.3) Revaluation 12 (1.5) (1.4) Finance income 12 0.2 0.3 Foreign exchange gain/(loss) on net debt 13 5.6 (0.2) Profit/(loss) before tax 6.5 (0.9) Taxation 14 (0.2) (0.5) Profit/(loss) for continuing operations attributable to the parent 6.3 (1.4) Basic earnings per share 15 26.3p (6.0)p Diluted earnings per share 15 15.3p (6.0)p
See Notes to the accounts.
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Year ended Year ended 31 December 31 December 2010 2009 Notes £m £m Profit/(loss) for the year 6.3 (1.4) Other comprehensive (expense)/income for the year, after tax: Exchange differences on translation of foreign operations (5.8) 5.4 Available for sale financial assets — impairment — 0.3 Actuarial (losses)/gains on defined benefit plans 29 (1.1) 0.2 Other comprehensive (expense)/income for the year, net of tax (6.9) 5.9 Total comprehensive (expense)/income for the year attributable to the owners of the parent, net of tax (0.6) 4.5
See Notes to the accounts.
Stock Code: SKP 59
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CONSOLIDATED BALANCE SHEET as at 31 December 2010
(Restated) As at As at 31 December 31 December 2010 2009 Notes £m £m ASSETS non-current assets Goodwill 16 2.1 2.1 Intangible assets 17 6.3 7.0 Property, plant and equipment 18 29.6 29.8 38.0 38.9 Current assets Inventories 20 1.3 1.3 Trade and other receivables 21 11.5 16.5 Cash and cash equivalents 22 29.0 27.0 41.8 44.8 Non-current assets classified as held for sale 23 4.2 — total assets 84.0 83.7 LIABILITIES Current liabilities Trade and other payables 24 (16.3) (12.2) Borrowings 25 (27.3) (13.4) Deferred income (1.4) (1.0) (45.0) (26.6) non-current liabilities Convertible bonds 25 (59.3) (58.5) Other borrowings 25 (40.7) (62.2) Deferred income (10.8) (10.8) Provisions 26 (5.1) (3.7) Long-term creditors 27 (3.0) (1.5) (118.9) (136.7) total liabilities (163.9) (163.3) net liabilities (79.9) (79.6)
SHAREHOLDERS’ EQUITY Share capital 30 98.5 98.5 Share premium 390.2 390.2 Translation reserve (25.2) (19.4) Own share reserve (0.2) (0.2) Retained losses (552.2) (558.1) Other reserves 9.0 9.4 total shareholders’ equity (79.9) (79.6)
Approved by the Board of Directors on 22 March 2011 and signed on its behalf by:
A Müller P Grant Chief Executive Officer Chief Financial Officer
See Notes to the accounts.
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Company BALANCE SHEET Financial statements as at 31 December 2010
As at As at 31 December 31 December 2010 2009 Notes £m £m ASSETS non-current assets Intangible assets 17 — 0.1 Property, plant and equipment 18 0.1 0.1 Shares in and loans to Group undertakings 19 243.9 245.0 244.0 245.2 Current assets Trade and other receivables 21 0.5 0.8 Cash and cash equivalents 22 9.3 16.4 9.8 17.2 total assets 253.8 262.4 LIABILITIES Current liabilities Trade and other payables 24 (60.5) (61.4) total liabilities (60.5) (61.4) net assets 193.3 201.0
SHAREHOLDERS’ EQUITY Share capital 30 98.5 98.5 Share premium 390.2 390.2 Own share reserve 0.6 0.5 Retained losses (305.0) (297.6) Other reserves 9.0 9.4 total shareholders’ equity 193.3 201.0
Approved by the Board of Directors on 22 March 2011 and signed on its behalf by:
A Müller P Grant Chief Executive Officer Chief Financial Officer
See Notes to the accounts.
Stock Code: SKP 61
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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2010
Attributable to owners of the parent Total Share Share translation own share Retained other shareholders’ capital premium reserve reserve losses reserves equity £m £m £m £m £m £m £m As at 1 January 2010 98.5 390.2 (19.4) (0.2) (558.1) 9.4 (79.6) Profit for the year — — — — 6.3 — 6.3 Other comprehensive expense — — (5.8) — (1.1) — (6.9) Total comprehensive (expense)/ income for the year — — (5.8) — 5.2 — (0.6) Share-based payment charge — — — — 0.3 — 0.3 Warrant write off — — — — 0.4 (0.4) — as at 31 December 2010 98.5 390.2 (25.2) (0.2) (552.2) 9.0 (79.9)
See Notes to the accounts.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2009
Attributable to owners of the parent Total Share Share translation fair value own share Retained other shareholders’ capital premium reserve reserve reserve losses reserves equity £m £m £m £m £m £m £m £m As at 1 January 2009 96.7 387.2 (24.8) (0.3) (0.2) (557.8) 9.4 (89.8) Loss for the year — — — — — (1.4) — (1.4) Other comprehensive income — — 5.4 0.3 — 0.2 — 5.9 Total comprehensive income/(expense) for the year — — 5.4 0.3 — (1.2) — 4.5 Issue of share capital — conversions 1.8 3.0 — — — 0.1 — 4.9 Share-based payment charge — — — — — 0.8 — 0.8 As at 31 December 2009 98.5 390.2 (19.4) — (0.2) (558.1) 9.4 (79.6)
See Notes to the accounts.
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Company STATEMENT OF CHANGES IN EQUITY Financial statements for the year ended 31 December 2010
Attributable to owners of the parent Total Share Share own share Retained other shareholders’ capital premium reserve losses reserves equity £m £m £m £m £m £m As at 1 January 2010 98.5 390.2 0.5 (297.6) 9.4 201.0 Loss for the year — — — (7.8) — (7.8) Total comprehensive expense for the year — — — (7.8) — (7.8) Warrant write off — — — 0.4 (0.4) — Share-based payment charge — 0.1 — — 0.1 as at 31 December 2010 98.5 390.2 0.6 (305.0) 9.0 193.3
See Notes to the accounts.
Company STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2009
Attributable to owners of the parent Total Share Share translation fair value own share Retained other shareholders’ capital premium reserve reserve reserve losses reserves equity £m £m £m £m £m £m £m £m As at 1 January 2009 96.7 387.2 1.0 (0.3) 0.2 (292.5) 9.4 201.7 Loss for the year — — — — — (5.8) — (5.8) Other comprehensive expense — — (1.0) — — — — (1.0) Total comprehensive expense for the year — — (1.0) — — (5.8) — (6.8) Issue of share capital — conversions 1.8 3.0 — — — 0.1 — 4.9 Share-based payment charge — — — — — 0.6 — 0.6 Charge for the year — — — — 0.3 — — 0.3 Impairment — — — 0.3 — — — 0.3 As at 31 December 2009 98.5 390.2 — — 0.5 (297.6) 9.4 201.0
See Notes to the accounts.
Stock Code: SKP 63
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CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2010
Year ended Year ended 31 December 31 December 2010 2009 Notes £m £m Cash flow from operating activities Cash generated by operations (a) 26.5 17.3 Income tax paid (0.5) (0.5) net cash generated by operating activities 26.0 16.8
Cash flows from investing activities Purchases of property, plant and equipment (4.2) (4.8) Purchases of intangible assets — (0.4) Interest received 0.2 0.3 net cash used in investing activities (4.0) (4.9)
Cash flows from financing activities Repayment of borrowings (10.3) (7.0) Interest paid (11.7) (12.6) net cash used in financing activities (22.0) (19.6)
effect of exchange rate changes 1.9 (0.8) net increase/(decrease) in net cash and cash equivalents 1.9 (8.5)
Net cash and cash equivalents at beginning of the year 27.0 35.5 Net increase/(decrease) in net cash and cash equivalents 1.9 (8.5) net cash and cash equivalents at end of year 28.9 27.0 analysis of net cash: Cash and cash equivalents 29.0 27.0 Bank overdraft (0.1) — net cash and cash equivalents 28.9 27.0
See Notes to the accounts.
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(a) Cash flow from operating activities Year ended Year ended 31 December 31 December 2010 2009 £m £m Profit/(loss) for the year 6.3 (1.4)
Adjustments for: Tax 0.2 0.5 Depreciation 2.6 2.9 Amortisation 0.7 0.6 Impairments 0.8 8.4 Finance costs 13.8 14.7 Finance income (0.2) (0.3) Share-based payment charge 0.3 0.8 Exchange gains on translation (7.5) (0.4) Other non-cash income — (2.7) Operating cash flows before movements in working capital 17.0 23.1
Changes in working capital Decrease in inventories 0.1 0.1 Decrease in trade and other receivables 5.8 1.6 Increase/(decrease) in trade and other payables 4.6 (6.5) Decrease in deferred income (1.0) (1.0) Cash generated by operations 26.5 17.3
Stock Code: SKP 65
20064.04 29/03/2011 Proof 15 SkyePharma PLC Annual Report AND Accounts 2010
Company CASH FLOW STATEMENT For the year ended 31 December 2010
Year ended Year ended 31 December 31 December 2010 2009 Notes £m £m Cash flow from operating activities Cash (used in)/generated by operations (a) (0.9) 0.1
Cash flows from investing activities Purchases of intangible assets — (0.1) Purchases of plant, property and equipment (0.1) — Interest received 0.1 0.3 Net cash generated by investing activities — 0.2
Cash flows from financing activities Interest paid (6.2) (6.3) Net cash used in financing activities (6.2) (6.3) Net decrease in net cash and cash equivalents (7.1) (6.0)
Net cash and cash equivalents at beginning of the year 16.4 22.4 Net decrease in net cash and cash equivalents (7.1) (6.0) Net cash and cash equivalents at end of year 9.3 16.4
(a) Cash flow from operating activities Year ended Year ended 31 December 31 December 2010 2009 Notes £m £m Loss for the year (7.8) (5.8)
Adjustments for: Tax (0.3) — Finance costs 6.2 6.3 Finance income (0.1) (0.3) Share-based payment charge 0.2 0.6 Reversal of intercompany provision — (6.2) Other non-cash charges 0.4 1.4 Operating cash flows before movements in working capital (1.4) (4.0)
Changes in working capital Decrease in trade and other receivables 1.1 2.8 (Decrease)/increase in trade and other payables (0.6) 1.3 Cash (used in)/generated by operations (0.9) 0.1
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NOTES TO THE ACCOUNTS Financial statements
1 General information SkyPharma PLC (the “Company”) and its subsidiaries (together the “Group”) is a speciality pharmaceutical Group which uses its multiple drug delivery technologies to create enhanced versions of existing pharmaceutical products.
The Company is incorporated and domiciled in the United Kingdom, with its registered office at 46–48 Grosvenor Gardens, London SW1W 0EB.
These accounts are presented in pounds sterling because that is the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies set out in Note 2.
2 accounting policies (a) Basis of preparation
The Group’s and Company’s financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union as they apply to the financial statements of the Group for the year ended 31 December 2010 and applied in accordance with the Companies Act 2006. The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 December 2010.
The accounts have been prepared under the historic cost convention, as modified by the revaluation to fair values of financial instruments at fair value through profit and loss and available for sale financial instruments. All values are rounded to the nearest £0.1 million.
Standards and interpretations effective in the current period In preparing the consolidated accounts for the year the Group has adopted the following new IFRS and IFRIC interpretations:
IFRS 2 (amended) — Share-based payments — Group cash-settled share-based payment transactions IFRS 3 (revised) — Business combinations IAS 27 (amended) — Consolidated and separate financial statements IAS 39 — Financial instruments: recognition and measurement — eligible hedged items IFRIC 17 — Distributions of non-cash assets to owners IFRIC 18 — Transfers of assets from customers Improvements to IFRSs (April 2009)
Adoption of these standards did not have any effect on the financial position of the Group, or result in changes in accounting policy or additional disclosure.
Standards and interpretations issued but not yet adopted The following standards and interpretations, relevant to the Group, have been issued at the date of these accounts but are not yet effective:
IFRS 1 — First time adoption of International Financial Reporting Standards — replacement of fixed dates for certain exceptions with the date of transition to IFRS IFRS 1 — First time adoption of International Financial Reporting Standards — additional exemption for entities ceasing to suffer from severe hyperinflation IFRS 7 — Financial instruments: disclosures — amendments enhancing disclosures about transfers of financial assets IFRS 9 — Financial instruments — classification and measurement IAS 12 — Income taxes IAS 24 — Related party disclosures (amendment)
Stock Code: SKP 67
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NOTES TO THE ACCOUNTS continued
2 accounting policies continued IAS 32 — Financial instruments: Presentation — classification of rights issues (amendment) IFRIC 14 — Prepayments of a minimum funding requirement (amendment) IFRIC 19 — Extinguishing financial liabilities with equity instruments 2010 improvements to IFRS
The Group plans to adopt IFRS 9 for the year commencing 1 January 2013, this will impact both the measurement and disclosure of financial instruments.
The Directors do not expect that adoption of the other standards listed above will have a material impact on the financial statements of the Group in future periods.
Restatement of 2009 research and development expenses In 2010 the classification of costs within research and development was reviewed to better reflect the commercial reality and the 2009 classification has been restated as follows:
Clinical trials, supplies and other external costs directly recharged to development partners increased by £0.3 million to £3.4 million Other external clinical trial and supply costs increased by £0.4 million to £1.1 million Other research and development costs decreased by £0.7 million to £15.1 million
Restatement of 2009 other income £0.3 million of rental income has been re-classified from corporate costs to other income for the year ended 31 December 2009.
Restatement of 2009 Group trade payables 2009 Group trade payables have been restated to re-classify £1.5 million of trade payables to long-term creditors. This relates to an amount payable to a former partner which has funded capital expenditure related to the Flutiform™ supply chain. This funding is repayable in March 2013, or earlier if the supply chain is outsourced.
Company income statement In accordance with the provisions of section 408 of the Companies Act 2006, no separate income statement and related notes have been presented for the Company.
Going concern The Directors have made an assessment of the risks and uncertainties inherent in the business, as disclosed in this 2010 Annual Report and Accounts and of the working capital requirements of the Group for the next 12 months.
The anticipated approval and launch of Flutiform™ in Europe in the second half of 2011 is pivotal to the value and cash generative potential of the Group. Over the next two years, a large part of the Group’s net cash of £28.9 million as at 31 December 2010 is earmarked to fund the Flutiform™ supply chain, including the validation of the manufacturing line, and to meet scheduled debt and interest payments to the extent not covered by cash generated from normal operations. The successful validation of the manufacturing line and anticipated approval and launch of Flutiform™ in 2011 will not significantly enhance liquidity in the next two years, as the Group is obliged to apply milestone receipts arising from the initial launches of Flutiform™ in Europe as pre- payments of secured debt. However, the approval and launch of Flutiform™ would underpin management’s current operating strategy including ongoing and expected contract R&D income from projects such as Flutiform™ product line extensions and the ability of the Group to address any working capital needs arising from the normal volatility of trading.
In its cash flow projections for the next 12 months, the Board has anticipated receipt of non-Flutiform™ milestones totalling £9.0 million, including a launch milestone of $10 million (£6.5 million) due from Pacira if EXPAREL™ is approved and launched in the United States. If these milestones are not received or their receipt is significantly delayed beyond 2011, the Board believes that there are a number of steps which could be taken to appropriately manage the resulting working capital position of the Group.
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2 accounting policies continued IAS 1: “Presentation of Financial Statements” requires the Directors to disclose “material uncertainties related to events or conditions that may cast significant doubt upon the Group’s ability to continue as a going concern”. After careful consideration of IAS 1 and the Financial Reporting Council’s Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009 the Directors consider that, taken together, the uncertainties described above are “material uncertainties”. Nevertheless, the Board has reasonable expectations that Flutiform™ and EXPAREL™ will be approved and launched successfully in their respective markets and that the Group will have adequate resources to continue in operational existence for the foreseeable future. Accordingly the Board considers that the business is a going concern and continues to adopt the going concern basis in preparing the Annual Report and Accounts. The financial statements do not contain the adjustments that would result if the Group was unable to continue as a going concern.
Whilst not a material uncertainty affecting going concern for the purpose of these financial statements, as set out in Note 25: Borrowings, the Group has in issue £63.0 million of bonds which may be converted into ordinary shares at £3.71 per share and may be called for repayment (“Put”) on various dates, the earliest being November 2013, and £20.0 million of bonds which may be converted into ordinary shares at £3.82 per share and may be Put on various dates, the earliest being December 2014 (collectively “Convertible Bonds”). Even with the expected approval and launch of Flutiform™ in 2011, it is unlikely, based on current financing and licensing agreements, that the Group will generate sufficient cash from normal trading to meet the earliest possible bond Puts if the Convertible Bonds are not converted prior to those dates. However, the Board believes that the approval of Flutiform™ should enable the Group’s capital structure to be strengthened well ahead of the bonds’ earliest Put dates. In anticipation of this the Board has appointed Jefferies International Limited to advise the Board on the Group’s capital structure.
(b) Basis of consolidation The underlying accounts comprise a consolidation of the accounts of the Company and all its subsidiaries. The accounts of the Group’s subsidiaries are made up to 31 December.
Subsidiaries Subsidiaries are all entities over which the Group has control. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities and is achieved through direct or indirect ownership of voting rights, currently exercisable or convertible voting rights, or by way of contractual agreement.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. The accounts of subsidiaries used for the preparation of the Group accounts are prepared for the same reporting year as the Parent Company, using consistent accounting policies.
Intercompany eliminations Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains unless the transaction provides evidence of an impairment of the asset transferred.
(c) Foreign currency translation Items included in the accounts of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “Functional Currency”). The consolidated accounts are presented in pounds sterling, which is the Company’s Functional Currency and Group’s and Company’s presentation currency.
Stock Code: SKP 69
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NOTES TO THE ACCOUNTS continued
2 accounting policies continued In preparing the individual accounts of the Group companies, transactions in currencies other than the entity’s Functional Currency are translated into the Functional Currency at the exchange rate prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when they relate to items recognised directly in equity (e.g. equities classified as available for sale) in which case the exchange component of that gain or loss will be recognised directly in equity. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date of the initial transactions.
Group companies For the purpose of preparing the consolidated accounts the results and financial position of the Group entities that have a Functional Currency different from the Group’s Functional Currency are translated into the Group’s Functional Currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet;
(ii) income and expenses for each income statement are translated at average exchange rates; and
(iii) all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, are taken to shareholders’ equity. Where subsidiaries are funded centrally, using long-term intercompany loans and settlement of these loans is neither planned nor likely to occur in the foreseeable future, they are treated as part of the net investment and exchange translation differences are taken to reserves.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. On disposal of a foreign entity, accumulated exchange differences are recognised in the income statement in the same period in which the gain or loss on disposal is recognised.
(d) Segment reporting The Group has identified that it has one operating segment; the development and manufacture of pharmaceutical products based on information used internally by management to assess the performance of, and allocate resources to, the business.
(e) Revenue recognition Revenue is stated net of sales taxes, rebates and discounts and after eliminating sales within the Group. Revenue is recognised as follows: Licence signing and milestone fees Licence signing and milestone fees represent amounts earned from licensing agreements, including up-front payments, milestone payments and technology access fees. Revenues are recognised where they are non-refundable, where the Group’s obligations related to the revenues have been discharged and their collection is reasonably assured. Refundable contract revenue is treated as deferred until such time that it is no longer refundable. In general, up-front payments are deferred and recognised on a systematic basis over the period of development to regulatory filing. Milestone payments related to scientific or technical achievements are recognised as income when the milestone is accomplished.
Contract research and development revenue Contract research and development revenue represents amounts earned for services rendered under development contracts. Revenues are recognised in the period in which they are earned.
Royalty income Royalty income is recognised on an accruals basis and is normally derived from a percentage of licensee’s net product sales in accordance with the substance of the relevant agreement. Generally the Group receives sales information from the licensee on a quarterly basis. For any period for which the information has not been received, the Group estimates sales and any adjustments arising from actual figures received are booked in the period in which they are received.
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2 accounting policies continued Manufacturing and distribution Manufacturing and distribution revenues principally comprise income from sales of product manufactured, contract manufacturing fees invoiced to third parties and other income derived from manufacturing and supply agreements. Revenues are recognised upon transfer to the customer of significant risks and rewards, usually upon despatch of goods shipped where the sales price is agreed and collectability is reasonably assured.
Interest income Interest income is recognised on a time-proportion basis using the effective interest method.
(f) Cost of sales Cost of sales is charged to the income statement in the period in which it is incurred. Cost of sales comprises the direct and indirect costs of manufacturing, agents’ commissions and royalties payable.
(g) Selling, marketing and distribution Selling, marketing and distribution expenses comprise the direct and indirect costs of business development, marketing and distribution.
(h) Research and development revenue Research and development expenditure is charged to the income statement in the period in which it is incurred. Research and development expenses comprise the direct and indirect costs on projects, feasibility studies and technology development; costs of chemistry, manufacturing and control development, clinical work and the registration and maintenance of intellectual property.
(i) Corporate costs Corporate costs comprise expenditure not directly related to research and development, manufacturing or business development.
(j) Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is tested annually for impairment, or when events and changes in circumstances indicate the carrying value may be impaired, and is carried at cost less accumulated impairment losses. Goodwill is allocated to cash generating units for the purpose of impairment testing. Each of those cash generating units is disclosed in Note 16: Goodwill.
Fair value shall be measured at the acquisition date by the components of any non-controlling interests in the acquiree that present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either:
(a) fair value; or (b) the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.
All other components of non-controlling interests shall be measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs.
Intellectual property 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 on a straight line basis over their estimated useful economic lives from the time they are available for use as disclosed in Note 17: Intangible Assets.
Stock Code: SKP 71
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NOTES TO THE ACCOUNTS continued
2 accounting policies continued Research and development Development expenditure is capitalised when the criteria for recognising it as an asset are met which is when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Regulatory and other uncertainties generally mean that such criteria are not met. Prior to product launch, capitalised development costs are tested annually for impairment. Once launched they are amortised over their useful economic lives.
Computer software Costs that are directly associated with the purchase and implementation of identifiable and unique software products by the Group are recognised as intangible assets. Expenditures that enhance and extend the benefits of computer software programmes beyond their original specifications and lives are recognised as a capital improvement and added to the original cost of the software. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Software costs are amortised over their useful economic lives, generally a period of 3 to 5 years.
(k) Property, plant and equipment Property, plant and equipment are stated at the cost of purchase or construction less provision for depreciation and impairment. The cost of property, plant and equipment includes acquisition, labour and overhead costs arising directly from the construction or acquisition of an item of property, plant and equipment.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance expenditures are charged to the income statement during the financial period in which they are incurred.
Depreciation is not provided on freehold land or projects under construction. On other property, plant and equipment depreciation is provided on the difference between the cost of an item and its estimated residual value, in equal annual instalments over the estimated useful lives of the assets as follows:
Freehold buildings 2%–5% Laboratory equipment and machines 10%–33% Office and other equipment 10%–33% Motor vehicles 20% Short leasehold property period of the lease
Assets in the course of construction are depreciated when they are ready for operational use. Residual values of assets and their useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if it is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the income statement.
(l) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value- in-use. Any impairment loss is charged to the income statement in the year concerned. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units).
The expected cash flows generated by the assets are discounted using asset specific discount rates which reflect the risks associated with the groups of assets. These risks vary with the nature and the location of the cash generating units.
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2 accounting policies continued (m) Financial assets The Group classifies its financial assets according to the purpose for which the financial assets were acquired. Management determines the classification of financial assets at initial recognition and re-evaluates the designation at every reporting date. The Group has the following categories of financial assets:
Loans and receivables Receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate except for short term receivables when the recognition of interest would be immaterial.
(n) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in-first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and an appropriate proportion of related production overheads, based on the normal level of production capacity. Pre-launch inventory is held as an asset when there is a high probability of regulatory approval for that product. Before that point inventory is expensed to the income statement. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Provision is made for obsolete, slow-moving or defective items where appropriate.
(o) Trade receivables Trade receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Trade receivables are recognised initially at fair value less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.
(p) Cash and cash equivalents Cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, net cash and cash equivalents comprise cash at bank and in hand, short-term deposits, marketable securities and bank overdrafts. Bank overdrafts are included within borrowings in current liabilities on the balance sheet.
(q) Assets held for sale Assets classified as held for sale are measured at the lower of carrying value and fair value less costs to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and expected to be completed within one year from classification and the asset is available for immediate sale in its present condition.
If these conditions are not met the assets will be included, or transferred if previously classed as held for sale, in the balance sheet line to which they relate.
(r) Borrowings Obligations for loans and borrowings are recognised when the Group becomes party to the related contracts and are measured initially at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on the repurchase, settlement or other cancellation of liabilities are recognised respectively in finance revenue and finance cost.
Stock Code: SKP 73
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2 accounting policies continued (s) Convertible bonds On issue, the debt and equity components of a convertible bond are separated and recorded at fair value net of issue costs. The fair value of the liability portion is determined by applying a market interest rate for an equivalent non-convertible bond to the forecast cash flows under the convertible bond agreement. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds of the bond is allocated to the conversion option which is recognised and included in shareholders’ equity. The value of the conversion option is not changed in subsequent periods. Where the bonds include early repayment options for the bond holders and early repayment will be at par the embedded option is considered as clearly and closely related and therefore not separated from the host contract.
On conversion of the bonds the amortised cost of the bond in liabilities will be de-recognised, and an equivalent amount recognised in shareholders’ equity. Also recorded is a transfer between share premium and retained earnings to remove the value of the conversion option initially recorded in shareholders’ equity.
(t) Paul Capital funding liabilities The liability was initially recorded at fair value, calculated by discounting the expected cash flows based on management’s estimation of a fair market rate at inception. Subsequently the liability is carried at amortised cost using the effective interest rate method. Any change in the expected cash flows is recognised as an adjustment to the carrying value with the corresponding gain or loss recorded in Finance costs: revaluation in the income statement.
(u) CRC liabilities The liability was initially recorded at fair value. Subsequently the liability is carried at amortised cost using the effective interest rate method. Any change in the expected cash flows is recognised as an adjustment to the carrying value with the corresponding gain or loss recorded in Finance costs: revaluation in the income statement.
(v) Derecognition of financial assets and liabilities A financial asset or liability is generally de-recognised when the contract that gives rise to it is settled, sold, cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss.
(w) Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfilment of the arrangement is dependant on the use of a specific asset or assets or the arrangement conveys a right to use the asset.
Lease agreements which transfer to the Group substantially all the risks and rewards of ownership of an asset are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased property, plant and equipment or the present value of minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate of interest on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other long-term payables. These payments are split between capital and interest elements using the annuity method. The interest element of the lease rental is included in the income statement. Assets held under finance leases are depreciated on a basis consistent with similar owned assets or the lease term if shorter.
All other leases are classified as operating leases. Payments made under operating leases, net of lease incentives or premiums received, are charged to the income statement on a straight line basis over the period of the lease.
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2 accounting policies continued (x) Employee benefits Pension obligations Switzerland The Group operates a pension scheme in respect of its employees in Switzerland. This scheme is a defined contribution plan into which the employer and employee contribute on a monthly basis, and which is designed to build a pension fund which will be used to determine a pension on retirement based on the conversion rate established at the time of joining the plan. The Group and employee also make additional contributions in respect of death or disability benefits.
The pension scheme is regulated to require that the funds achieve a minimum investment return, established by the government on a yearly basis. The return is set each year by the Swiss government based on market conditions each year and taking into account the relatively conservative investment criteria which must be followed by the pension investment company. The primary obligation to ensure that each pension fund achieves at least the minimum return lies with the pension investment company; a company controlled by its member-employers and member-employees, which pools the funds across many employers and is able to smooth out any under-performance over a number of years. If the investment target is not met, the effect is usually assessed over a number of years. If the deficit persists over this period or is substantial, it will first be met from past reserves (from years when the investment return has exceeded the minimum required). If a deficit remains, or is significant, members may agree (or be required by the regulator) to make a higher rate of future contribution in order to restore the investment funds to a fully funded level over a number of years. These additional contributions would be shared equally between the employer and the employee.
The employer and employee members are therefore exposed to the following risks:
(i) the risk that the minimum investment return is not met, and is not made up from past excess returns or future returns; and (ii) the risks that the assets held by the pension fund are not sufficient to cover payments to pensioners, disability benefit and death in service benefit.
As some of these risks match the criteria for accounting for a scheme as a defined benefit scheme, the Swiss pension plan is accounted for in accordance with IAS 19.
The liability included in the balance sheet in respect of the Swiss pension plan is therefore the present value of the defined benefit obligations less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses. Defined benefit obligations for the schemes are calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligations is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Service costs are included in staff costs and charged to income statement over the remaining average expected service lives of employees. They are set at a level designed to give a charge through the profit and loss account which is a level percentage of salaries.
The Group recognises actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions directly in equity, in the period in which they have occurred, in accordance with the alternative treatment allowed by the amendment to IAS 19: Employee benefits — Actuarial gains and losses, Group plans and disclosures.
UK The Group operates various defined contribution plans for its employees in the UK. The Group’s contributions to this plan are charged to the income statement in the period to which they relate, and the assets are held in separate trustee administered funds. The Group has no further payment obligations once the contributions have been paid.
Stock Code: SKP 75
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2 accounting policies continued France The Group contributes to the State run defined benefit schemes relevant to its employees in France. The liability recognised in the balance sheet in respect of the defined benefit retirement indemnities is the present value of the defined benefit obligations at the balance sheet date. The obligation is restricted solely to a lump sum payment payable on retirement in employment. The Group has no residual liability or transfer payment to make in the event that an employee leaves employment prior to retirement. The scheme is unfunded and there are no plan assets. Defined benefit obligations for the schemes are calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligations is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid. Service costs are included in staff costs and are charged to the income statement over the remaining average expected service lives of employees.
Share-based compensation Incentives in the form of shares are provided to employees under share option, share purchase and long-term incentive plans. In accordance with IFRS 2 Share-based Payments, charges for these incentives are expensed through the income statement on a straight line basis over their vesting period, based on the Group’s estimate of shares that will eventually vest. The total amount to be expensed is determined by reference to the fair value of the options or awards at the date they were granted excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in estimates about the number of options that are expected to become exercisable or are released.
The Group provides finance to an employee share ownership trust to purchase Company shares on the open market to meet the Group’s obligation to provide shares when employees exercise their options or awards. The costs of running the employee share ownership trust are charged to the income statement as they accrue. Shares held by the employee share ownership trust are deducted from shareholders’ equity.
At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period.
(y) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, if it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Restructuring charges are provided in the period in which management has committed to a plan and it is probable that an obligation has been incurred that can be reliably estimated. Provisions are not recognised for future operating losses.
(z) Taxation Current tax is the expected tax payable on the taxable income for the year using the tax rates and laws that have been enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated accounts. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date. Deferred tax assets and liabilities are not discounted.
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2 accounting policies continued (aa) Deferred consideration Provisions for deferred consideration comprise the fair value of contingent consideration arising from acquisitions and are included in the cost of business combinations at the acquisition date if the adjustment is probable and can be reliably measured. Provisions are reviewed annually by the Directors, and changes to the estimated fair value of the contingent consideration are recorded as an adjustment to goodwill or the underlying asset value.
(ab) Own Shares Own equity instruments which are re-acquired are recognised at cost and deducted from equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference between the carrying amount and the consideration is recognised in other reserves.
(ac) Exceptional Items Exceptional items, which are presented on the face of the income statement, are those material items of income and expense which, because of the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and the assessment of trends in financial performance.
3 Critical accounting estimates and judgements The preparation of the consolidated accounts requires the Group to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Group bases its estimates and judgements on historic experience and on various other assumptions that it considers to be reasonable. Actual results may differ from these estimates under different assumptions or conditions.
Judgements Revenue recognition The Group’s revenue comprises revenues from licensing agreements, including up-front payments, milestone payments and technology access fees, contract research and development revenue, royalty income and manufacturing and distribution revenue. The Group enters into a wide variety of collaborative arrangements with its partners from which it may earn all, or some of, these revenue streams. The application of the Group’s revenue recognition policy to the complex collaboration agreements requires significant estimates and judgement. In particular, in arrangements with multiple deliverables, there may be significant judgement in separating the different revenue generating activities.
Deferred consideration Provisions for deferred consideration payable by the Group comprise the fair value of contingent consideration arising from acquisitions. The eventual outcome is subject to the Group’s future performance and certain contractual terms. Provisions are reviewed annually by the Directors, who make significant judgements as to the estimated fair value of the contingent consideration. Based on these judgements, changes to the estimated fair value of the consideration are recorded. No deferred consideration has been recorded in the accounts. Further details of contingent consideration are set out in Note 30: Share capital.
Stock Code: SKP 77
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3 Critical accounting estimates and judgements continued Estimates Paul Capital finance The proceeds received from Paul Capital are treated as financial liabilities under IAS 39. The fixed amortisable note is recorded at the net present value of expected amortisation payments to be paid to Paul Capital. This amount is net of amounts forecast to be paid to Paul Capital by Pacira Pharmaceuticals which reduce the amount owing to Paul Capital by the Group. In order to be able to calculate the funding liabilities, significant estimation of the Group’s future cash flows is required. This includes the timing of any pre-payments, including those made when from sharing the first U.S.$10 million of milestones in respect of Flutiform™ and expected payments by Pacira Pharmaceuticals. Further details are set out in Note 12: Finance costs and income, and Note 25: Borrowings.
CRC finance The loan received from CRC is treated as a financial liability under IAS 39. The liability is recorded at the net present value of expected payments to be made to CRC. Pre-payments are due in certain circumstances, including sharing the first U.S.$10 million of receipts of milestones in respect of Flutiform™. Therefore in order to be able to calculate the funding liabilities, significant estimation of certain of the Group’s future cash flows is required. Cash flows from license agreements are periodically reassessed to determine the estimated funding liabilities. Further details are set out in Note 12: Finance costs and income, and Note 25: Borrowings.
Impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with its accounting policy. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. The estimates used in goodwill impairment testing as at 31 December 2010 and 2009 are presented in Note 16: Goodwill.
Impairment of other intangible assets and property, plant and equipment The Group tests annually whether other intangible assets and property, plant and equipment have suffered any impairment. These calculations require the use of estimates.
Contingent Liabilities Provisions for contingent liabilities are dependent upon estimates and assessments of whether the criteria for recognition have been met, including estimates by the Directors as to the probable outcome and the amount of the potential cost of resolution. Any estimate for such an accrual is developed in consultation with external legal advisors advising the Group on such matters and is based upon an analysis of potential outcomes. Further details are set out in Note 34: Contingencies.
Pensions The Group recognises actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions directly in equity, in the period in which they have occurred, in accordance with the alternative treatment allowed by the amendment to IAS 19: Employee benefits — Actuarial gains and losses, group plans and disclosures. The costs are assessed in accordance with advice received from independent actuaries. These assumptions include inflation rate, rate of increase in salaries, discount rate and expected return on plan assets and are disclosed in Note 29: Retirement benefit obligations. The selection of different assumptions could affect the results of the Group.
Share-based compensation Incentives in the form of shares are provided to employees under share option, share purchase and long-term incentive plans. The fair value of the employee services received in exchange for the grant of the options and rewards is recognised as an expense. The expense is based upon a number of assumptions disclosed in Note 32: Share-based payments. The selection of different assumptions could affect the results of the Group.
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3 Critical accounting estimates and judgements continued Amortisation lives Other intangible assets are recorded at their fair value at acquisition date and are amortised on a straight line basis over their estimated useful economic lives from the time they are available for use. Any change in the estimated useful economic lives could affect the future results of the Group.
Taxation Current tax is the expected tax payable on the taxable income for the year using the tax rates and laws that have been enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. The Group has open tax assessments and queries with a number of revenue authorities and, on the basis of external professional advice, continues to believe that it has made adequate provision for any liabilities that may arise from these open assessments. The ultimate liability for such matters may vary from the amounts provided, and is dependent upon negotiations with the relevant tax authorities.
4 Segmental information For management purposes, the Group is treated as one reportable operating segment — the development and manufacture of pharmaceutical products.
Revenue from external customers Year ended Year ended 31 December 31 December 2010 2009 £m £m UK 2.8 7.5 Rest of Europe 38.3 27.5 North America 8.7 18.3 Rest of World 8.3 2.6 Total revenue 58.1 55.9
Revenue is based on the location of the customer.
Information about major customers Revenue earned from the Group’s largest customers is as follows: Customer 1 — £17.2 million (2009: £9.1 million), Customer 2 — £7.1 million (2009: £2.4 million), Customer 3 — £5.8 million (£6.4 million).
Non-current assets by location Year ended Year ended 31 December 31 December 2010 2009 £m £m UK 7.5 4.8 Rest of Europe 30.5 34.1 Total non-current assets 38.0 38.9
Non-current assets consist of goodwill, property, plant and equipment and intangible assets.
Stock Code: SKP 79
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5 Revenue by income stream Year ended Year ended 31 December 31 December 2010 2009 £m £m Revenue earned is analysed as follows: Signing and milestone payments 1.6 4.0 Contract research and development revenue 8.6 9.3 Royalties 25.0 28.9 Manufacturing and distribution 22.9 13.7 Total revenue 58.1 55.9
6 Cost of sales Year ended Year ended 31 December 31 December 2010 2009 £m £m Manufacturing and distribution 13.3 14.2 Other cost of sales 0.8 0.8 Total cost of sales 14.1 15.0
7 Research and development (Restated) Year ended Year ended 31 December 31 December 2010 2009 £m £m Clinical trials, supplies and other external costs directly recharged to development partners 3.7 3.4 Other external clinical trial and supply costs 6.5 1.1 Other research and development costs 13.3 15.1 Total research and development 23.5 19.6
8 other income/(expense) (Restated) Year ended Year ended 31 December 31 December 2010 2009 £m £m Rental income 0.4 0.3 Loss on disposal of fixed assets (0.1) — Business rate refund 0.1 — Total other income/(expense) 0.4 0.3
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9 Pre-exceptional operating profit Pre-exceptional operating profit for the year has been arrived at after crediting/(charging): Year ended Year ended 31 December 31 December 2010 2009 £m £m Net foreign exchange gains/(losses) 0.3 (0.2) Depreciation (2.6) (2.9) Amortisation (0.7) (0.6) Staff costs (17.7) (19.6)
Auditors’ remuneration It is the Group’s policy to employ the auditors on assignments additional to their statutory audit duties where their expertise and experience with the Group are important, principally tax advice and as reporting accountants on significant transactions, or where they are awarded assignments on a competitive basis. During the year, the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditors at costs detailed below: Year ended Year ended 31 December 31 December 2010 2009 £m £m Audit Services Fees payable for the audit of the Company and consolidated accounts 0.2 0.2 Fees payable for the audit of the Company’s subsidiaries pursuant to legislation 0.1 0.1 Non-audit services Tax advisory services 0.1 0.1 Total fees payable 0.4 0.4
Included in the analysis of audit fees above are fees of £25,000 which were paid in respect of the Parent Company (2009: £25,000).
Stock Code: SKP 81
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10 Staff costs Year ended Year ended 31 December 31 December 2010 2009 £m £m Wages and salaries 12.7 13.7 Equity settled share-based payments 0.3 0.8 Social security costs 2.2 2.1 Pensions Defined benefit plans 0.8 1.1 Defined contribution plans 0.4 0.6 Other benefits 1.3 1.3 Total staff costs 17.7 19.6
The average number of people including Executive Directors, employed by the Group during the period was 108 (2009: 121) in research and development, 91 (2009: 101) in manufacturing and 12 (2009: 13) in administration.
The average number of people employed by the Company was 12 (2009: 13).
The Group’s key management personnel for disclosure purposes comprises only Executive Directors. Non-Executive Directors’ remuneration for the year is shown in the audited part of the Remuneration Report.
11 exceptional items Year ended Year ended 31 December 31 December 2010 2009 Exceptional credits Notes £m £m Foradil® Certihaler® contract termination — 5.1 Exceptional accrual release (a) 0.2 4.7 Total exceptional credits 0.2 9.8
Year ended Year ended 31 December 31 December 2010 2009 Exceptional charges Notes £m £m Restructuring charges (b) 0.2 2.8 Goodwill impairment — 5.7 Intellectual property impairment (c) 0.8 2.7 Total exceptional charges 1.0 11.2
(a) The exceptional credit of £0.2 million relates to the release of accruals no longer required at 31 December 2010 related to restructuring activities in Lyon, France.
(b) The exceptional charge of £0.2 million for 2010 primarily relates to costs incurred during restructuring activities undertaken within the Group.
(c) At 31 December 2010 the Group incurred a £0.8 million non-cash impairment charge primarily relating to a licence for Flutiform™ in North America. The Group believes the value of this licence is unlikely to be recovered before patent expiry and has therefore been fully written off.
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12 finance costs and income Year ended Year ended 31 December 31 December 2010 2009 £m £m finance cost — interest: Bank borrowings 0.4 0.4 Paul Capital finance 2.8 3.0 CRC finance 3.0 3.7 Convertible bonds 6.1 6.2 Total finance cost — interest 12.3 13.3 finance cost — revaluation: Cost of revaluation of liabilities due to Paul Capital and CRC 1.5 1.4 Total finance cost — revaluation 1.5 1.4
Year ended Year ended 31 December 31 December 2010 2009 £m £m finance income: Interest income 0.2 0.3 Total finance income 0.2 0.3
13 foreign exchange gain/(loss) on net debt Year ended Year ended 31 December 31 December 2010 2009 £m £m Paul Capital finance 2.3 0.2 CRC finance 5.2 0.2 Foreign denominated cash balances (1.9) (0.6) Total foreign exchange gain/(loss) on net debt 5.6 (0.2)
Stock Code: SKP 83
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14 Taxation Year ended Year ended 31 December 31 December 2010 2009 £m £m Current tax 0.2 0.5 Total current tax 0.2 0.5
The tax on the Group’s losses before tax differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK. The differences are explained below:
Year ended Year ended 31 December 31 December 2010 2009 £m £m Profit/(loss) before tax 6.5 (0.9) Tax (charge)/credit at the UK corporation tax rate of 28.0% (2009: 28.0%) (1.8) 0.2
Effects of: Adjustments in respect of foreign tax rates (2.3) 0.6 Expenses deductible for tax purposes 0.9 3.8 Tax losses for which no deferred tax asset was recognised (2.9) (6.2) Tax losses utilised 1.5 1.6 Witholding taxes (0.5) (0.5) Tax provision no longer required 0.3 — effective tax (0.2) (0.5)
As at 31 December 2010, the Group has estimated Corporate/Federal tax losses of approximately £287.7 million (2009: £265.6 million) and tax credits and temporary differences of £34.2 million (2009: £33.8 million). The Group has estimated Cantonal/State losses of approximately £36.2 million (2009: £62.5 million).
The expiry profile of the tax losses of the Group is estimated as follows: Indefinite Expiry carry expiry 2011 expiry 2012 expiry 2013 expiry 2014 expiry 2015 thereafter forward total £m £m £m £m £m £m £m £m Tax losses: Corporate/ Federal 2.0 37.6 45.2 41.6 34.0 71.0 56.3 287.7 Cantonal/State 2.7 7.2 10.9 8.1 7.3 — — 36.2
The majority of the tax losses relate to Switzerland and these losses expire on 1 January in each of the years set out above. Overall the Group tax losses are specific to various companies and businesses, and there can be no assurance that they can be utilised against profits which arise in the future. No deferred tax asset has been recognised given the uncertainty of future recoverability.
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15 earnings per share Earnings per share is calculated based on earnings after tax and the weighted number of Ordinary Shares in issue during the year.
For the calculation of diluted earning per share, the weighted average number of Ordinary Shares in issue is adjusted to assume full conversion of all potential new Ordinary Shares which are regarded as dilutive for this purpose. The Group has two classes of dilutive potential Ordinary Shares (see Note 30: Share capital):
those granted to employees shares to be issued on conversion of the 2024 convertible bonds Year ended Year ended 31 December 31 December 2010 2009 Earnings £m £m Attributable profit/(loss) before exceptional items 7.1 0.0 Exceptional items (0.8) (1.4) Basic and diluted attributable profit/(loss) 6.3 (1.4)
Number of shares m m Weighted average number of ordinary shares in issue 24.0 23.4 Potentially dilutive share options 17.3 — Weighted average number of diluted ordinary shares 41.3 23.4
Basic earnings per Ordinary Share Pence Pence Pre-exceptional earnings per share 29.6 0.0 Exceptional earnings per share (3.3) (6.0) Basic earnings per share 26.3 (6.0) Diluted earnings per Ordinary Share 15.3 (6.0)
Stock Code: SKP 85
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16 Goodwill Total £m Cost At 1 January 2009 33.7 at 31 December 2009 and 31 December 2010 33.7 Amortisation At 1 January 2009 25.9 Impairment 5.7 At 31 December 2009 31.6 At 31 December 2010 31.6 net book value at 31 December 2009 and 31 December 2010 2.1
Goodwill is not amortised but is tested annually for impairment or more frequently if there are indications that goodwill might be impaired. Value-in-use calculations are generally utilised to calculate the recoverable amount. Key assumptions for the value-in- use calculations are as follows:
Launch dates of products employing these technologies — launch dates reflect management’s most recent information on the expected date of launch of products. Sales projections — these are based on management’s projections, based on information supplied by partners where available. Discount rates — the discount rate is calculated using the Capital Asset Pricing Model, giving a rate of 15 per cent. This rate is adjusted to reflect the specific risk associated with the related product. Approved products’ discount rates may be reduced below 15 per cent. Cash flow projections — cash flow projections are usually for ten years (or to the expiry of the patent if shorter) based on expected product lives. A terminal value is applied where appropriate. Products under development — no value is attributed to products under development until revenues can be forecast with reasonable certainty.
Goodwill was tested for impairment at 31 December 2010 and 31 December 2009.
Goodwill relates to the Cash Generating Unit (“CGU”) comprising products and potential products acquired with the acquisition of RTP Canada in 2001/2002 and relates to the Insoluble Drug Delivery® (“IDD®”) technology. The IDD® CGU carrying amount (net book value) consists of: As at As at 31 December 31 December 2010 2009 Goodwill £m £m Beginning of the year 2.1 7.8 Impairment — (5.7) End of the year 2.1 2.1 Property, plant & equipment 1.2 1.5 Total IDD® CGU 3.3 3.6
The recoverable amount for the IDD® CGU has been determined using a value-in-use calculation with the following assumptions:
Business Plan covering 10 years. 10 years is used based on expected product lives. Pre-tax discount rate of 12 per cent. (2009: 12 per cent.) for approved products.
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16 Goodwill continued Using these assumptions, the recoverable amount of the IDD® CGU has been calculated as £3.7 million (2009: £3.6 million).
Sensitivity to changes in assumptions Management believes that reasonably possible changes to key assumptions would cause the recoverable value of the goodwill to be reduced further. The forecast sales are the key assumption to determine the value of the IDD® CGU. For example, if sales forecasts were reduced due to further erosion of the sales by competition in the market by 50 per cent. the recoverable amount would reduce to £1.8 million, resulting in an impairment charge of £1.5 million.
17 intangible assets Intellectual Software Development property costs costs Total Group £m £m £m £m Cost At 1 January 2009 43.1 0.7 0.5 44.3 Exchange (3.5) — (0.1) (3.6) Additions — 0.4 — 0.4 Disposals — (0.1) — (0.1) Transfer (0.5) — 0.1 (0.4) Impairment (2.7) — — (2.7) At 31 December 2009 36.4 1.0 0.5 37.9 Exchange 11.0 0.1 0.2 11.3 Write-off (0.1) — — (0.1) Impairment (0.7) — — (0.7) at 31 December 2010 46.6 1.1 0.7 48.4 accumulated amortisation At 1 January 2009 32.4 0.6 0.5 33.5 Exchange (2.6) (0.1) (0.1) (2.8) Amortisation charge 0.5 0.1 — 0.6 Transfers (0.5) — 0.1 (0.4) At 31 December 2009 29.8 0.6 0.5 30.9 Exchange 10.3 — 0.2 10.5 Amortisation charge 0.6 0.1 — 0.7 at 31 December 2010 40.7 0.7 0.7 42.1 net book value At 31 December 2009 6.6 0.4 — 7.0 at 31 December 2010 5.9 0.4 — 6.3
Stock Code: SKP 87
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17 intangible assets continued There are no intangible assets with indefinite useful lives.
Included within intellectual property is £2.0 million (2009: £1.8 million) of assets that are not used in launched products. These assets have not been amortised but have been tested for impairment using the method set out in Note 16: Goodwill.
One of these assets, with a value of £0.7 million (2009: £0.7 million), is a licence related to Flutiform™ in North America. The Group believes the value of this licence is unlikely to be recovered before patent expiry and it has, therefore, been fully written off. The charge is included within exceptional items in the income statement.
£2.7 million (2009: £4.3 million) of the intangible assets relate to Solaraze®. These assets are amortised over a 20 year period to 2020, based on the expected useful life of the product. Computer software Company £m Cost At 1 January 2009 — Additions 0.1 At 31 December 2009 0.1 At 31 December 2010 0.1 accumulated amortisation At 1 January 2009 and 31 December 2009 — Amortisation charge 0.1 At 31 December 2010 0.1 net book value At 31 December 2009 0.1 At 31 December 2010 —
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18 Property, plant and equipment Laboratory Assets Office Land and equipment under and other motor buildings and machines construction equipment vehicles total Group £m £m £m £m £m £m Cost At 1 January 2009 41.3 50.6 0.3 2.2 0.3 94.7 Exchange (3.2) (3.9) — (0.2) 0.1 (7.2) Additions 0.2 4.7 0.2 0.1 — 5.2 Transfer — — (0.2) (0.1) — (0.3) Transfer from assets held for sale — 4.9 — — — 4.9 Disposal — (0.3) (0.1) — (0.1) (0.5) At 31 December 2009 38.3 56.0 0.2 2.0 0.3 96.8 Exchange 1.2 4.9 — 0.1 — 6.2 Additions 0.9 3.3 0.1 0.1 — 4.4 Transfer — (1.8) (0.2) — — (2.0) Transfer to assets held for sale (7.9) (0.2) — — — (8.1) Disposal — (0.1) — — (0.1) (0.2) at 31 December 2010 32.5 62.1 0.1 2.2 0.2 97.1 Depreciation At 1 January 2009 21.4 44.8 0.1 1.9 0.2 68.4 Exchange (1.4) (3.4) — (0.1) — (4.9) Depreciation charge 1.5 1.2 — 0.1 0.1 2.9 Write off — — (0.1) — — (0.1) Transfer from assets held for sale — 1.2 — — — 1.2 Disposal — (0.3) — (0.1) (0.1) (0.5) At 31 December 2009 21.5 43.5 — 1.8 0.2 67.0 Exchange — 3.5 — 0.1 — 3.6 Depreciation charge 1.5 1.0 — 0.1 — 2.6 Disposals 0.1 (0.1) — — (0.1) (0.1) Transfer — (1.8) — — — (1.8) Transfer to assets held for sale (3.9) — — — — (3.9) at 31 December 2010 19.2 46.2 — 2.0 0.1 67.5 net book value At 31 December 2009 16.8 12.5 0.2 0.2 0.1 29.8 at 31 December 2010 13.3 15.9 0.1 0.2 0.1 29.6
Included in land and buildings is an amount of £5.6 million (2009: £6.6 million) in respect of land which is not depreciated.
Included in laboratory equipment and machines is £12.5 million (2009: £8.0 million) of assets related to the Flutiform™ supply chain.
At 31 December 2010, the carrying amount of the Group’s motor vehicles includes an amount of £Nil (2009: £0.1 million) in respect of assets held under finance leases and hire purchase arrangements.
Stock Code: SKP 89
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18 Property, plant and equipment continued At 31 December 2010, the net book value of the property, plant and equipment pledged as collateral in the framework of various borrowing agreements (disclosed in Note 25: Borrowings) was £12.0 million (2009: £10.7 million). The net book value of property, plant and equipment did not include any material assets which were temporarily idle as at the balance sheet date.
Assets Office Land and under and other buildings construction equipment Total Company £m £m £m £m Cost At 1 January and 31 December 2009 0.1 — 0.2 0.3 Additions — 0.1 — 0.1 At 31 December 2010 0.1 0.1 0.2 0.4 Depreciation At 1 January and 31 December 2009 — — 0.2 0.2 Depreciation charge 0.1 — — 0.1 at 31 December 2010 0.1 — 0.2 0.3 net book value At 31 December 2009 0.1 — — 0.1 at 31 December 2010 — 0.1 — 0.1
19 Shares in and loans to Group undertakings Shares in Loans to Group Group undertakings undertakings Total Company £m £m £m At 1 January 2009 132.5 108.0 240.5 Additions — 0.5 0.5 Exchange — (0.3) (0.3) Impairment (2.2) — (2.2) Reversal of impairment — 6.3 6.3 Share-based payment charge related to subsidiaries 0.2 — 0.2 At 31 December 2009 130.5 114.5 245.0 Exchange — (0.3) (0.3) Payments — (0.9) (0.9) Share-based payment charge related to subsidiaries 0.1 — 0.1 at 31 December 2010 130.6 113.3 243.9
Principal subsidiaries are detailed in Note 36: Principal subsidiaries.
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20 Inventories As at As at 31 December 31 December 2010 2009 Group £m £m Raw materials and consumables 0.6 0.9 Work in progress 0.2 0.2 Finished goods 0.5 0.4 1.3 1.5 Less inventory provision — (0.2) Total inventory 1.3 1.3
21 trade and other receivables Group Group Company Company As at As at As at As at 31 December 31 December 31 December 31 December 2010 2009 2010 2009 £m £m £m £m Trade receivables 3.0 7.0 — — Amounts owed by subsidiary undertakings — — 0.3 0.4 Other receivables 1.5 1.5 0.1 0.1 Prepayments and accrued income 7.0 8.0 0.1 0.3 Total trade and other receivables 11.5 16.5 0.5 0.8
Trade receivables are non-interest bearing and are generally on up to 30 day terms.
Movements in the provision against receivables were as follows: As at As at 31 December 31 December 2010 2009 Group £m £m Balance at beginning of year — 0.1 Unused amounts reversed — (0.1) Balance at end of year — —
As at 31 December 2010, the aged analysis of trade receivables was as follows:
Neither past due nor Past due but not impaired total impaired <30 days 30–60 days 60–90 days 90–120 days >120 days Group £m £m £m £m £m £m £m 2010 3.0 2.4 0.4 0.2 — — — 2009 7.0 3.1 2.8 0.8 — — 0.3
Stock Code: SKP 91
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22 Cash and cash equivalents Group Group Company Company As at As at As at As at 31 December 31 December 31 December 31 December 2010 2009 2010 2009 £m £m £m £m Cash at bank and in hand 29.0 27.0 9.3 16.4 Total cash and cash equivalents 29.0 27.0 9.3 16.4
Cash at bank earns interest at floating rates based on the daily bank deposit rates.
23 non-current assets classified as held for sale As at 31 December 2010 the Group had land and buildings with a net book value of £4.2 million (2009: Nil) classified as held for sale. This represents a building and associated land in Switzerland which was put up for sale in January 2011, following a review of the space requirements in Switzerland. As disclosed in Note 25: Borrowings, the mortgage on this building (£2.8 million) will be fully repayable on its sale.
24 trade and other payables (Restated) Group Group Company Company As at As at As at As at 31 December 31 December 31 December 31 December 2010 2009 2010 2009 £m £m £m £m Trade payables 3.2 2.2 0.1 0.2 Amounts owed to subsidiary undertakings — — 59.3 59.1 Witholding and company taxes 0.3 0.5 0.3 0.5 Other taxation and social security costs 0.4 1.4 — 0.1 Accruals 12.4 8.1 0.8 1.5 Total trade and other payables 16.3 12.2 60.5 61.4
Trade payables are non-interest bearing and are generally settled in accordance with the terms and conditions agreed with suppliers, subject to satisfactory performance of the contracts.
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25 Borrowings As at As at 31 December 31 December Interest rate Currency of 2010 2009 % denomination £m £m Current Bank overdraft 6.5 Swiss Franc 0.1 — Bank borrowings 6.5 Swiss Franc 1.3 1.2 Property mortgage 3.9 Swiss Franc 8.6 0.4 Paul Capital finance 11.2 U.S. Dollar 7.8 6.3 CRC finance EURIBOR + 5.85/10.85 Euro 3.4 2.7 CRC finance LIBOR + 5.85 U.S. Dollar 6.0 2.8 Finance lease liabilities 5.5 Swiss Franc 0.1 — Total current borrowings 27.3 13.4 Non-current Convertible 6% bonds due May 2024 9.6 Sterling 46.8 46.2 Convertible 8% bonds due June 2025 14.2 Sterling 12.5 12.3 Total convertible bonds 59.3 58.5 Property mortgage 3.9 Swiss Franc — 7.6 Paul Capital finance 11.2 U.S. Dollar 14.2 18.4 CRC finance EURIBOR + 5.85/10.85 Euro 14.9 19.3 CRC finance LIBOR + 5.85 U.S. Dollar 11.6 16.8 Finance lease liabilities 5.5 Swiss Franc — 0.1 Total other non-current borrowings 40.7 62.2 Total non-current borrowings 100.0 120.7 Total borrowings 127.3 134.1
Bank overdraft and borrowings At 31 December 2010 bank borrowings consist of a loan of £1.3 million (CHF 2.0 million) (2009: £1.2 million (CHF 2.0 million)) with the Basellandschaftliche Kantonalbank. This loan can be terminated on six weeks’ notice by either party and bears interest at 6.5 per cent. per annum. This loan is secured on the assets of SkyePharma AG.
Convertible bonds The Group holds £63.0 million (2009: £63.0 million) 6 per cent. convertible bonds due 2024, which are convertible into Ordinary Shares at a conversion price of £3.71. The bonds may be called for repayment in November 2013, November 2015, November 2017 and November 2020.
The Group also holds £20.0 million (2009: £20.0 million) 8 per cent. convertible bonds due 2025 which are convertible into Ordinary Shares at a conversion price of £3.82. The bonds may be called for repayment in December 2014, December 2016, December 2018 and December 2021.
In the year ended 31 December 2010 no bonds were converted into Ordinary Shares (2009: 6,587 of the 6 per cent. convertible bonds with a principal value of £6.6 million were converted into Ordinary Shares).
The bonds are included partly in non-current liabilities (2010: £59.3 million; 2009: £58.5 million) and partly in share premium (2010 and 2009: £28.5 million). The total face value of convertible bonds outstanding at 31 December 2010 is £83.0 million (2009: £83.0 million).
Stock Code: SKP 93
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NOTES TO THE ACCOUNTS continued
25 Borrowings continued Property mortgages At 31 December 2010, the Group had two mortgage facilities with the Basellandschaftliche Kantonalbank totalling £8.6 million (CHF 12.5 million) (2009: £8.0 million (CHF 13.1 million)) both of which are secured on the assets of SkyePharma AG. Both bear interest at 3.875 per cent. per annum and were fully repayable in February 2011 unless continued by mutual agreement.
In February 2011 the Group renewed both its mortgage agreements with the Basellandschaftliche Kantonalbank. The first is for £2.8 million (CHF 4.2 million), which bears interest at a variable rate (currently 3.875 per cent. per annum) and is repayable with three months’ notice from either party. The second is for £5.8 million (CHF 8.3 million), which bears interest at 3.6 per cent. per annum and is fully repayable in 2016.
One of the sites in Switzerland has now been vacated and is up for sale. This has a net book value of £4.2 million and a mortgage of £2.8 million which will be repayable out of any sale proceeds.
Paul Capital finance On 23 March 2007, SkyePharma PLC and its subsidiary, Jagotec AG (together “Jagotec”) entered into an agreement with Paul Capital and a subsidiary (together “PCRF”). Pursuant to this agreement, PCRF assigned its existing interests in the royalties and certain milestones from Solaraze®, Xatral® OD, Triglide®, Pulmicort® HFA-MDI, Foradil® Certihaler® and Paxil CR™ (“PCRF Products”) in exchange for a fixed amortisable senior note (the “Note”) in the amount of U.S.$92.5 million issued by Jagotec. This would be increased to U.S.$105 million on or after 31 March 2011 if worldwide sales of Depodur™ reached certain thresholds prior to 31 December 2015. The Group does not believe that this threshold will be reached. The Note is repayable on a quarterly basis in accordance with an amortisation schedule beginning on 31 March 2007 through to 31 December 2015. The outstanding amount under the Note at 31 December 2010 is U.S.$46.5 million (£30.2 million) (2009: U.S.$59.8 million (£38.7 million)), excluding the additional U.S.$12.5 million.
The Injectable Business was sold on the basis that it retained its obligations to PCRF to share royalties received in respect of DepoCyt® and Depodur™ and to the extent that payments are made in satisfaction of such obligations, the liability of Jagotec under the Note is reduced accordingly.
The Note must be prepaid in certain circumstances, including 50 per cent. of any milestone payments for any Flutiform™ licence agreements or 50 per cent. of any signing fees with respect to Flutiform™ license agreements entered into with regard to any unlicensed territory, in each case received after 1 January 2009, in an amount up to U.S.$10 million. As at 31 December 2010 a total of U.S.$1.0 million has been repaid under this clause. Jagotec must also prepay the Note in an amount equal to 50 per cent. of the proceeds received upon the disposal of any of the intellectual property related to the PCRF Products. Jagotec has the option to prepay the Note by providing 10 days’ prior written notice. Such prepayment amount will be calculated at a discount to the remaining scheduled amortisation payments due more than 12 months after the date of prepayment at a rate of U.S. Dollar LIBOR plus 75 basis points. Following any such prepayment the minimum amortisation schedule is amended.
The terms of the Note contain representations and warranties and covenants customary for agreements of this type. There is also a covenant (negative pledge) not to grant security over Flutiform™ intellectual property, and the requirement for prior consent from PCRF for certain transactions that could affect PCRF’s security and risk. The Note is secured by milestone payments and royalty receipts receivable by Jagotec under licence agreements related to the PCRF Products.
In connection with the Note, Jagotec granted PCRF a royalty-free, fully paid-up and worldwide, license or sub-license, as applicable, subject to third party rights, limited to the right to grant sub-licenses (through multiple tiers) under the intellectual property in the PCRF Products, which becomes operable following an event of default and in certain other circumstances, pursuant to a Licence Agreement dated as of 23 March 2007.
The liability was initially recorded at fair value, calculated by discounting the expected cash flows based on management’s estimation of a fair market rate at inception. Subsequently the carrying value of the Note is at amortised cost, calculated as the net present value of the expected future minimum payments (net of the amounts expected to be paid by the Injectable Business) discounted at 11.2 per cent. (the effective comparable interest rate at inception).
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25 Borrowings continued At 31 December 2010, the carrying value of the Note was £22.0 million (2009: £24.7 million).
CRC Finance On 22 December 2006, SkyePharma PLC and various of its subsidiaries entered into an agreement with a specialised lending entity (“CRC”), advised by Christofferson, Rob & Company LLC, for a 10 year secured amortising loan facility. This facility was amended on 23 March 2007, and has been fully drawn down.
Key terms of the CRC finance are as follows:
(i) the total loans of U.S.$35 million and ¤26.5 million are repayable over 10 years based on a minimum amortisation schedule. The schedule was based on expected receipts from milestones and royalties in respect of Coruno®, Lodotra® and Requip® Once-a-day (the “CRC Products”). In the event that the cumulative milestones and royalties from the CRC Products exceed the minimum principal and interest payments, the excess will be applied to repay principal early without penalty;
(ii) interest is charged on a quarterly basis on the U.S. Dollar facility at the three month U.S. Dollar LIBOR rate plus a 5.85 per cent. margin and on the euro facility at the three month EURIBOR rate plus a 10.85 per cent. margin on the first ¤7.5 million of the euro facility and a 5.85 per cent. margin on the balance;
(iii) the loan facility was secured by a comprehensive security package, including pledges of shares of certain key subsidiaries, charges over certain bank accounts, charges over certain intra-Group debts, a floating charge over the assets of SkyePharma PLC and charges over or, subject to third party consents being received, assignments of receivables in respect of the CRC Products, Sular® and Zyflo CR®;
(iv) there is a comprehensive covenant package, including a negative pledge, so further security over the Group’s assets may not be granted, nor may certain other transactions that could affect CRC’s security and risk be entered into, without prior consent from CRC;
(v) the loan must be prepaid in certain circumstances, including 50 per cent. of any milestone payments for any Flutiform™ license agreements, or 50 per cent. of any signing fees with respect to Flutiform™ license agreements entered into with regard to any unlicensed territory, in each case received after 1 January 2009 in an amount up to U.S.$ 10.0 million. Such prepayments comprise a capital element and an amount based on a pre-agreed schedule to compensate CRC for loss of future interest. Following any such prepayment the minimum amortisation schedule is amended; and
(vi) CRC was granted a royalty-free, fully-paid up and worldwide license or sub-license, as applicable, subject to third party rights, in favour of CRC limited to the right to grant sub-licenses (through multiple tiers) under the intellectual property in the CRC Products, which becomes operable following an event of default and certain other circumstances.
Interest on the U.S.$ portion of the CRC finance is charged at three month U.S. LIBOR + 5.85 per cent. As at 31 December 2010, U.S. LIBOR was 0.303 per cent. (2009: 0.2825 per cent.).
Interest on the first ¤7.5 million of the euro portion of the CRC finance is charged at 3 month EURIBOR + 10.85 per cent. Interest on the remainder of the facility is charged at 3 month EURIBOR + 5.85 per cent. As at 31 December 2010, EURIBOR was 1.01 per cent. (2009: 0.739 per cent.).
As at 31 December 2010 a total of U.S.$1.0 million out of the total of U.S.$10 million has been repaid under clause (v) of the agreement.
The balance as at 31 December 2010 is £35.9 million (net of £0.7 million of costs) (2009: £42.4 million net of £0.8 million of costs).
Stock Code: SKP 95
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25 Borrowings continued Finance lease liabilities Obligations under hire purchase and finance leases are secured upon the assets to which they relate and as at 31 December 2010 total £0.1 million (2009: £0.1 million).
Maturity analysis of financial liabilities The following tables detail the Group’s remaining contractual maturity for its borrowings and the related interest payments. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay and includes the prepayments forecast to be due to Paul Capital and CRC from Flutiform™ milestones. The table includes cash flows for both interest, based on rates applicable at 31 December 2010, and principal amounts.
As at 31 December 2010 Over 5 0 to 1 1 to 2 2 to 3 3 to 4 4 to 5 years years years years years years from 2011 2012 2013 2015 2015 2016 Total £m £m £m £m £m £m £m Convertible bonds 5.4 5.4 68.4 21.6 — — 100.8 Property mortgage 8.6 — — — — — 8.6 Paul Capital finance 11.1 10.4 7.0 1.7 — — 30.2 CRC finance 11.9 10.8 6.3 5.7 5.3 4.8 44.8 Finance lease liabilities 0.1 — — — — — 0.1 Bank overdraft and borrowings 1.5 — — — — — 1.5 Total borrowings 38.6 26.6 81.7 29.0 5.3 4.8 186.0
As at 31 December 2009 Over 5 0 to 1 1 to 2 2 to 3 3 to 4 4 to 5 years years years years years years from 2010 2011 2012 2013 2014 2015 Total £m £m £m £m £m £m £m Convertible bonds 5.4 5.4 5.4 68.4 21.6 — 106.2 Property mortgage 0.7 7.6 — — — — 8.3 Paul Capital finance 8.5 11.5 8.7 7.1 1.7 — 37.5 CRC finance 8.6 14.3 7.6 6.6 6.0 10.3 53.4 Finance lease liabilities — 0.1 — — — — 0.1 Bank overdraft and borrowings 1.3 — — — — — 1.3 Total borrowings 24.5 38.9 21.7 82.1 29.3 10.3 206.8
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25 Borrowings continued The amounts for convertible bonds are included in the maturity analysis above are based on the earliest put dates. As described above these were 2013 and 2014 for the 2024 bonds and 2025 bonds respectively subsequent to the modification to the terms on the bonds in September 2008. Interest is calculated at 6 per cent. for the 2024 bond and 8 per cent. for the 2025 bond.
The Paul Capital debt is included in the analysis above over a repayment period of 15 years, based on the amortisation schedule agreed on signing modified to include additional payments of U.S.$10 million due on receipt of the Flutiform™ milestones received after 1 January 2009. This excludes additional payments to be made if sales of DepoDur™ reach certain thresholds and any reductions for future sales-related payments by the Injectable Business for DepoCyt® and DepoDur™.
The CRC liability is included in the analysis over a repayment period of 10 years. The maturity has been based on the minimum amortisation schedule agreed on signing, modified to include additional payments totalling U.S.$10 million due on receipt of Flutiform™ milestones received after 1 January 2009.
26 Provisions As at As at 31 December 31 December 2010 2009 Group Notes £m £m Pension (a) 4.5 2.9 Other (b) 0.6 0.8 Total 5.1 3.7
As at As at 31 December 31 December 2010 2009 (a) Pension £m £m Beginning of the year 2.9 3.0 Exchange 0.3 (0.1) Utilised — (0.4) Actuarial losses/(gains) 1.1 (0.2) Charge for the year 0.2 0.6 End of year 4.5 2.9
£4.5 million (2009: £2.9 million) of the provision at 31 December 2010 relates to the Group’s retirement commitments under its pension scheme in respect of its employees in Switzerland and the Group’s leaving indemnity commitments in respect of its employees in France under French law, as disclosed in Note 29: Retirement benefit obligations. As at As at 31 December 31 December 2010 2009 (b) Other £m £m Beginning of the year 0.8 0.7 Charge for the year — 0.1 Released (0.2) — End of year 0.6 0.8
The other provisions of £0.6 million (2009: £0.8 million) primarily consists of provisions for future legal actions relating to potential intellectual property infringements and remaining restructuring costs.
Stock Code: SKP 97
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NOTES TO THE ACCOUNTS continued
27 Long-term creditors (Restated) As at As at 31 December 31 December 2010 2009 Group £m £m Long-term creditor 3.0 1.5 total long-term creditors 3.0 1.5
The long-term creditor of £3.0 million (2009 restated: £1.5 million) relates to an amount payable to a former partner which has funded capital expenditure related to the Flutiform™ supply chain. No interest is payable on the balance and the funding is repayable in March 2013, or earlier, if the supply chain is outsourced.
28 financial instruments (a) Categories and fair value of financial instruments The Group’s financial assets are all classed as loans and receivables at 31 December 2010 and 2009. The Group’s financial liabilities are classed as measured at amortised cost at 31 December 2010 and 2009.
Except as detailed below the carrying value of financial assets and liabilities approximate to their fair value:
As at 31 December 2010 As at 31 December 2009 Carrying fair Carrying Fair value value value value £m £m £m £m Convertible bonds 59.3 18.7 58.5 18.3 CRC liability 35.9 28.9 41.6 32.8 Paul Capital liability 22.0 20.1 24.7 21.9
The fair values are determined as follows:
The fair value for the Convertible Bonds is based on quoted market prices at 31 December 2010. The quoted market price used for financial assets held by the Group is the current bid price.
The fair value of the CRC funding liability is calculated using a discounted cash flow forecast. The interest rate used in the calculation is an estimate of the prevailing rate payable on an instrument with substantially the same terms and conditions at 31 December 2010.
The fair value of the Paul Capital funding liability is calculated using a discounted cash flow forecast. The interest rate used in the calculation is an estimate of the prevailing rate payable on an instrument with substantially the same terms and conditions at 31 December 2010.
(b) Capital management The Group seeks to manage its capital to ensure that entities in the Group are able to continue as going concerns whilst maximising the return to stakeholders through the optimisation of the balance between intra-Group debt and equity. The capital structure of the Group consists of debt, as disclosed in Note 25: Borrowings, cash and cash equivalents, convertible bonds (shown partly in borrowings and partly in equity) and equity comprising issued share capital, reserves and retained earnings.
Certain companies within the Group have capital maintenance obligations under local law and under their financing agreements, and these are reviewed for compliance on a regular basis. All requirements have been complied with in the current year.
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28 financial instruments continued (c) Financial risk management The primary risks the Group is exposed to through its use of financial instruments are liquidity risk, market risk (foreign currency risk and interest rate risk) and credit risk.
Group treasury matters are controlled centrally under a treasury policy approved by the Board. Board authorisation is required for all significant agreements that may affect the Group risk structure. It is the Group’s policy that no speculative trading in financial instruments shall be undertaken.
(d) Liquidity risk Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due. The Group’s policy is to maintain continuity of funding through a mixture of long-term debt and bank loans, raised to cover specific requirements, and through the issue of shares to collaborative partners, where necessary, to finance development contracts. Short-term flexibility is provided through the use of overdrafts.
Responsibility for liquidity risk management ultimately lies with the Board. The Group aims to ensure that its liabilities will be covered by expected cash balances and cash inflows. The Group manages liquidity risk by maintaining cash balances on short term deposits to enable flexibility, and ongoing monitoring of cash flow projections. Management reviews cash flow projections for the next 12 months on a monthly basis. Cash flow projections for a 24 month period are formally reviewed at least three times a year — during the annual budget process and when preparing the annual and half year accounts.
The Group has at its disposal undrawn facilities of £0.7 million to further reduce liquidity risk.
(e) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates or interest rates, will affect the Group’s income or value of its investments:
Foreign currency risk Almost all of the Group’s operations are based in Continental Europe and sales are primarily in the U.S. and Europe giving rise to exposures to changes in foreign exchange rates notably the Swiss Franc, Euro and U.S. Dollar.
To minimise the impact of any fluctuations, the Group’s policy has historically been to maintain natural hedges by relating the structure of borrowings to the trading cash flows that generate them. Where subsidiaries are funded centrally, this is achieved by the use of long-term loans, on which exchange translation differences are taken to reserves. Where it has not been possible to use natural hedges, currency options and forward currency contracts are used to cover material and reasonably predictable exposures. No options or forward contracts have been used during 2010 or 2009. The facility with CRC is denominated approximately 50 per cent. in U.S.$ and 50 per cent. in Euro, reflecting an approximation to the currency of underlying sales giving rise to income, and is designed to provide a reasonable long-term hedge against currency fluctuations.
In addition to the exposure to the U.S. Dollar, Euro and Swiss Franc, the Group is exposed to cross currency fluctuations, as subsidiaries’ operating costs are often in currencies other than their functional currency.
The following table details the Group’s profit before tax sensitivity to a 10 per cent. increase and decrease in Sterling against the relevant foreign currencies, with all other variables held constant. 10 per cent. is an illustration — a greater, or smaller change would have a pro-rata effect on the income statement. It includes foreign currency denominated monetary items and adjusts their translation at the period end for a 10 per cent. change in foreign currency rates. A positive number indicates a strengthening of the relevant currency. For a weakening there would be an equal and opposite impact on the profit, and the balances below would be reversed. The movements would have the same effect on the Group’s equity.
Stock Code: SKP 99
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NOTES TO THE ACCOUNTS continued
28 financial instruments continued £m £/$ £/¤ £/CHF CHF/$ CHF/¤ 2010 — 0.1 0.4 (3.3) (1.4) 2009 0.4 — (0.1) (4.0) (1.7)
Interest rate risk The Group borrows at fixed and floating rates of interest as deemed appropriate for its circumstances. As some borrowings and all deposits are at floating rates the Group is exposed to interest rate risk. Although there are no current contracts the Group does, from time to time, use interest rate swaps to achieve the desired interest rate profile. At 31 December 2010 approximately 76 per cent. of the Group borrowings are at a fixed rate of interest (2009: 74 per cent).
The Group’s exposure to interest rates on financial assets and liabilities is detailed in Note 25: Borrowings.
The sensitivity analysis has been prepared to show the effect of a 1 per cent. increase in market interest rates on interest income and expense. For floating rate liabilities the analysis is prepared assuming the amount of liability was outstanding at the balance sheet date. 1 per cent. is an illustration — a greater, or smaller change would have a pro-rata effect on the income statement. A 1 per cent. decrease would have an equal and opposite effect on the change in profit before tax.
2010 2009 Increase/ Increase/ (decrease) (decrease) in profit in profit before tax before tax £m £m U.S. Dollar — LIBOR (0.1) (0.2) Euro — EURIBOR (0.1) (0.2)
(f) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group is exposed to credit risks primarily from its operating activities, including trade receivables and from its investing activities, including bank deposits.
The creditworthiness of customers is assessed by reference to publicly available information, or information provided by those customers. In view of the nature of the business, most customers are either large, profitable, pharmaceutical companies or relatively small, in some cases, special purpose vehicles, set up to develop defined products. Where such companies are not yet profitable the creditworthiness depends on their liquid resources and availability of future finance. In the present market environment such finance may not be as readily available as it has been in previous years, but the Directors do not believe that this is a concern for current trade receivables.
Trade receivables are spread across a number of customers, and the balances are monitored on an ongoing and regular basis with a view to minimising the exposure to bad debts. The maximum exposure is the carrying amount, as disclosed in Note 21: Trade and other receivables.
With respect to credit risk arising from other financial assets in the Group, the maximum exposure is equal to the carrying value of the instrument. Funds are not invested in institutions or funds rated below A to minimise any risks. Significant investments require Board approval before being authorised. The policy is to invest surplus funds with financial institutions or funds which have a high credit rating, and takes into account government support for or ownership of such institutions.
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29 Retirement benefit obligations The liabilities in the Group balance sheet in respect of pensions and other retirement obligations are as follows: As at As at 31 December 31 December 2010 2009 £m £m Balance sheet obligations for: Retirement indemnity 0.8 0.7 Swiss pension benefits 3.7 2.2 Total obligation 4.5 2.9
Swiss pension plan The Group operates a defined contribution scheme in respect of its employees in Switzerland. Both employers and employees contribute to the scheme and the pension at retirement age is set at 6.8 per cent. of the retiree’s pension fund at that time. As explained in Note 2(x): Employee benefits, the Group shares with employees the risk that the future contribution rates may need to increase if investment returns, over a period of time, are less than the amounts set by the government each year, or if the liabilities outweigh the value of assets due to experience factors.
As some of these risks match the criteria for accounting for the scheme as a defined benefit scheme, the Swiss scheme is accounted for as such in accordance with IAS 19. The liability included in the balance sheet in respect of the Swiss pension plan is, therefore, the present value of the defined benefit obligations less the fair value of plan assets, together with adjustments for unrecognised actuarial gains and losses. Service costs are included in staff costs and charged to the income statement over the remaining average expected service lives of employees and are set at a level designed to give a charge through the income statement which is a level percentage of salaries.
The amounts recognised in the balance sheet are as follows: As at As at 31 December 31 December 2010 2009 £m £m Present value of funded obligations 15.1 9.7 Fair value of plan assets (11.4) (7.5) Balance sheet liability 3.7 2.2
The movement in the defined benefit obligation over the year is as follows: As at As at 31 December 31 December 2010 2009 £m £m Beginning of the year 9.7 10.7 Exchange 1.7 (0.5) Current service cost 1.0 1.2 Past service cost 0.1 0.6 Benefits paid and withdrawals 1.4 (2.1) Interest on pension scheme liabilities 0.4 0.3 Actuarial losses/(gains) recognised in equity 0.8 (0.2) Curtailment — (0.3) End of the year 15.1 9.7
Stock Code: SKP 101
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NOTES TO THE ACCOUNTS continued
29 Retirement benefit obligations continued The movement in the fair value of the plan assets over the year is as follows: As at As at 31 December 31 December 2010 2009 £m £m Beginning of the year 7.5 8.8 Exchange 1.3 (0.4) Benefits paid and withdrawals 1.4 (2.1) Actuarial losses recognised in equity (0.2) (0.1) Employer contributions 0.6 0.6 Employee contributions 0.4 0.4 Expected return on plan assets 0.4 0.3 End of the year 11.4 7.5
Plan assets comprise: As at As at 31 December 31 December 2010 2009 £m £m Equity 3.6 2.3 Other 7.8 5.2 Total plan assets 11.4 7.5
The amounts recognised in the income statement are as follows: As at As at 31 December 31 December 2010 2009 £m £m Current service costs 1.0 1.2 Past service cost 0.1 0.6 Interest cost 0.4 0.3 Expected return on assets (0.4) (0.3) Curtailment — (0.3) Employee contributions (0.4) (0.4) Total included in staff costs 0.7 1.1
The 2010 past service cost was £0.1 million (2009: £0.6 million). The 2009 past service cost was higher as a non-cash charge arose from surplus assets being allocated to employees as a result of the change in pension providers during 2007.
Amounts recognised in the statement of comprehensive income are as follows: As at As at 31 December 31 December 2010 2009 £m £m Actuarial (losses)/gains recognised in equity (1.1) 0.2 Cumulative actuarial losses recognised in equity (2.2) (1.1)
The actual return on plan assets was £0.2 million (2009: £0.2 million).
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29 Retirement benefit obligations continued At 31 December 2010 and 2009 actuarial valuations were performed by professionally qualified actuaries on the present value of the accrued liabilities calculated under the projected unit credit method. The principal assumptions made by the actuaries were:
2010 2009 % per % per annum annum Inflation rate 1.0 1.0 Rate of increase in salaries 2.0 2.0 Discount rate 2.75 3.3 Future pension increases 0.2 0.2 Expected return on plan assets 3.5 4.5
Assumptions regarding future mortality experience are set based on advice in accordance with published statistics and experience in Switzerland.
2010 2009 Life expectancy at assumed retirement age years years Male 17.9 17.9 Female 21.9 21.9
Expected contributions to post employment benefit plans for the year ending 31 December 2011 are £1.2 million (2009: £0.9 million).
Amounts for the current and previous four periods are as follows: 2010 2009 2008 2007 2006 £m £m £m £m £m Defined benefit obligation (15.1) (9.7) (10.7) (7.3) (6.6) Plan assets 11.4 7.5 8.8 6.1 5.6 Plan deficit (3.7) (2.2) (1.9) (1.2) (1.0) Experience adjustments on plan liabilities (0.2) 0.3 (0.2) — (0.1) Experience adjustments on plan assets (0.2) (0.1) (0.2) (0.1) 0.2
Retirement indemnity The Group provides for a statutory retirement indemnity in respect of its employees in France, as described in Note 2(x): Employee benefits. The liability as at 31 December 2010 is £0.8 million (2009: £0.7 million).
Defined contribution plans The Group operates various defined contribution plans for its employees in the UK. The Group’s contributions to these plans are charged in the income statement in the period to which they relate, and the assets are held in separate trustee administered funds. The income statements charge related to the defined contribution plans is disclosed in Note 10: Staff Costs.
Stock Code: SKP 103
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NOTES TO THE ACCOUNTS continued
30 Share capital The Company’s authorised share capital is as follows: Authorised shares As at As at 31 December 31 December 2010 2009 Issued and fully paid £m £m ordinary shares 140,000,000 (2009: 140,000,000) Ordinary Shares of £1.00 each 140 140 Deferred ‘B’ Shares 12,000,000 (2009: 12,000,000) Deferred ‘B’ Shares of 10p each 1.2 1.2 Deferred ‘C’ Shares 7,334,899,200 (2009: 7,334,899,200) Deferred ‘C’ Shares of 1p each 73.3 73.3
The changes in the Company’s issued share capital have been as follows:
Ordinary shares Deferred ‘B’ shares Deferred ‘C’ shares Total nominal nominal nominal nominal value value value value issued and fully paid number £m number £m number £m £m At 1 January 2009 22,167,695 22.2 12,000,000 1.2 7,334,899,200 73.3 96.7 Issue of share capital — conversion 1,775,467 1.8 — — — — 1.8 at 31 December 2009 and 31 December 2010 23,943,162 24.0 12,000,000 1.2 7,334,899,200 73.3 98.5
Issue of shares In 2009 share capital was increased by 1,775,467 by the conversion of £6.6 million of convertible bonds.
Holdings by Trustees The SkyePharma PLC Share Purchase Plan Trust supports the purchase of shares for the UK element of the SkyePharma PLC International Share Purchase Plan. The holding at 31 December 2010 was 35,642 shares (2009: 15,592 shares)
The General Employee Benefit Trust supports purchases of shares to satisfy the Company’s obligations to provide shares under any of its other share plans. The holding as at 31 December 2010 was 78,290 shares (2009: 65,492 shares).
Deferred ‘B’ Shares In July 2000, 12 million Deferred ‘B’ Shares were issued to Dr. Gonella, the vendor of Jago, under a settlement agreement that established the full and final settlement of the deferred consideration payable on the acquisition of Jago. The holders of Deferred ‘B’ Shares have no rights to participate in the profits of the Company, no voting rights and on a winding up or other return of capital only receive the nominal value of their shares if the holders of Ordinary Shares in the Company have received the sum of £100 million per Ordinary Share.
The Deferred ‘B’ shares were transferred to the Company Secretary in 2006 for no consideration for him to hold as custodian and have no value.
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30 Share capital continued Deferred ‘C’ Shares In September 2008 7,334,899,200 Deferred ‘C’ Shares were issued as part of the share capital reorganisation. The Deferred ‘C’ Shares created have no voting or dividend rights and on a return of capital, the right only to receive the amount paid up thereon after the holders of Ordinary Shares have received £1 million per Ordinary Share held. Subject to the terms of the following paragraph, the Deferred ‘C’ Shares are not transferable. The Deferred ‘C’ Shares are, therefore, of no value and all of the value that is currently attributable to the existing Ordinary Shares in issue following the implementation of the share capital reorganisation. The Company may repurchase all of the Deferred ‘C’ Shares without making any payment to the holders thereof. No application has been made for the Deferred ‘C’ Shares to be listed.
The rights of the Deferred ‘C’ Shares allow a reduction of capital which cancels the Deferred ‘C’ Shares for no consideration or a transfer of all the Deferred ‘C’ Shares to be executed by a person nominated by the Directors on behalf of the beneficial owners. The purpose of this is either to have the Deferred ‘C’ Shares owned by a single person who will assist the Company as necessary or to facilitate the purchase of such deferred shares by the Company. Accordingly the Directors may nominate the Company Secretary as the person to execute a transfer of all of the Deferred ‘C’ Shares in due course.
Potential issues of Ordinary Shares (a) Employee share schemes The Group encourages employee participation in its shares through ownership and continues to operate various incentive schemes whereby Directors and employees are able to acquire shares, and potential shares, in the Company. Further details are provided in Note 32: Share-based payments.
(b) Deferred consideration on acquisition of Krypton The deferred consideration on the acquisition of Krypton provides that a maximum of 375,000 Ordinary Shares would be issued contingent on a change of control of the Company at a share price of not less that £8.00 compounded at an annual rate of 10 per cent. (£33.54 as at 31 December 2010), or satisfaction of various conditions and hurdles which lapsed on 31 December 2003. No provision for deferred consideration has been recognised at 31 December 2010 and 2009 as there is virtually no likelihood of the share options being exercised.
(c) Convertible bonds The terms of both sets of convertible bonds allow for conversion into Ordinary Shares, subject to certain conditions being met. The 6 per cent. 2024 bonds are convertible at a price of £3.71 per share. The 8 per cent. 2025 bonds are convertible at a price of £3.82 per share. The maximum number of potential shares that could be issues is 22,218,625.
31 Reserves As permitted by section 408 of the Companies Act 2006, the income statement of the Company is not presented. The loss of the Company for the year ended 31 December 2010 was £7.8 million (2009: £5.8 million).
As set out in the Consolidated Statement of Changes in Equity the own share reserve consists of cash amounts paid to the employee benefit trust to purchase matching shares for the various share-based compensation plans.
As set out in the Consolidated Statement of Changes in Equity the other reserves totals £9.0 million (2009: £9.4 million). £9.0 million (2009: £9.0 million) is a merger reserve related to the acquisition of Krypton in 1998. The warrant reserve of £Nil (2009: £0.4 million) related to expired ‘D’ and ‘E’ warrants. £0.4 million has been recycled to retained earnings in 2010 as the warrants have expired.
Stock Code: SKP 105
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NOTES TO THE ACCOUNTS continued
32 Share-based payments The Group operates various share-based compensation plans as follows:
Option schemes Options granted to United Kingdom and Continental European employees are only exercisable between the third and tenth anniversary of the date of grant, and are subject to the Company’s Code of Business Conduct and Ethics for dealing in Shares and the Model Code. Options granted to United States employees prior to 2001 vest at 25 per cent. per annum from the date of grant and there were no performance criteria. UK and European options granted prior to 2001 may only be exercised if the growth in the Company’s share price over a consecutive three year period exceeds the growth over the same period in the FTSE All Share Index. Employees with options that are within their exercise period are now able to exercise those options within any one-year period from the date the performance condition is satisfied.
Following changes to the option plans approved at the Annual General meeting in June 2001, options granted to Directors and senior employees since that date are subject to performance conditions linked to the total shareholder return of a comparator Group of companies, per cent. per annum with no performance criteria, and other Continental European employees who are not Directors and senior employees can exercise their options after three years and are not subject to performance conditions. The Group’s option plans are detailed further in the Remuneration Report.
The following table summarises the activity in share options for the year ended 31 December 2010:
Share options Option price Beginning of the year 44,367 £23.75–£41.76 Cancelled or expired 3,614 £41.76 End of the year 40,753 £23.75–£41.22 Exercisable 40,753 £23.75–£41.22
The weighted average exercise price as at 31 December 2010 was £34.65 (2009: £35.23).
The market value of an Ordinary Share as at 31 December 2010 was 31.5 pence. The market value of Ordinary Shares during 2010 ranged from the lowest closing mid-price of 27 pence to the highest closing mid-price of 101 pence per share. No options were granted during 2010 or 2009.
As at 31 December 2010 the following Ordinary Shares were under option to employees or former employees of the Group:
Option price number of for each options over Ordinary Ordinary Share Shares normal expiry date of £1.00 of £1.00 12 June 2011 £41.22 10,961 31 October 2011 £28.44 2,672 12 April 2012 £36.96 17,818 25 September 2012 £26.42 1,783 7 April 2013 £23.75 7,519 end of the year 40,753
The weighted remaining contractual life as at 31 December 2010 was 1.2 years (2009: 2.12 years).
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32 Share-based payments continued As stated above, no options were granted to employees in 2010 or 2009. For those options granted in prior years which impact the income statement, fair values were determined using an option pricing model based on Black–Scholes but adjusted to model the particular features of the options. The fair value of these options is consistent with the values previously disclosed for SEC filing purposes.
Long-term Incentive Plan (“LTIP”) Under the 2007 LTIP rules, Directors and senior employees receive conditional rights to acquire Ordinary Shares in the Company, which, subject to performance conditions, will vest and become exercisable in the case of nil cost options or be released in the case of conditional shares at the end of a three year performance period and the achievement of a share price target. For grants made in 2007 between 10 per cent. and 100 per cent. of the award will vest at the end of the performance period if the share price target of £18.64 –£29.29 or greater is achieved, the exact percentage to be calculated on a straight line basis between share prices.
For grants made in 2009, under the 2007 plan, between 10 per cent. and 100 per cent. of the award will vest at the end of the performance period if the share price target of £2.40–£5.80 or greater is achieved, the exact percentage to be calculated on a straight line basis between share prices. Further information on the awards and performance conditions is provided in the Remuneration Report.
LTIP awards Beginning of the year 707,219 Forfeited (204,809) Lapsed (312,545) End of the year 189,865
Super bonus scheme In addition to the above plans, a one-off share-based arrangement was put in place for the Executive Directors in 2010. Under the provisions of this arrangement the Executive Directors would be granted rights to acquire a set number of Ordinary Shares if a pre-determined share price was met at 31 December 2010, otherwise the shares would not be granted. Further information is provided in the Remuneration Report.
Super bonus Beginning of the year — Granted 260,000 Forfeited (116,667) Lapsed (143,333) End of the year —
For the purposes of IFRS 2 the fair value of the shares is determined as the market value of the shares at the date of grant. In determining the charge to the income statement, the Company has assumed that the number of share awards that will ultimately vest is not reduced.
Stock Code: SKP 107
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NOTES TO THE ACCOUNTS continued
32 Share-based payments continued One-off award A one-off share-based award was put in place for the new Chief Executive Officer on his recruitment. Under the provisions he was granted conditional rights to acquire Ordinary Shares at the beginning of a two year holding period. There are no performance conditions attached to these shares. Further information is provided in the Remuneration Report.
One-off award Beginning of the year — Granted 169,841 End of the year 169,841
For the purposes of IFRS 2 the fair value of the shares is determined as the market value of the shares at the date of grant. In determining the charge to the income statement, the Company has assumed that the number of share awards that will ultimately vest is not reduced.
International Share Purchase Plan (“ISPP”) All employees are eligible to participate in the ISPP whereby employees buy shares in the Company. These shares are called Partnership Shares and are held in trust on behalf of the employee. For every Partnership Share bought by the employee the Company will give the employee one share free of charge (Matching Shares). The employees have to take their shares out of the plan on leaving the Company and will not be entitled to the Matching Shares if they leave within three years of buying the Partnership Shares. In addition, the Company can also award employees rights to acquire up to a maximum of £3,000 of shares (Free Shares). There are no vesting conditions attaching to the Free Shares other than being continuously employed by a Group company on the third anniversary of the date of grant. No Free Shares were awarded during 2010 or 2009.
ISPP Matching shares Beginning of the year (restated) 28,564 Granted 30,294 Forfeited (1,482) Released (1,561) End of the year 55,815
For the purposes of IFRS 2 the fair value of these Matching Shares and Free Shares is determined as the market value of the shares at the date of the grant. In determining the charge to the income statement the Company has assumed that the number of shares that will ultimately vest is not reduced.
The total expense relating to share-based payments, which are all equity settled transactions, is disclosed in Note 10: Staff costs.
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33 Commitments Future minimum lease payments under operating non-cancellable operating leases are as follows:
Group Group Company Company As at As at As at As at 31 December 31 December 31 December 31 December 2010 2009 2010 2009 £m £m £m £m Operating leases on land and buildings: Within one year 0.1 0.4 0.1 0.4 In two to five years inclusive 0.5 — 0.5 — Total commitments 0.6 0.4 0.6 0.4
In addition the Group has committed to undertake certain clinical trials on behalf of its partners under development and licensing agreements. The Group is committed to make certain payments to third parties contingent upon future events such as the approval and launch of products, although such payments may be funded from amounts received from development partners.
To establish the supply chain the Group has committed to substantial development expenditure to scale up and validate the manufacturing processes. The Group has also committed to capital expenditure of £13.2 million, of which £12.5 million had been spent as at 31 December 2010. The Group expects to commit a further €1.6 million (£1.4 million) during 2011 for additional capital equipment. A former partner is funding £3.2 million of the expenditure of the Flutiform™ supply chain, of which £3.0 million had been funded as at 31 December 2010, and the Group is obliged to repay this funding by March 2013, or earlier if the supply chain is outsourced. The amount funded as at 31 December 2010 is included in long-term creditors as disclosed in Note 27: Long-term creditors.
The Group is contractually committed to certain minimum volumes in respect of Flutiform™ from its suppliers from 2011 to 2015, subject to termination rights if Flutiform™ is not launched by the end of 2011. The Group is additionally committed to a further £0.3 million of capital expenditure primarily related to its facility in Lyon, France.
34 Contingencies At 31 December 2010 the Company had provided guarantees on various bank borrowings of its subsidiaries as set out in Note 25: Borrowings.
Where appropriate the Company provides guarantees of performance obligations on behalf of its subsidiary undertakings. The Company has also guaranteed the performance obligations for SkyePharma (Jersey) Limited in respect of the convertible bonds, including the obligation to meet any puts when they fall due.
As described in Note 25: Borrowings, the Injectable Business was sold on the basis that it retains responsibility to Paul Capital for its existing obligations to make payments based on DepoCyt® and Depodur™. The Group retains responsibility for the full liability under the Paul Capital Note whether or not these payments are made.
The Group is involved in various ongoing legal proceedings surrounding challenges to its patents and intellectual property which are likely to incur costs. If significant activity is required the costs of such action may be substantial. Where the Group is able to reliably estimate the financial effect that will be incurred on such proceedings a provision will be made in accordance with Note 2(y): Accounting policies — provisions. Currently there are no ongoing actions where costs incurred are expected to be significant.
Solaraze® — the Group and its licensee (Nycomed) received an ANDA Paragraph IV notice letter relating to Solaraze® in the United States in April 2010. Nycomed and SkyePharma have filed suit against the ANDA filer and the proceedings are at an early stage. A provision has been included in the financial statements for the Group’s share of preliminary costs related to this action but not for further costs as these cannot be quantified with sufficient certainty at this stage.
Stock Code: SKP 109
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NOTES TO THE ACCOUNTS CONTINUED
35 Related parties Company The Company has issued share options to employees of subsidiary undertakings and in accordance with IFRS 2 has made a charge of £0.1 million (2009: £0.2 million).
The Company has charged £1.6 million (2009: £1.7 million) to its subsidiary undertakings and the Company was charged £0.1 million (2009: Nil) 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 24: Trade and other payables. All current intercompany balances are settled on a monthly basis, therefore no interest is charged.
36 Principal subsidiaries Per cent. held of nominal Country of value and Company incorporation voting rights Principal activities SkyePharma Production SAS1 France 100% Manufacturing of pharmaceuticals SkyePharma (Jersey) Limited1 Jersey 100% Issue of bonds Jago Holding AG Switzerland 100% Holding company Jagotec AG Switzerland 100% Exploitation of intellectual property SkyePharma AG Switzerland 100% Research and development SkyePharma Holding AG1 Switzerland 100% Holding company SkyePharma Holding Inc1 United States 100% Holding company SkyePharma U.S. Inc. United States 100% Business development
1 Directly held by the Company.
37 Post-balance sheet events As disclosed in Note 25: Borrowings, in February 2011 the Group renewed its two new mortgage agreements with the Basellandschaftliche Kantonalbank. The first is for £2.8 million (CHF 4.2 million), which bears interest at a variable rate (currently 3.875 per cent. per annum) and is repayable with three months’ notice from either party. The second is for £5.8 million (CHF 8.3 million), which bears interest at 3.6 per cent. per annum and is fully repayable in 2016.
As announced on 7 March 2011, AstraZeneca discontinued the production of Pulmicort® pMDI due to complex manufacturing issues related to technical aspects of the device. The issues only impact AstraZeneca’s Pulmicort® pMDI device which is a unique combination of device components. Royalties from this product in 2010 comprised about 5 per cent. of SkyePharma’s revenues.
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glossary of terms Financial statements
Actinic keratosis (“AK”) Concerned Member States (“CMS”) A pre-malignant skin condition, which may progress to squamous The European countries (in addition to the RMS) where an cell carcinoma. applicant also files an NDA under the decentralised system for new drug licensing in the EU. Abbreviated New Drug Application (“ANDA”) US application for generic drug approval. CMD(h) Coordination group for mutual recognition and decentralised Agence francaise de securite sanitaire des produits de santé procedure for human medicinal products. (“AFSSAPS”) The French agency responsible for the safety of health products. COPD Chronic Obstructive Pulmonary Disease, a group of diseases of Anti-hypertensive agent the lungs in which the airways become narrowed resulting in Treatment to reduce blood pressure. poor airflow to and from the lungs, causing shortness of breath Benign Prostatic Hypertrophy (“BPH”) which is poorly reversible and usually gets progressively worse A common non-cancerous enlargement of the prostate gland, over time. resulting in obstruction to urine flow. Corticosteroid Bioequivalence A class of steroid hormones produced in the adrenal cortex. Scientific basis on which drugs with the same active ingredient(s) Used in a wide variety of physiologic systems including stress are compared. To be considered bioequivalent, the bioavailability response, immune response and regulation of inflammation, e.g. of two products must not differ significantly when the two fluticasone for asthma. products are administered in clinical studies at the same dosage DepoCyt® under similar conditions. An injectable version of cytarabine, a cytotoxic anticancer drug, Blood lipid disorders developed by Pacira Pharmaceuticals Inc (formerly SkyePharma Inc). High blood cholesterol and/or triglycerides, resulting in increased DepoDur™ risk of atherosclerosis and heart disease. An injectable version of morphine, developed by Pacira Calcium channel blocker Pharmaceuticals Inc (formerly SkyePharma Inc). Medicines which are mainly used to treat high blood pressure (hypertension). Dermatologics/dermatology Medicines/the practice of medicines absorbed through the skin. CFC Chlorofluorocarbon Double blind A clinical trial design in which neither the participating individuals Circadian cytokine modulators nor the study staff knows which participants are receiving the Circadian cytokine modulators are drugs that modify the levels of experimental drug and which are receiving a placebo (or another pro-inflammatory cytokines at specific times of the day when therapy). Double-blind trials are thought to produce objective they will have specific therapeutic effects. results, since the expectations of the doctor and the participant about the experimental drug do not affect the outcome. Clock stop Where the specified pre-determined time line for the approval DPI process for a new drug application is halted to give the applicant Dry Powder Inhaler time to provide answers to questions raised by the RMS and CMS. EBITDA Complete Response Letter Earnings before interest, tax, depreciation and amortisation. A written communication to an applicant from the FDA usually European Medicines Agency (“EMA”) describing all of the deficiencies that the agency has identified European Union agency responsible for the evaluation and in an application or abbreviated application that must be supervision of medicinal products. satisfactorily addressed before it can be approved.
Stock Code: SKP 111
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GLOSSARY OF TERMS CONTINUED
EXPAREL™ (formerly DepoBupivacaine™) Inhaled corticosteroid (“ICS”) An injectable version of the anaesthetic bupivacaine, being A drug commonly used in asthma medications, e.g. fluticasone developed by Pacira Pharmaceuticals Inc. (formerly SkyePharma propionate in Flutiform™. Inc). IDD® Food and Drug Administration (“FDA”) SkyePharma’s proprietary Insoluble Drug Delivery® technology The United States agency responsible for evaluation and platform used in Triglide®. SkyePharma has a number of supervision of medicinal products. different types of insoluble drug delivery technologies: MicroParticle, MicroDroplet and self emulsifying. Fenofibrate A fibre-based drug that reduces lipid disorders and cholesterol Inhalation levels in patients by increasing high density lipoprotein (HDLs) Drug delivery system using the airways and lungs. and reducing low density lipoprotein (LDL). LABA Fluticasone A long acting beta-2-agonist. Asthma drugs designed to keep the The inhaled corticosteroid used in Flutiform™. bronchial airways relaxed and open over a 12 hour period, e.g. formoterol fumarate in Flutiform™. Flutiform™ The fixed dose combination of fluticasone and formoterol. Leukotriene synthesis inhibitors Asthma medications which seek to reduce the inflammatory Formoterol impact of leukotrienes. The long-acting beta-2-agonist used in Flutiform™. Marketing Authorisation Application (“MAA”) Generic Marketing Authorisation Application for European approval. A non-branded drug which is bioequivalent to a branded drug which usually becomes available following patent expiry. MDI Metered Dose Inhaler. Geoclock™ SkyePharma’s proprietary oral drug delivery platform which Milestone payments allows the preparation of chronotherapy-focused press-coated Financial payments made upon the achievement of a pre- tablets. Allows timed or pulse delivery of active ingredients. determined target, e.g. the completion of a clinical study, filing for regulatory approval, acceptance within a particular timescale Geomatrix™ or achieving certain sales targets. SkyePharma’s proprietary oral drug delivery platform which enables customised levels of controlled release of specific drugs. NAPF It can achieve the simultaneous release of two different drugs at National Association of Pension Funds different rates from one tablet. NDA Glucocorticoid New Drug Application is the document used in the United A class of steroid hormones which includes cortisol. States as the basis for a marketing application (an application for approval to market the product based on a full review of all GMP status/cGMP status quality, safety, and efficacy data, including clinical study reports). Good Manufacturing Practice or current Good Manufacturing Practice. Control and management of manufacturing and quality Non-benzodiazepine control testing of pharmaceutical products. Hypnotic agents, also known as “Z drugs” (zopiclone, zolpidem, zaleplon) that are chemically different to benzodiazepines. HFA Hydrofluoroalkane is an environmentally friendly aerosol Open-label propellant which has replaced CFCs. Used in Pulmicort® PMDI and A clinical trial where both the researchers and the participants Flutiform™. know which treatment is being administered (contrast with single and double blind trials). Hypnotic Drug to treat sleep disorders.
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Oral Safety study Oral drugs are delivered to the mouth, and absorbed either in the A clinical study which measures the safety of a drug rather than mouth or the gastrointestinal system. its efficacy.
Paediatric SKP-1041 (Zaleplon) Relating to patients aged under 12 years. A non-benzodiazepine hypnotic agent to treat people who have difficulty maintaining sleep. PDCO Paediatric Committee of the European Medicines Agency. Their main SKP-1052 task is to assess the content of paediatric investigation plans (PIPs). An oral product for treatment of a particular aspect of diabetes Phase I care. First stage of human clinical testing for toxicity and for proof of concept in healthy human volunteers. SkyeHaler™ SkyePharma’s proprietary dry powder inhaler, a multi-dose Phase II reservoir suitable for acute and chronic therapies with a dose Additional in vivo testing may be performed (also called pre- counter and end of life lockout mechanism. pivotal trials) involving a small patient population to evaluate the optimal clinical dose. SkyeProtect™ SkyePharma’s proprietary inhalation technology which protects Phase III the active ingredient from moisture This is an expanded patient population, typically at dispersed sites. Also called pivotal trials. Titration The process of gradually adjusting the dose of a medicine until PIP the desired effect is achieved. Paediatric Investigation Plans which are required to be assessed by the PDCO of the European Medicines Agency. Topical For SkyePharma, drugs that are applied directly to the skin, e.g. pMDI Solaraze®. Pressurised metered dose inhaler. Triglide™ Pre-clinical An oral treatment for elevated blood lipid disorders. In vitro (laboratory) feasibility study to determine whether, under laboratory conditions, the formulation of the product candidates can be achieved.
Prophylaxis Preventative treatments.
Randomisation A method based on chance by which study participants are assigned to a treatment group. Randomisation minimises the differences between groups by randomly distributing people with particular characteristics among all the trial arms.
Reference Member State (“RMS”) The European country where an applicant first files an NDA under the decentralised system for new drug licensing in the EU.
Stock Code: SKP 113
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Shareholder information
Annual General Meeting Shareholder enquiries To be held at 10.30 a.m. on Thursday 12 May 2011 at: If you have any questions about your shareholding or wish to notify any change in your details please contact the Registrars, Financial Dynamics Capita Registrars (see contact details opposite). Whenever you Holborn Gate contact the Registrars please quote the full names in which your 26 Southampton Buildings shares are held. Please advise the Registrars promptly of any London change of address. WC2A 1PB Electronic communications Secretary and Registered Office Shareholders can elect to obtain shareholder documents such J Murphy as Annual and Half-Yearly Reports and Notice of Meetings SkyePharma PLC electronically from SkyePharma’s website rather than by post. To 46-48 Grosvenor Gardens take advantage of this free service, connect to Capita Registrar’s London secure Share Portal website and follow the on-screen instructions SW1W 0EB to register. Shareholders can also send in votes for general meetings electronically via Capita’s Share Portal website by Telephone: 020 7881 0524 following the instructions for eProxy Voting. Facsimile: 020 7881 1199 Email: [email protected] Website: www.skyepharma.com Registered in England and Wales. Registered No. 107582
Warning to Shareholders — Boiler Room Scams Over the last year, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas based “brokers” who target UK shareholders, offering to sell them what often turn out to be worthless or high risk shares in US or UK investments. These operations are commonly known as “boiler rooms”. These “brokers” can be very persistent and extremely persuasive, and a 2006 survey by the Financial Services Authority (FSA) has reported that the average amount lost by investors is around £20,000.
It is not just the novice investor that has been duped in this way; many of the victims had been successfully investing for several years. Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports.
If you receive any unsolicited advice: l Make sure you get the correct name of the person and organisation l Check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/register l Report the matter to the FSA either by calling 0845 606 1234 or visiting www.moneymadeclear.fsa.gov.uk l If the calls persist, hang up.
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme. The FSA can be contacted by completing an online form at www.fsa.gov.uk/pages/doing/regulated/law/alerts/overseas. shtml.
Details of any share dealing facilities that the Company endorses will be included in Company mailings.
More detailed information on this or similar activity can be found on the FSA website www.moneymadeclear.fsa.gov.uk.
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auditors ADR Depositary SkyePharma PLC Ernst & Young LLP Bank of New York Mellon Apex Plaza 101 Barclay Stret SkyePharma’s mission is to become Reading New York NY 10286 one of the world’s leading RG1 1YE USA speciality drug delivery companies, Solicitors Registrars Fasken Martineau LLP Capita Registrars powered through excellence in its 17 Hanover Square The Registry London 34 Beckenham Road oral and inhalation technologies. W1S 1HU Beckenham Kent SkyePharma strives to deliver Clifford Chance LLP BR3 4TU clinical benefits for patients 10 Upper Bank Street London Telephone: 0871 664 0300 by using its multiple delivery E14 5JJ (Calls cost 10 pence per minute plus network extras) (from outside the UK: +44 (0) 20 8639 3399) technologies to create Corporate Broker & Financial Adviser enhanced versions of existing Singer Capital Markets Ltd Lines are open Monday – Friday 8:30 a.m. – 5:30 p.m. One Hanover Street Facsimile: +44 (0) 20 8639 2220 pharmaceutical products. London Email: [email protected] W1S 1YZ Website:www.capitaregistrars.com Capita Share Portal: www.capitashareportal.com Bankers Our Business FINANCIAL STATEMENTS HSBC Bank plc Highlights/Key Events 01 Independent Auditors’ Report 56 Group Overview 02 Consolidated Income Statement 58 70 Pall Mall Marketed Products 08 Consolidated Statement of Comprehensive London Our Performance Income/(Expense) 59 SW1 5EZ Chairman’s Statement 10 Consolidated Balance Sheet 60 Business Review 12 Company Balance Sheet 61 Financial Review 20 Consolidated Statements of Changes in Equity 62 Our Governance Company Statements of Changes in Equity 63 Directors and Officers 26 Consolidated Cash Flow Statement 64 Report of the Directors 28 Notes to the Consolidated Cash Flow Corporate Social Responsibility 33 Statement 65 Corporate Governance 35 Company Cash Flow Statement 66 Remuneration Report 44 Notes to the Accounts 67 The Statement of Directors’ Responsibilities 54 Glossary of Terms 111 Shareholder Information 114 Advisers IBC Head Office skyepharma plc 46–48 grosvenor gardens London sw1w 0eb Registered No: 107582 telephone: +44 (0)207 881 0524 Fax: +44 (0)207 881 1199 email: [email protected] Multiple www.skyepharma.com Delivery Technologies Annu a l Repo r t A N D Accounts fo r the ye ar en d e 31 ecembe 2010
creating excellence and innovation
enhancing quality of life for patients
Annual Report AND Accounts for the year ended 31 december 2010