annual report 2001 -...

annual report 2001SkyePharm

a PLC

annual report 2001

Front and inside front cover image: The DepoFoam system is proprietary, injectabletechnology that provides controlled drug delivery for an extended period of time,improving bioavailability profiles and clinical outcomes.

DepoFoam particles are composed of thousands of lipid-walled chambers which canencapsulate a wide variety of drugs – from small molecules to proteins, peptides andnucleic acids – offering a platform for the development of new pharmaceutical andbiopharmaceutical products in a wide range of therapeutic areas.

Contents01 Corporate profile02 Corporate highlights03 Financial highlights04 What is drug delivery?06 Sites, technologies and products10 Chairman’s statement12 Key product pipeline14 Review of operations24 Directors and officers26 Financial review28 Report of the Directors29 Statement of Directors’

Responsibilities29 Corporate Governance

31 Remuneration Report37 Auditors’ Report38 Consolidated Profit and Loss Account39 Statement of Total Recognised

Gains & Losses/Reconciliation ofMovement in Shareholders’ Funds

40 Consolidated Balance Sheet41 Company Balance Sheet42 Consolidated Cash Flow Statement43 Notes to the Consolidated Cash

Flow Statement45 Notes to the Financial Statements70 Reconciliation to US Accounting

Principlesibc Company Information and Advisors

01 SkyePharma annual report 2001

Corporate profile

SkyePharma uses world-leading drug deliverytechnology to make good drugs even better.

We have the ability to solve over 90% of theindustry’s formulation and delivery challenges by drawing onthe broadest-available range of drug delivery technologies,turning already-proven drugs into more effective and safermedicines. Combining our established pre-clinical, clinicaland regulatory expertise with the capability to formulateandmanufacture drugs, both for clinical studies andcommercial sale, we identify and develop new therapeuticsfor ourselves and for our partners.

Corporate highlights

Product launches and sales growthPaxil® CR (GlaxoSmithKline): anxiolytic-antidepressant/oral– US launch by end of April 2002DepoCyt® (Chiron/Elan/Nippon-Shinyaku): oncology/injectable– Re-launched in US by Chiron: European Commission

marketing approval– Licensed to Elan for sales and distribution in Europe and

Nippon-Shinyaku for JapanSolaraze® (Quintiles/Bioglan): pre-cancerous skin disorder/topical– Launched: 2001 in UK and Germany, Jan 2002 in US– US marketing rights transferred to QuintilesXatral®-OD (Sanofi-Synthelabo): benign prostatic hypertrophy/oral– Launched in several key European markets during 2001– US Food and Drug Administration (FDA) approvable letter received

Good pipeline progressDepoMorphine™: pain management/injectable – Five US Phase III trials under wayForadil® dry powder inhaler (Novartis): asthma/inhalation– US and European studies progressing well: launch

anticipated 2003DepoBupivacaine™: pain management/injectable– Pilot Phase I study – local anaesthetic effect exceeded 48 hoursNew product development

HFA-Pulmicort® (AstraZeneca): DepoFoam proteinmacromolecule formulations (Chugai); AD313 (Arakis);Psoraxine™ (Astralis); enhanced solubility (Baxter & Schering-Plough); propofol and HFA-formoterol (SkyePharma)

Corporate agreementsCompleted acquisition of RTP Pharma, Canada– specialistsin improving drug solubilityUS$30 million from Paul Capital– supporting clinicaldevelopment of propofol and HFA-formoterol


Financial highlights

2001 2000

Financial highlights presented under UK GAAP £’000 $’000 £’000 $’000

Turnover 46,126 66,278 24,292 34,905

Gross profit 27,306 39,236 8,694 12,492

Group operating loss (5,099) (7,327) (17,984) (25,841)

Retained loss (9,452) (13,582) (19,690) (28,293)

Loss per Ordinary Share (1.8p) (2.59c) (3.9p) (5.60c)

Cash use (10,903) (15,667) (26,846) (38,575)

Cash use represents cash outflow from operations before the use of liquid resources and financing. US dollar value equivalents are shownfor convenience and have been calculated for both periods using the current period average rate of $1.4369 to the pound sterling.

A reconciliation to US GAAP is included on pages 70 to 72 for the convenience of US readers.



What is drug delivery?

“The novel drug delivery technologiesbeing developed continue to be very appealing to majorpharmaceutical companies and to the marketplace.Companies are particularly interested in technologies thatwill enable the large molecules generated by biotechnologyresearch to be delivered effectively. As the number of suchcompounds continues to grow, the demand on the drugdelivery specialists to solve these issues will continue todrive the industry...

convenient to use. Governments andinsurance companies are under growingpressure to bring down the costs of drugs.At the same time, the pharmaceuticalindustry is faced by more technicallychallenging drug substances as a resultof the increasing complexity of new drugdiscovery science, in a marketplace thatis becoming more competitive andheavily regulated.

Since 1983 SkyePharma has beenworking at the forefront of currentresearch into drug delivery, During thecourse of the last few years, the Companyhas assembled the largest number of drugdelivery technologies compared with anyother drug delivery company. This allowscross-fertilisation of ideas among ourscientists as they strive to solve drugdelivery problems and helps to bringmore effective products to the market.Our technology portfolio covers over 90%of all the drug delivery needs of thepharmaceutical industry.

By far the most popular method of dosingis by mouth – more than 50% of allmedicines are administered in this way

The effectiveness of any new drug, nowmatter how promising, will always belimited by one major factor: how well itcan be delivered and absorbed into thehuman body. New ways are constantlybeing sought of administering medicinesin a controlled way to achieve apredetermined therapeutic outcome:to deliver the right amount of drug, at theright time, to the right place in the body,with the minimum of side effects. Thisprocess is known as drug delivery, andover the last 30 years a whole new industrysegment has emerged, with a marketvalue estimated at between US$25 and$50 billion at current retail prices.

This sector is growing at around12–15% annually, about double theoverall industry rate.* Drug delivery isplaying an increasingly important rolewithin the pharmaceutical industry. Webelieve many exciting new developmentslie just around the corner because of thegrowing challenges faced by the wholepharmaceutical industry. Patients arebecoming increasingly influential in theprescribing process and are demandingsafer drugs that are easier and more


or monthly. Such sustained releaseinjectables will prolong the effects ofthe drug to provide greater levels ofcomfort and convenience for the patient.Significant savings will also be realisedby health providers.

Inhaled pharmaceuticals are usedalmost exclusively to treat the more than150 million patients in the industrialisedworld who suffer from asthma orbronchitis. SkyePharma has developedinhalation technologies that are eitherbreath-actuated or powered by non-CFCpropellants, protecting the environmentand providing patients with convenient,easy-to-use symptom control. We arealso working on a range of topical deliverysystems, whereby drugs are absorbedthrough the skin. An example is Solaraze®,an easy-to-use gel for the treatment ofa pre-cancerous skin condition.

One major problem facing all drugcompanies is solubility. In order to beproperly absorbed by the body, nearlyall drugs need to be soluble in water, nomatter how they are delivered. Many drugs,particularly those emerging from thenewer discovery technologies, are eithernot soluble at all, or are not soluble enoughto be properly absorbed and thus effective.Drug delivery technologists have beenfocusing on how to address these issuesin recent years, in particular by thetransformation of raw drug into nano-particles less than one millionth ofa metre in diameter. This appears to haveremarkable effects on drug solubilityand rates of absorption enabling manyotherwise ineffective therapeutics tobe developed into successful products.

– as a tablet, capsule, lozenge or sachet.Reformulating a drug so that it needs to betaken less often is a simple and effectiveway of benefiting patient, prescriber andthe healthcare system as a whole. We areall more likely to take our medicines if wehave to do so less often – in the UnitedStates (US) alone, it is estimated that poorpatient compliance results in a financialburden to healthcare providers of someUS$20 billion a year. If a patient is betterable to follow the prescriber’s instructionsand therefore receive the intended dosage,this will result in fewer costly emergencyhospital admissions, doctors’ and nurses’time will be saved and the patient will behealthier and have a better quality of life.

A number of the new compounds beingdeveloped, in particular by the biotechnologyindustry, must be delivered by injection.This is because they would rapidly breakdown and become inactive if taken orally.Often these drugs have a very shortduration of action so that repeated dailyinjections or infusions, which may takehours to deliver, are required. Despiteimprovements in injection equipment,suchas finer, sharper needles, patientsmay still find injections traumatic andpainful. Self-injection systems and needle-less injections go some way to addressingthese issues. However, their use is limitedto only a very few compounds, many ofwhich still require repeated dosing.

This challenge has led to the developmentof sustained release injectable productssuch as DepoFoam, SkyePharma’s depottechnology, which can reduce thefrequency of daily injections, or the needfor continuous infusion, to once weekly

...The industry is also interested inreformulating existing compounds to invigorate its productsand extend their lifecycles. The pace of development of thissector is predicted by analysts to accelerate and it remainsone of the most exciting in the industry.” Scrip Magazine Drug Delivery Companies Fact File 2002

Finally, for the pharmaceutical companyitself, the application of drug deliverytechnology can be useful in extendinga successful product’s lifecycle. Byreformulating an existing marketedproduct it can be possible to receivepatent extensions and thus prolong theprotected life of the product. Moreover,such reformulated products will bedifferentiated from their competitors,often by expanded therapeutic use,targeting different or additional patientsand expanding the market. A win–winformula for patients, the pharmaceuticalindustry and SkyePharma.

* Scrip Drug Delivery Companies Fact File 2002PJB Publications Ltd, Copyright 2002


SkyePharma – a global company

A speciality pharmaceutical company withfacilities in Europe andNorth America

World-leading drug delivery technology in fiveareas – oral, inhalation, topical, injectable and enhancedsolubilisation – powers new product development

A world-class team of research scientists,formulation experts, clinical development andregulatoryaffairs professionals in three ‘centres ofexcellence’ – SanDiego, US (injectable), Muttenz,Switzerland (oral, inhalation, topical), and Montreal,Canada(enhanced solubilisation)

FDA and EMEA-approved manufacturingfacilitieson both sidesof the Atlantic

World-wide business development coveragetodrive corporategrowth

Muttenz, Switzerland San Diego, US Lyon, France


Key product pipeline

Technology Client/licensee Drug Therapeutic platform category

Feasibility In vitro(laboratory) feasibilitystudy to determinewhether, under laboratoryconditions, the formulation of the product candidatecan be achieved.

In addition there are a number of early stage and internal development projects at variousstages for each of the technology platforms. These are shown in the table on the right.Solubilisation is included in the table as a separate category for the first time. Someprojects now included under solubilisation were previously shown under Oral.

Oral 6 Injectable 6Inhalation 9 Topical 6Solubilisation 9

Oral Sanofi-Synthelabo Xatral OD Genito-UrinaryRoche Madopar DR Parkinson’s DiseaseWatson Dilacor XR CardiovascularRatiopharm Diclofenac ArthritisMundipharma Nifedipine HypertensionGlaxoSmithKline Paxil CR CNSSkyePharma Naproxen ArthritisUndisclosed Undisclosed UndisclosedGlaxoSmithKline Requip Parkinson’s DiseaseMerck KGaA Undisclosed UndisclosedKowa Statin NK-104 Cardiovascular

Inhalation Novartis Foradil AsthmaSkyePharma Formoterol HFA AsthmaAstraZeneca Pulmicort AsthmaSepracor Undisclosed AsthmaArakis AD 313 COPD

Injectable Chiron/Elan/Nippon-Shinyaku DepoCyt OncologySkyePharma DepoMorphine Acute PainSkyePharma DepoBupivacaine Local AnaestheticAstralis Psoraxine PsoriasisChugai Undisclosed Undisclosed

Topical Quintiles/Bioglan Solaraze Actinic KeratosisSkyePharma Hyclinda Acne

Solubilisation IDEXX Labs Undisclosed Bacterial DiseasesSkyePharma Propofol AnaesthesiaSuperGen Busulfan OncologyUndisclosed Fenofibrate CardiovascularBaxter Multiple Undisclosed

Paxil CRXatral ODMadopar DRNifedipineDiclofenacDilacor XRNaproxenRequipStatin NK-104

ForadilFormoterol HFAPulmicortAD 313

SolarazeHyclinda

1. Hydroxypropylmethylcellulose matrixcontaining active drugs

2. Additional barrier layerscontrolling diffusion of drugs from core


Sites, technologies and products

TechnologiesSite Products

Dr Francesco Patalano President, SkyePharma AG

SkyePharma AG, SwitzerlandMuttenz is SkyePharma’s centre ofexcellence for research and developmentof new products containing our topical andGeomatrix oral technologies, advancedinhalation formulations and deliverysystems. There are around 140 employeesincluding 60 highly-skilled scientists fromover 10 different countries, combining theirskills to provide an enviable pool of talent.A new, purpose-built extension, openedin April 2001, covers three floors each of1100m2, and houses state-of-the-artlaboratories for groups of scientistsdedicated to each specialist technologyand supporting disciplines of analytics,process development and production.Facilities to produce pilot-scale batchesof metered dose inhalers (MDI) poweredby the environmentally-friendly propellanthydro-fluoro alkane (HFA) have recentlybeen commissioned.

OralThe Geomatrix system controls the amount,timing and location of drug release in thedigestive tract, achieved by a combinationof layers, each with a different release ofthe drugs. Inert barrier layers furthercontrol the drug release out of the tablet.

InhalationSkyePharma is a major independentprovider of inhaled pharmaceuticaldrug delivery technology. We offer drug formulation capability inenvironmentally-friendly metered doseinhalers, and in our state-of-the artbreath-actuated dry powder inhaler (DPI).A collaborative programme with Meridica,UK has produced the Xcelovent inhalercombining breath-actuation with theoption of HFA-powered MDI delivery.

TopicalWe have five basic technologies tosupport topical drug delivery. The HITand HILT systems use hyaluronic acid,a naturally-occurring substance, to holddrug substances in the outer layers of theskin. Crystalip enhances the stabilityof drugs by embedding them in lipidcrystals. DermaStick presents the activeingredients in a wax stick, enablingcontrolled application to affected skin. ES-Gel, a semi-solid formulation producingenhanced solubility of drugs, may be usedto enhance our dermatology portfolio.

1

2

2


Phase I Also called Pre-clinical, where batches are manufacturedfor in vivo studies (inhumans) in healthyvolunteers.

Phase II Additional in vivotesting may be performed(also called pre-pivotaltrials) involving a smallpatient population.

Phase III Trials in anexpanded patient population, typically atdispersed sites. All of theimproved outcome or newproducts under developmentrequire a Phase III trial. Also called pivotal trials.

Filed SkyePharma or itspartners file for regulatoryapproval in the jurisdictionsin which it is intended thatthe product will be marketed.For example, in the US,this will require filingwith the FDA.

Approved Approved by the relevant regulatoryauthority.

Marketed by partner orlicensee

Red blood cells Nano-particles Greg Ford, President SkyePharma Canada

Site Technologies Products

SkyePharma Canada Inc. – CanadaBased in Montreal, SkyePharmaCanada, formerly known as RTP PharmaInc. (RTP), is the newest addition to ourrapidly expanding corporate structure.SkyePharma Canada is a world-leadingcentre of excellence for solubilisationtechnologies. There are over 30 staff,including scientists and engineersfrom all parts of the world, focusedexclusively on enhancing the deliveryof insoluble and poorly soluble drugsthrough the application of ourproprietary nanotechnologies.

The insoluble drug delivery technologiesinclude the formation of submicron-sized,water-insoluble drug cores stabilised withphospholipid surface modifiers. The drug corecan either be solid or liquid drug substancewhich could then be delivered in many ways,including orally, intravenously or topically.The technology can be used to formulatedrugs in unlimited therapeutic categories.

FenofibrateBusulfanPropofolOxytetracyclineBudesonide




DepoCyt

SkyePharma Inc. – USBased in San Diego, California,SkyePharma Inc. is our centre ofexcellence for the development andmanufacture of injectable, sustainedrelease therapeutic products.

There are around 100 employees onsite, over three-quarters of whom arescientists. Apart from space to houseadministrative and research staff, therearemanufacturing facilities in purpose-built buildings providing commercialsupplies of the injectable DepoCyt to theappropriate regulatory guidelines andclinical trial materials for other earlier-stage development projects.

DepoCytDepoMorphineDepoBupivacainePsoraxine

The DepoFoam system is proprietary,injectable technology that providescontrolled drug delivery for an extendedperiod of time, improving bioavailabilityprofiles and clinical outcomes

DepoFoam particles are composed ofthousands of lipid-walled chambers whichcan encapsulate a wide variety of drugs –from small molecules to proteins, peptidesand nucleic acids – offering a platform forthe development of new pharmaceuticaland biopharmaceutical products in a widerange of therapeutic areas

Drugs can be released over a few hours,days and up to several weeks.

Site Product development services Contract manufacturing & packaging

GEOMATRIX tablets Dry powder inhaler

SkyePharma Production – FranceThe SkyePharma Production plant in Lyon,France covers 22,000 m2 dedicated tomanufacturing, warehousing, offices andlaboratories. The US and European-approved facilities provide large-scalemanufacturing of marketed product andpilot scale production to support clinicalstudies. Over 100 staff are responsiblefor the production and packaging ofSkyePharma’s oral and inhalationformulations as well as contractmanufacture for other clients.

Geomatrix and classic tablet manufacture300 m2 pilot plant facilityProduction of dry formulationsManufacture and packing of:

Tablets or capsules in blister packsor bottlesLiquids in bottlesClinical trial materialsStability batchesAnalytical development

Drug design and formulationProcess adaptationProduction and packaging ofclinical batchesScale up, technology transferValidation batchesDossier set-up and registrationIndustrial production and packagingAnalytical support



Business development Investor relations

Dr Val Tate, Head of Investor RelationsDr Paul Wotton, Global Head of Business Development

stakeholders’ queries. Interested partiescan register to receive all Company newsas soon as it is released on our website atwww.skyepharma.com. We will do ourbest to respond to all shareholder enquiries.

SkyePharma US Inc. – USFor SkyePharma to be successful, wemust attract high quality marketingpartners for our development projectsand new clients to share the benefitsof our world-class drug deliverytechnologies. We have built a world-classbusiness development team with aproactive approach to bringing productideas to new or current partners. Ledfrom the US East Coast and with officesin London and Basel, we have the globalreach to serve the world’s majorpharmaceutical markets. Our businessprocess integrates marketing withresearch and development. In this way,we can identify market opportunitieswhere our technologies will make asignificant contribution to a drug’stherapeutic performance, bringingeconomic value to our partners andthe healthcare system.

The Company recognises its responsibilityto provide shareholders and otherstakeholders with timely, balanced andaccurate information. To supply this, wearebuilding a team of in-house professionals,supported by focused agencies in both theUS and Europe. We will ensure a two-wayflow of information, not only deliveringnews of the Company’s financial,commercial and scientific progress,but also listening and responding to

Chairman’s statement


We now move to an era when we cananticipate increasing royalty income, both from launchedclients’ products, such as Paxil CR and Xatral OD, as wellasfrom our own products, such as DepoCyt and Solaraze,marketed by partners.

A breakthroughI am delighted to report our significantand important breakthrough, achievinga profitable second half to the financialyear 2001. Recent events, includingGlaxoSmithKline’s (GSK) announcementof the imminent launch of Paxil CR,together with progress on a broad frontthroughout 2001, make us confidentthat the full year 2002 and thereaftershould see equally successful andexciting growth.

For several years now, we have invested inproducts, new scientific and manufacturingfacilities, novel technologies, furtherbusiness initiatives, and expanded ourcapabilities to full product development.Our income was, consequently, heavilydependent on irregular milestones andcontract revenues.

We now move to an era when we cananticipate increasing royalty income, bothfrom launched clients’ products, such asPaxil CR and Xatral OD, as well as fromour own products, such as DepoCytand Solaraze, marketed by partners.

With already-marketed, safer, moreeffective products, and a rapidly filling late-stage development pipelineincluding DepoMorphine, providing48 hours of post-operative pain relieffrom a single injection, and ourformulation of Novartis’ asthma drugForadil, we are poised to take worldleadership of the drug delivery sector ofspeciality pharmaceuticals. Earlier clinicalstage products, like the slow-release localanaesthetic DepoBupivacaine, anenvironmentally-friendly version

of the asthma drug formoterol andan improved formulation of theanaesthetic propofol, should all fuelfuture growth.

The changed landscapeThe anticipated April launch of Paxil CR,a new controlled-release formulation ofthe world’s seventh largest selling drug,not only reinforces our confidence goingforward but also changes the landscape.Whilst Paxil CR is very important to ustoday, its launch should not detractfrom our belief that there are severaldrugs in our pipeline, both our own andthose under development for clients,that have the potential to be similar,if not greater, future revenue earners.Paxil CR is also especially importantbecause its launch goes to the heartof SkyePharma’s credibility.

Drug delivery and beyondWe aim to identify and developbreakthrough drugs, incorporatingour technology, which can transformthe lives of patients and the fortunesof the Company. Other companies –Elan Pharmaceuticals Inc. (Elan) withCardizem®CD, ALZA with Procardia®XLand, more recently, Enzon Inc. with PEG-Intron® – have achieved this.Almost overnight, these companieshave emerged to reap the rewards oftheir years of investment. We can nowrealistically hope to do the same.

SkyePharma has also taken this modelone step further. We use our drug deliverytechnologies as sources for drug creation,enabling us to expand our drug portfoliowith proprietary products which we

Ian Gowrie-SmithExecutive Chairman


to customers worldwide. Chugai’s recentlyannounced merger, becoming a 50.1%subsidiary of Roche, makes this companya very important client.

Developing our own productsPaul Capital Royalty Acquisition Fund, L.P.(Paul Capital) has agreed to contributeUS$30 million over the next two yearsto support the development of newclinical pipeline entrants propofol andHFA-formoterol, in return for a share ofpotential future revenues and royaltiesfrom nine SkyePharma products. Thisagreement reflects our aim of achievingan expanded clinical pipeline withoutdelaying our move towards profitability.

Meeting challengesThe past year has not been withoutits challenges. The unfolding storiessurrounding Bioglan Pharma PLC (Bioglan)and its financial position threatened ourmarketing partnership for our actinickeratosis drug, Solaraze. Resolution wasreached in late December when Bioglanagreed to pay SkyePharma US$12.5 millionand transfer the US marketing rights toQuintiles Transnational Corporation(Quintiles), a global pharmaceutical servicescompany, for a further US$5 million.

Having just successfully resolved theuncertainties created by Bioglan’sproblems, the financial world was plungedinto concerns about accounting practices.We believe that SkyePharma’s accountingpractices are appropriate and in line withour peers.

Broadening our technology platformAround half of all new chemical drugsfail to leave the laboratory because theyare insoluble. This is a major setback forpatients hoping for new treatments andcompanies seeking to identify new drugs.By acquiring solubility experts RTPPharma Inc. (RTP), a Canadian-basedcompany, we have consolidated ourposition as world leaders in thistechnology area. Used synergisticallyin a way that sets us apart from ourcompetitors, we can apply enhancedsolubilisation technology in combinationwith our other proprietary oral, inhalation,topical and injectable technologies.

The Board of DirectorsI would like to thank Tamar Howson, aformer non-executive director, for hervaluable contribution to the business in2001. Tamar was appointed senior vicepresident of corporate development forBristol-Myers Squibb in November 2001and therefore resigned her post withSkyePharma. We wish her every success.

I am delighted to announce that Dr DavidEbsworth, until recently worldwide headof the pharmaceutical division of Bayer AG,has agreed to join us as a non-executivedirector. Dr Ebsworth brings experiencespanning more than two decades ofdistinguished leadership, innovationand involvement in the pharmaceuticalindustry which will be immenselyvaluable as we continue to grow.

In conclusionAn exciting future lies ahead of us.SkyePharma is better placed than at anyprevious time to secure success and Iwant, wholeheartedly, to thank our highlyskilled staff for their professionalismand commitment in sharing our vision.Our scientists and operational staff worktogether to create these opportunities;shareholders provide much-appreciatedsupport; as management we have a dutyto deliver upon their expectations.

Ian Gowrie-SmithExecutive Chairman

can either develop ourselves or offerto pharmaceutical clients. As the chanceof successfully developing marketedproducts from research-based discoverycontinues to be low, so drug delivery isfilling the gap.

Building valueSkyePharma offers unique, sophisticateddrug delivery systems, addressingchallenges ranging from lifecycle extensionof proven drugs to delivering promisingnew drugs emerging at the cutting edge ofthe biotechnology industry. Correspondingly,the rewards are climbing and it is now notuncommon to expect returns from clientsor marketing partners in excess of 10%, insome cases, climbing as high as 30%.

Increasingly, clients ask us to play aleading role in their drug programmesbecause we have built value by developingin-house expertise in full drug developmentsupport including formulation, clinical,regulatory and manufacturing skills.We already provide these services forGSK in respect of a new formulation ofRequip®, their therapy for Parkinson’sdisease. As further examples, we havesigned an agreement with AstraZenecato reformulate their asthma medicationPulmicort® into an environmentally-friendlyinhaler and carry out its clinical development.Earlier this year, we announced apartnership with US-based Astralis todevelop a promising new therapy for thedistressing skin condition psoriasis.

Recent developmentsWe have been particularly successful inattracting new business in Japan, signingseven new agreements. I am proud toannounce here the signature of anagreement with Chugai PharmaceuticalCo Ltd (Chugai) to license, manufacture,market and sell novel formulations ofprotein macromolecules, to be developedusing SkyePharma’s injectable, extended-release DepoFoam technology. This is anexcellent opportunity for us to demonstratehow we meet the challenge of deliveringclinically important proteins and peptides.

Chugai is a leading, research-drivenJapanese pharmaceutical company,providing many in-house developed drugs

3 SkyePharma annual report 200112 SkyePharma annual report 2001

Key product pipeline

Technology Client/licensee Drug Therapeutic platform category

Feasibility In vitro(laboratory) feasibilitystudy to determinewhether, under laboratoryconditions, the formulation of the product candidatecan be achieved.







In addition there are a number of early stage and internal development projects at variousstages for each of the technology platforms. These are shown in the table on the right.Solubilisation is included in the table as a separate category for the first time. Someprojects now included under solubilisation were previously shown under Oral.

Oral 6 Injectable 6Inhalation 9 Topical 6Solubilisation 9

Oral Sanofi-Synthelabo Xatral OD Genito-UrinaryRoche Madopar DR Parkinson’s DiseaseWatson Dilacor XR CardiovascularRatiopharm Diclofenac ArthritisMundipharma Nifedipine HypertensionGlaxoSmithKline Paxil CR CNSSkyePharma Naproxen ArthritisUndisclosed Undisclosed UndisclosedGlaxoSmithKline Requip Parkinson’s DiseaseMerck KGaA Undisclosed UndisclosedKowa Statin NK-104 Cardiovascular

Inhalation Novartis Foradil AsthmaSkyePharma Formoterol HFA AsthmaAstraZeneca Pulmicort AsthmaSepracor Undisclosed AsthmaArakis AD 313 COPD

Injectable Chiron/Elan/Nippon-Shinyaku DepoCyt OncologySkyePharma DepoMorphine Acute PainSkyePharma DepoBupivacaine Local AnaestheticAstralis Psoraxine PsoriasisChugai Undisclosed Undisclosed

Topical Quintiles/Bioglan Solaraze Actinic KeratosisSkyePharma Hyclinda Acne

Solubilisation IDEXX Labs Undisclosed Bacterial DiseasesSkyePharma Propofol AnaesthesiaSuperGen Busulfan OncologyUndisclosed Fenofibrate CardiovascularBaxter Multiple Undisclosed

Red blood cells Nano-particles Greg Ford, President SkyePharma Canada


SkyePharma Canada Inc. – CanadaBased in Montreal, SkyePharmaCanada, formerly known as RTP PharmaInc. (RTP), is the newest addition to ourrapidly expanding corporate structure.SkyePharma Canada is a world-leadingcentre of excellence for solubilisationtechnologies. There are over 30 staff,including scientists and engineersfrom all parts of the world, focusedexclusively on enhancing the deliveryof insoluble and poorly soluble drugsthrough the application of ourproprietary nanotechnologies.

The insoluble drug delivery technologiesinclude the formation of submicron-sized,water-insoluble drug cores stabilised withphospholipid surface modifiers. The drug corecan either be solid or liquid drug substancewhich could then be delivered in many ways,including orally, intravenously or topically.The technology can be used to formulatedrugs in unlimited therapeutic categories.

FenofibrateBusulfanPropofolOxytetracyclineBudesonide




DepoCyt

SkyePharma Inc. – USBased in San Diego, California,SkyePharma Inc. is our centre ofexcellence for the development andmanufacture of injectable, sustainedrelease therapeutic products.

There are around 100 employees onsite, over three-quarters of whom arescientists. Apart from space to houseadministrative and research staff, therearemanufacturing facilities in purpose-built buildings providing commercialsupplies of the injectable DepoCyt to theappropriate regulatory guidelines andclinical trial materials for other earlier-stage development projects.

DepoCytDepoMorphineDepoBupivacainePsoraxine

The DepoFoam system is proprietary,injectable technology that providescontrolled drug delivery for an extendedperiod of time, improving bioavailabilityprofiles and clinical outcomes

DepoFoam particles are composed ofthousands of lipid-walled chambers whichcan encapsulate a wide variety of drugs –from small molecules to proteins, peptidesand nucleic acids – offering a platform forthe development of new pharmaceuticaland biopharmaceutical products in a widerange of therapeutic areas

Drugs can be released over a few hours,days and up to several weeks.

Site Product development services Contract manufacturing & packaging

GEOMATRIX tablets Dry powder inhaler

SkyePharma Production – FranceThe SkyePharma Production plant in Lyon,France covers 22,000 m2 dedicated tomanufacturing, warehousing, offices andlaboratories. The US and European-approved facilities provide large-scalemanufacturing of marketed product andpilot scale production to support clinicalstudies. Over 100 staff are responsiblefor the production and packaging ofSkyePharma’s oral and inhalationformulations as well as contractmanufacture for other clients.

Geomatrix and classic tablet manufacture300 m2 pilot plant facilityProduction of dry formulationsManufacture and packing of:

Tablets or capsules in blister packsor bottlesLiquids in bottlesClinical trial materialsStability batchesAnalytical development

Drug design and formulationProcess adaptationProduction and packaging ofclinical batchesScale up, technology transferValidation batchesDossier set-up and registrationIndustrial production and packagingAnalytical support



Business development Investor relations

Dr Val Tate, Head of Investor RelationsDr Paul Wotton, Global Head of Business Development

stakeholders’ queries. Interested partiescan register to receive all Company newsas soon as it is released on our website atwww.skyepharma.com. We will do ourbest to respond to all shareholder enquiries.

SkyePharma US Inc. – USFor SkyePharma to be successful, wemust attract high quality marketingpartners for our development projectsand new clients to share the benefitsof our world-class drug deliverytechnologies. We have built a world-classbusiness development team with aproactive approach to bringing productideas to new or current partners. Ledfrom the US East Coast and with officesin London and Basel, we have the globalreach to serve the world’s majorpharmaceutical markets. Our businessprocess integrates marketing withresearch and development. In this way,we can identify market opportunitieswhere our technologies will make asignificant contribution to a drug’stherapeutic performance, bringingeconomic value to our partners andthe healthcare system.

The Company recognises its responsibilityto provide shareholders and otherstakeholders with timely, balanced andaccurate information. To supply this, wearebuilding a team of in-house professionals,supported by focused agencies in both theUS and Europe. We will ensure a two-wayflow of information, not only deliveringnews of the Company’s financial,commercial and scientific progress,but also listening and responding to


Review of operations

During 2001, we have accelerated ourmission to become the world’s leadingspeciality pharmaceutical company,powered through excellence in drugdelivery. Importantly, our strategy hassuccessfully propelled the Companyinto its first profitable second half year.This was last year’s main goal.

A global companyOur strategy is to maintain our leadershipposition in drug delivery, building thebroadest range of complementarytechnologies which will enable us toachieve a growing number of value-enhancing deals. To support this, we haveexpanded our business developmentglobally, securing increasing numbersof client relationships and marketingagreements in the US, Europe and Japan.We now have established marketingpartnerships for our proprietary products;DepoCyt with Chiron in the US, ElanPharmaceuticals in Europe and Nippon-Shinyaku in Japan, and for Solaraze withQuintiles in the US and Bioglan in Europe.Bioglan is now in administration, but weremain confident that we will be able torealise superior value for this product withanother partner. This year, we will focuson identifying marketing partners forDepoMorphine, DepoBupivacaine andan additional, unnamed internal product.

Adding value with our partnersToday, we can number many of the world’s major pharmaceutical andbiopharmaceutical companies as clients,including Roche, Abbott Laboratories,Pfizer, Kowa, GSK, Sanofi-Synthelabo,Nippon-Shinyaku, Chugai, Novartisand AstraZeneca. Specifically this yearwe have benefited from a focusedcampaign to target potential clientcompanies in Japan, the world’s secondlargest pharmaceutical market afterNorth America. Seven agreementshave been signed, the majority involvingour sustained release injectabletechnology – DepoFoam.

Underlying our strategy is a focus on drugdelivery as a research and developmenttool. Supported by our clinical, regulatoryand manufacturing resources, we usedrug delivery to create both internal andclient-funded new therapeutic products.From these projects, we are able to realisea greater share of the products’commercialisation value.

As examples of this strategy in action,during 2001 we continued to progress highvalue partnerships with external clients;with Novartis, for a new formulation oftheir Foradil asthma drug; with GSK andtheir product Requip to treat Parkinson’s

Michael AshtonChief Executive Officer

Our strategy is to maintain our leadershipposition in drug delivery, building thebroadest range of complementarytechnologies which will enable us toachieve a growing number of value-enhancing deals.

To support this, we have expanded ourbusiness development globally, securingincreasing numbers of client relationshipsand marketing agreements in the US,Europe and Japan.


In addition, we can provide themechanism by which important newproducts will be made clinically effective.With our internal expertise in clinicaldevelopment, regulatory affairs andmanufacturing, we are true developmentpartners with our pharmaceutical andbiopharmaceutical clients.

To strengthen our businessdevelopment team, I am delighted withthe appointment of Dr Paul Wotton asGlobal Head of Business Development.He will manage our existing clientrelationships and identify new internaland external business opportunitiesand projects. With over 16 years’experience in the industry, Paul willmake a strategic contribution to thecorporate business plan, andprovide leadership in broadening ourclient relationships, building on ourinternal development initiatives andexpanding geographically.

disease; with US-based Astralis whohave discovered an exciting new approachto treat the skin condition psoriasis; andwith AstraZeneca, to develop anenvironmentally-friendly formulationof Pulmicort, their proprietary asthmadrug. These relationships validate ourtechnology and significantly improvethe value of our pipeline.

Broadening our drug deliverytechnologybaseNew approaches to drug design,combinatorial chemistry and high-throughput screening are identifyingmany more promising drugs.Unfortunately, many are insolubleand cannot be presented to the patientin such a way that they are safe or easilyabsorbed. During the year we acquireda 40.2% interest, raised later to 100%,in RTP, a company acknowledged forits leadership in making insolubledrugs more soluble. This has openedsignificantly more opportunities forus because this technology can notonly be used alone but also combinedwith our other proprietary drugdelivery approaches.

We are particularly impressed withRTP’s rich pipeline of over ten projects,including a late-stage new formulationof the lipid-lowering drug fenofibrateand an improved formulation of theanaesthetic propofol. These productswill be valuable contributors toSkyePharma’s growing portfolio of in-house developed products, whichshould enhance the quality of earningsin the future. In March 2002, we announcedthat Paul Capital will pay SkyePharmaUS$30 million, principally to fund theclinical development of propofol and ournew pipeline product HFA-formoterol(see ‘Inhalation’).

With our broad range of technologies– oral, topical, inhalation, injectableand enhanced solubilisation – whichtogether provide solutions to the majorityof the industry’s needs, we are ideallypositioned to improve the commercialopportunity for clients’ marketed drugs,in many cases providing a newtherapeutic focus for their products. ➔



Managing for sustainabilityAs we achieve our primary financialgoal, we must now focus on the taskof sustaining profitability and achievinggrowth. Effective utilisation of resources,people and physical assets, and carefulcost control will be key issues.

During 2001, we implemented organisationalchanges aimed at improving inter-companycommunication and encouraging innovativesolutions to drug delivery problems,supporting cross-fertilisation of ideas,synergistic use of technologies andeffective sharing of expertise.

Centres of excellenceWith the acquisition of RTP complete,we will create three centres of excellence.SkyePharma AG in Muttenz, Switzerlandwill specialise in research and developmentfor oral, topical and inhaled products.In April 2001, a purpose-built, three-floored extension, each floor of 1100m2,was opened to house state-of-the-artresearch and development laboratories.

Following the consolidation of nano-particulate technology from Switzerland,SkyePharma Canada in Montreal, formerlyRTP, will become our centre of excellencefor improving the solubility of otherwiseinsoluble drugs.

Commercial manufacture of productsusing these technologies will be atSkyePharma Production in Lyon, France.This is one of the few facilities in Francethat has manufacturing facilitiesapproved by both US Food and DrugAdministration (FDA) and EuropeanHealth Authority regulatory inspectors.

SkyePharma Inc. in San Diego is ourcentre of excellence for the research,development and manufacture ofsustained release injectable products.We have a continuing programme offacility investment to sustain operationsto the necessary regulatory guidelines.A full refurbishment of the DepoCytmanufacturing facility in San Diego,completed on time and within budget,included a new product flowconfiguration for more efficient, cost-effective manufacturing,allowing us to handle increasednumbers of feasibility projects.

Re-organisationTo maximise resource utilisation, we haverestructured the organisation, which willafford flexibility of approach, improvecommunication and create an environmentcombining the strengths and potential ofour technologies with the talents of ourcommitted scientists and support staff.


technology and our other technologies arealready attracting potential new clients.

RTP also brings a rich pipeline of overten projects, including a late-stage newformulation of the lipid-lowering drugfenofibrate and an improved formulationof the anaesthetic propofol. Fenofibrateis partnered with an undisclosedpharmaceutical company and has amarket of over US$500 million in itscurrent form. The improved propofolformulation will enter Phase IIb trialsduring the first half of 2002 with a targetlaunch date, on successful completion ofclinical trials, in 2005. Propofol is the activeingredient in AstraZeneca’s Diprivan,a leading injectable anaesthetic, whichachieved sales in 2001 of US$465 million.In addition, RTP had worked with busulfan,an anti-cancer agent, an intravenousantibiotic formulation and oralbudesonide, to treat inflammatory boweldisease. These products will be valuablecontributors to SkyePharma’s growingportfolio of in-house developed products.

The RTP acquisition followed a step-by-step approach to ensure that RTP’sbusiness was on track to deliver results,and that funds would be available tocontinue the development of identifiedprojects. When we acquired the first 40.2%of RTP, it had a number of third-partyclients including SuperGen, IDEXX andSchering-Plough. In September 2001,RTP announced a major, exclusiveagreement with Baxter HealthcareCorporation, a leader in injectablemedications to use RTP’s IDD™technology to formulate injectables forBaxter’s own clients. In addition, a further,previously unannounced, agreement hasbeen signed with Schering-Plough toformulate another of their proprietarycompounds. With these agreements inplace, the appointment of new seniormanagement, and US$30 million fromPaul Capital, we moved to increase ourshareholding to 100%

For each drug delivery platform, wehave appointed a ‘champion’ who willbe responsible for project managementof all ongoing programmes and, usingtheir knowledge and contacts, for newproduct innovation. Teams, able to supportequally all the platform technologies withgeneral services such as chemicalanalysis, process development andproduction, will work alongside andsupport the champions. Both Companyand clients benefit from maximising eachteam’s contribution.

Project managementProject management plays a critical rolein decision-making and in controllingglobal resource allocation as we growand seek to maximise returns on all ourprojects. It is a vital process in ensuringefficient, cost-effective and timely projectprogression and in maximising technical,research and clinical staff productivity.Throughout the year we continuouslyimproved resourcing and technicalsupport, and this will be extended to RTP’sproducts integrated into our portfolio.

Enhanced solubilisationAbout 50% of new, chemically baseddrugs are insoluble or poorly soluble inwater. As a result, many otherwisepromising compounds never reach themarket. If they do, they may be marketedas sub-optimal formulations, often givingpoor or erratic bioavailability or a greaterrisk of adverse side effects.

SkyePharma has been gradually buildingits expertise in this valuable area sincethe acquisition of certain solubilisationtechnologies from German-based MedacGmbH in 1999. Now adding RTP’stechnology, SkyePharma has the mostadaptable, advanced and comprehensiverange ofsolubilisation technologies availableto any single drug delivery company.

RTP’s Insoluble Drug Delivery (IDD™)technology platform provides a solutionto many insolubility problems, enhancingthe uptake and safety of water-insolubledrugs across a broad range of therapeuticclasses including anaesthetics, anti-cancer agents and immune suppressants.The clear synergies between this

Solubilisation“Nanotechnology and nanobiology areexpected to have a profound impact onhealth and medicine. Some of the potentialbenefits of working at submicron levelinclude new formulations and routes fordrug delivery that broaden therapeuticpotential.” Scrip Magazine January 2002.

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Injectable technologyInjectables comprise some 15% of thedrug delivery market. Traditional methodsof injectable drug administration mayhave a number of limitations includingshort-term provision of therapeutic drugconcentrations, side effects, poor patientcompliance and high costs due to the needfor frequent administration. Our highlyversatile DepoFoam technology, a unique,lipid-based system able to deliver sustaineddrug release for defined periods up to amonth from a single injection, can providesolutions to all these issues.

Of all our drug delivery technologies, webelieve DepoFoam will have the greatestimpact on the Company’s future growth.This is because it can deliver complexmacromolecules, proteins, peptides andnucleic acids, the current market for whichis in excess of US$10 billion. These, andfuture, biotechnology products cannotcurrently be delivered other than byrepeated injection.

OncologyDepoCyt, an injectable, sustained releaseformulation of cytarabine, is the only FDA-approved chemotherapeutic agent for thetreatment of lymphomatous meningitis, aserious complication of certain cancers.

Full year progress was significantlybolstered by the product’s reintroductioninto the US market in March 2001. Salesto the end of 2001 by our marketing

partner Chiron Corporation were slowerthan anticipated. However, there areearly positive indications from a revisedmarketing strategy aimed at identifyingand treating patients at an earlier stagein their disease and emphasising theresulting positive impact on their qualityof life. We believe that this producthas annual US sales potential in theregion of US$50 million.

Post-marketing Phase IV clinicalstudies, a feature of the US approvalprocess, are progressing well andsimilar trials have now started inEurope. The studies are recruitingpatients with solid tumours as wellas those with haematologicalmalignancies. Using this data, we willseek an expanded label in both the USand Europe that will include approvalto treat patients with solid tumours.

DepoCyt received European Commissionmarketing authorisation during the year. InJuly 2001, we chose Elan Pharmaceuticalsto market the product in Europe and thePhilippines because we were impressedby their specialist hospital marketing focusand commitment to the development of aworld-class oncology business in Europe.A European launch is anticipated in thethird quarter of 2002.

In June 2001, we licensed DepoCyt forJapanese commercialisation to Nippon-Shinyaku, who currently market DepoCyt’s


During the year, several DepoFoam projectsprogressed to an identifiable stage. Otherearly stage feasibility programmes werestopped either for commercial or technicalreasons, including those with Amgen Inc.,USA and Kirin Brewery Company Ltdof Japan. In total, we started four newrelationships with external companiesto use DepoFoam technology andprogressed one additional internally-fundedproject. The partners remain undiscloseddue to their wish to maintain confidentiality,at least during early stage development.However, we have been ableto disclose thatan agreement is nowin place with Chugai tolicense, manufacture, market and sell novelformulations of certain unnamed proteinmacromolecules, to be developed usingour DepoFoam™ technology.

DermatologyA recent agreement with the emerging USbiotechnology company Astralis gives usan opportunity to share in the significantpotential of a novel injectable therapy forthe treatment of psoriasis that has alreadyshown encouraging early-stage clinicalresults. Astralis are paying us to developtheir lead compound Psoraxine up to theend of Phase II clinical studies when wewill have the option to acquire worldwidelicensing and distribution rights.

There is no approved cure for psoriasis,a chronic skin disorder affecting about 3%of the population. Currently the US marketsize, comprising often-inadequatetherapies, is in excess of US$2 billion.Some 2,770 psoriasis patients have alreadybeen treated in Venezuela in accordancewith the Venezuelan Ministry of Healthstandards. Astralis observed a positiveresponse in 96% of the patients tested.648 patients experienced a 100% PASI(Psoriasis Area and Severity Index)reduction of their psoriasis whilst 1,000patients experienced between 70% and99% PASI reduction.

Separately, SkyePharma has made anequity investment in Astralis, currentlygiving us 12.2% of the company risingto 18.0% by January 2003. In additionto Psoraxine, Astralis will focus on thedevelopment of novel treatments forother immune system disorders.

active component in Japan. Together wewill seek accelerated marketing approvalfor DepoCyt and we are currently reviewingtheir regulatory strategy and clinical plans.

Pain managementSkyePharma has two, clinical-stageDepoFoam products aimed at providingextended pain management. Our leadproduct DepoMorphine has a uniqueprofile in the management of moderate-to-severe post-operative pain, offering48 hours of pain relief from a single pre-operative injection. In Phase IIstudies, DepoMorphine scored ‘excellent’ratings compared with standardunencapsulated morphine. Followingdiscussions with the US FDA, two pivotalPhase III studies, enrolling around 750patients in total, are investigatingDepoMorphine’s safety and efficacy incontrolling post-operative pain followinghip replacement or lower abdominalsurgery. Additional Phase III studies,to compare DepoMorphine withunencapsulated morphine for effectivepost-operative pain relief in patientsfollowing knee replacement, childbirthby Caesarean section and majorabdominal surgery, will be used tosupport filing for European regulatoryand marketing approvals, expected withUS filing in 2003. The data will also supportproduct marketing by SkyePharma’sultimate marketing partner.

DepoBupivacaine is an extended releaseformulation of bupivacaine, commonlyused as a local anaesthetic in manysurgical procedures. There is a significantmarket opportunity for products that canprovide pain relief for the first two daysfollowing minor to moderate surgery,in particular for plastic surgery. A pilotPhase I study, comparing the efficacyagainst time of our formulation withplacebo or active control in a small numberof volunteers, clearly demonstrated thatDepoBupivacaine gave a local anaestheticeffect that exceeded 48 hours. We plan tofile an IND and start full-scale US clinicalstudies in 2002. An undisclosed majorpharmaceutical company has beengranted an option, currently underreview, to enter a full developmentand marketing agreement.

InjectableOf all our drug delivery technologies, webelieve DepoFoam will have the greatestimpact on the Company’s future growth.This is because it can deliver complexmacromolecules, proteins, peptides andnucleic acids, the current market for whichis in excess of US$10 billion. These, andfuture, biotechnology products cannotcurrently be delivered other than byrepeated injection.

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Topical technologyDermatology is the main area ofapplication for SkyePharma’s topicaltechnology. Solaraze, SkyePharma’sfirst marketed product based on ourproprietary Hyaluronan InducedTargeting (HIT) technology, is a topicalgel formulation of hyaluronic acid (HA)and the non-steroidal anti-inflammatorydrug diclofenac. Solaraze is approved forthe treatment of actinic keratosis, aprecancerous skin condition caused byover-exposure to the sun. During 2001,Solaraze received marketing approvalin both Europe and the US, where weestimate there is a US$250 millionpotential market. A May 2001 UK launchby our marketing partner, Bioglan, wasfollowed by a German launch in August.Quintiles launched Solaraze in the USin January 2002.

Autumn 2001 witnessed considerableuncertainty about Bioglan’s future thatalso had a negative effect on our ownCompany. However, resolution wasreached for the North Americanmarkets in December when we receivedUS$17.5 million, US$12.5 million fromBioglan and US$5 million from Quintiles.Following this, the North Americanmarketing rights were transferred toQuintiles although Bioglan retained

European rights. In February,administrators were appointed tosell the assets of Bioglan.We are indiscussion with Arthur Andersen,Bioglan’s Administrator, and believethat we will realise superior value forthis product through its out-licensingto another European partner.

Hyclinda, a topical gel to treat acne,is another product, based on HITtechnology, which had been takenthrough certain Phase III clinical studieswith Shire Pharmaceuticals (Shire). Wehave now recovered the rights to Hyclindafrom Shire and we will complete the datapackage and prepare to file for marketingapproval in the US and Europe during 2003.A new marketing partner is being sought.

In January 2001, we announced that wehad gained certain marketing rights tothree of Bioglan’s topical drug deliverytechnologies – Crystalip, DermaStick and two products using the ES-Gelsystem. Crystalip enhances the stabilityof drugs by embedding them in lipidcrystals. DermaStick presents the activeingredients in a wax stick, enablingcontrolled application to affected skin. ES-Gel is a semi-solid formulationproducing enhanced solubility of drugs.With these technologies, we are now


asthmatic condition, often associatedwith smoking, that also causes chronicbronchitis and emphysema. Thisprogramme with Arakis is a primeexample of our commitment to investingin our own pipeline to develop valueadded products in important diseaseareas with large market potential.

In January 2002, we announced thesignature of exclusive agreements withAstraZeneca PLC to develop the nextgeneration of their Pulmicort® MDI.In an endorsement and validationof our expertise in the developmentof environmentally-friendly inhalers,we will replace the CFC propellantin the currently marketed MDIs with hydro-fluoro alkane (HFA). We will beresponsible for all pre-clinical and clinicaldevelopment as well as regulatory filingsfor marketing approval. We received asigning fee of US$2 million, and cananticipate progress-related milestonepayments that could total up to US$10million once marketing approval isgranted. In addition, we will receiveroyalties on net sales of the HFA-based product.

A recent addition to our pipeline, whosedevelopment will be funded in part byPaul Capital, is our own HFA formulationof formoterol, the long-acting beta-2against which will be used in MDIs to treatsome of the world’s 150 million asthmapatients. HFA-formoterol will enterhuman clinical studies during the firsthalf of 2002, targeting an anticipatedproduct launch in 2004. A marketingpartner will be sought in 2002.

An ongoing collaboration with Meridica,a PA Group company, has resulted inthe design of the Xcelovent inhaler thatcombines the best features of our breath-actuated dry powder technology with theoption of HFA-powered metered dosedelivery. We have agreed several productsthat will be co-developed, and anticipatehaving a product at proof of principlestage by the end of 2002.

world leaders in improving the deliveryof drugs on, or through, the skin.

Inhalation technologySkyePharma is a major independentprovider of inhaled pharmaceuticaldrug delivery technology. We offer drugformulation capability and inhalerdevelopment for environmentally-friendly,non-chlorofluorocarbon (CFC) poweredmetered dose inhalers (MDIs) and fullybreath-actuated dry powder inhalers(DPI). We estimate that European andUS legislation will propel non-CFC MDItechnology to 60% of the future worldmarket for inhaled products, currentlyworth $6 billion and growing at the rateof 10% a year.

Inhaled pharmaceuticals are used almostexclusively to treat the more than 150million patients in the industrialised worldwho suffer from asthma or bronchitis.Progress, both with the enhancementof our inhalation technologies for asthmaand the number of new deals identifiedand signed, has been very encouraging.

Novartis has adopted SkyePharma’sbreath-actuated DPI, incorporatingour patented powder formulation, forthe next generation of their asthmamedication Foradil. Phase III clinicaltrials continue to progress well and weanticipate a joint US and European filingin the second half of 2002, with the firstlaunches in the following year.

Novartis’ validation of our DPI technology,and the continuing progress of our clinicaltrials, particularly in the US, has stimulatedinterest from other companies. Activediscussions are ongoing with severalparties and we anticipate announcingfurther agreements over the coming12 to 24 months.

Last summer, we announced anagreement with Arakis, an emergingUK pharmaceutical company, to jointlydevelop AD 313, a novel tissue-remodelling agent for the treatment ofchronic obstructive pulmonary disease(COPD) using SkyePharma’s proprietaryinhalation formulation and devicetechnology. COPD is a severe, debilitating

TopicalDermatology is the main area of applicationfor SkyePharma’s topical technology.Solaraze, SkyePharma’s first marketedproduct based on our proprietaryHyaluronan Induced Targeting (HIT)technology, is a topical gel formulation ofhyaluronic acid (HA) and the non-steroidalanti-inflammatory drug diclofenac.

InhalationSkyePharma is a major independentprovider of inhaled pharmaceutical drugdelivery technology. We offer drugformulation capability and inhalerdevelopment for environmentally-friendly,non-chlorofluorocarbon (CFC) poweredmetered dose inhalers (MDIs) and fullybreath-actuated dry powder inhalers (DPI).

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Oral technologySkyePharma has developed a numberof platform technologies and productsincorporating its proprietary newGeomatrix patented formulationscontrolled release systems, includingGSK’s Paxil CR. All control the amount,timing and location of drug release intothe body. The original concept behindthis technology was described in the early1980s. Since then, a number of productsincorporating new Geomatrix patentedformulations have been marketedincluding Dilacor XR in the US, DiclofenacCR in Germany and, one of our leadingproducts, Xatral-OD in ten Europeancountries, including France, the UK,the Netherlands, Italy, Swedenand Switzerland.

Xatral-OD is a once daily formulationof Alfuzosin used for the treatment ofbenign prostatic hyperplasia, a commondisorder that affects more than 50% ofmen in later life. It was developed withSanofi-Synthelabo who already marketa two or three times daily formulation inmore than 80 countries worldwide,supporting sales in excess of US$100million in Europe alone. Sanofi-Synthelaboare marketing Xatral-OD in Europe.An approvable letter received from theUS FDA in October 2001, asked foradditional clinical data, which shouldbe available before the end of 2002.We anticipate marketing approval late2002 or early 2003 in the US.

With GSK, we continue to make progressdeveloping a once-daily Geomatrixformulation of ropinerole, an FDA-approved drug that is currently marketedas Requip. Requip is indicated for thetreatment of Parkinson’s disease, achronic progressive disease in which nervecells degenerate and impair the control ofbody movements, either as monotherapyor as adjunct therapy to L-dopa. Thedevelopment of new treatment guidelinesin the US will lead to significant increasesin the prescribing of dopamine agonists,like ropinerole, as first line therapy for thetreatment of Parkinson’s disease.SkyePharma is developing a once-dailyRequip formulation, aiming for fastersymptom control. We are generatingPhase II data and anticipate startingpivotal studies later in 2002.

On March 27, 2002, we were delightedwith GSK’s announcement that they wouldbe launching Paxil CR, a new controlled-release formulation of their leadingantidepressant Paxil (paroxetine HCI)by the end of April 2002. As the seventhlargest selling drug in the world today,Paxil has been a great success for GSKand for patients worldwide. SkyePharmareformulated Paxil using its Geomatrix oraltechnology, and will receive an undisclosedmilestone payment when Paxil CR islaunched, in addition to royalties on netsales. The US FDA have approved Paxil CRfor the treatment of major depressivedisorder and panic disorder. GSK are


focused on sustaining profitability,providing growth and shareholdervalue.GSK’s recent announcement, thatPaxil CR would be launched by the end ofApril 2002, was a substantial milestone forus. We have every confidence that Paxil CRwill make a significant contribution toSkyePharma’s future growth.

Drug delivery offers enormousopportunities. We estimate that thepotential market for drugs usingSkyePharma technology nowamounts to some US$8 billion.

SkyePharma is firmly committed toproviding a single source of drugdevelopment expertise, extending the lifeof good drugs, developing a proprietaryrange of new and existing molecules,supplying the medical profession withthe most efficient drugs available andto sustaining a profitable future for staff,shareholders and clients. I am happy to say that we remain on track to achievethese goals.

Michael AshtonChief Executive Officer

also carrying out clinical studies withwomen suffering from pre-menstrualdysphoric disorder, a severe form of pre-menstrual syndrome. We expectPaxil CR to contribute towards ourrevenue growth in coming years.

One programme to develop an undisclosedoral drug with Pfizer Inc. was stoppedduring the year. This follows an internaldecision by Pfizer which was unrelatedto our development expertise.

Whilst Geomatrix patented technologycontinues to demonstrate its valuefor clients, we continue to update thetechnology and file new patents. Webelieve we are now leaders in achievinga technically-demanding, oral deliveryformulation which allows a predeterminedlag time before drug molecules start to bereleased into the body. This is designed fordrugs for which dosing is required atparticular times of the day or night, oftenseveral hours after the patient has takenthe drug. This technology is behind theprogramme we are progressing withMerck KgaA, where we have optimised theformulation and dosage of an un-nameddrug and are moving into clinical studies.

Finally, during the year, we signeda technology access agreement with a US collaborative partner, to useGeomatrix drug delivery technology in thefields of high quality, oral and nutriceuticaldietary supplements. Under a separateagreement, the partner will identify sixproducts in total for development, twoof which have already been selected.Improved oral formulation will providemore user-friendly products with improveddosing characteristics and better efficacy.The global market for vitamins, minerals,herbal and homeopathic remediesis estimated to be worth aroundUS$35 billion and continues to grow.

SummaryIn summary, I am very pleased with theadvances we have made during the 2001financial year, most particularly withapplication of a clear strategic direction thatrecognises the challenges facing theworldpharmaceutical and biopharmaceuticalindustry. At the same time, we are clearly

OralSkyePharma has developed a numberof platform technologies and productsincorporating its proprietary Geomatrixcontrolled release systems, includingGSK’s Paxil CR. All control the amount,timing and location of drug release into the body.

Xatral-OD is a once daily formulationof alfuzosin used for the treatment ofbenign prostatic hyperplasia, a commondisorder that affects more than 50% ofmen in later life.


Directors and officers 2001

01 02 03

01 Ian Gowrie-Smith 02 Michael Ashton 03 Air Chief Marshal Sir Michael Beavis

04 R Stephen Harris 05 Dr Jerry Karabelas 06 Dr Keith Mansford 07 Donald Nicholson

08 Walter Zeller 09 Suzanne V McLean

04 05 06 07

08 09


01 Ian Gowrie-Smith * (aged 53)Executive Chairman, appointed in January1995. Mr Gowrie-Smith has more than15 years of management experiencein the pharmaceutical industry andwas responsible for the founding andsubsequent flotation of Medeva plc.

02 Michael Ashton * (aged 56)became Chief Executive Officer inNovember 1998, appointed to the Boardin March 1997. He has over 30 years of experience in the pharmaceuticalindustry having worked for Merck Inc.,Pfizer Inc., Purepac Inc. and, prior to thisappointment, Faulding Inc where Mr Ashton was Chairman, President and CEO.

03 Air Chief Marshal Sir Michael Beavis(aged 72)Non-executive Director, appointed in May1989. Sir Michael entered the Royal AirForce in 1947 and retired in 1987, his last appointment being DeputyCommander-in-Chief Allied ForcesCentral Europe, NATO. He is a defenceconsultant with Burdeshaw Associates,USA and a Non-executive Director ofAlliance Aircraft, USA. He is a Freeman of The City of London and a Liveryman inthe Guild of Air Pilots and Navigators.

04 R Stephen Harris (aged 59)Non-executive Director, appointed inNovember 1995. He has 38 years‘commercial experience in thepharmaceutical industry, having workedfor ICI Pharmaceuticals, Merck, Eli Lilly,Boots, Reckitt & Colman and Gensia;and was Director of Development andLicensing with Medeva plc. He is Non-executive Chairman of ProteomeSciences plc and Non-executive Directorof Advanced Medical Solutions Group plc,Microscience Ltd, Prophilian plc,Sinclair Pharma Limited and businessdevelopment Director of Trigen Limited.

05 Dr Jerry Karabelas (aged 49) Non-executive Director, appointed inNovember 2000. Dr Karabelas hasmore than 20 years‘ experience of thepharmaceutical industry having spent themajority of his career with SmithKlineBeecham. Dr Karabelas was appointedChairman of the Novartis Venture Fundin July 2000 having previously held theposition of CEO of Novartis Pharma AG.He is also an External Director of LaytonBiosciences, California; Fox Chase CancerCenter, The University of the Sciencesin Philadelphia, and a member of theScientific Advisory Committee of theMassachusetts General Hospital, Boston.He is also a partner of Care Capital LLCanda Director of NitroMed Inc.

06 Dr Keith Mansford (aged 70)Non-executive Director appointed in March1996. He has over 40 years‘ experience inthe pharmaceutical and biotechnologysectors principally with Beecham Groupand SmithKline Beecham. From 1989to 1992 Dr Mansford was Chairman ofResearch and Development at BeechamGroup and subsequently SmithKlineBeecham plc. He is an External Directorof Sepracor Inc. and of MindsetPharmaceuticals. He is Chairman ofMansford Associates, an internationalhealthcare consultancy.

07 Donald Nicholson * (aged 44)Finance Director, appointed in March 1997,joined SkyePharma in February 1996.He is a member of the Institute ofChartered Accountants of Scotland.He began his professional career withDeloitte Haskins & Sells and has spentover 16 years in healthcare includingWellcomeplc and Corange Groupwhere he was Corporate Strategy &Finance Director.

08 Walter Zeller (aged 71)Non-executive Director, appointed inFebruary 1996. Mr Zeller had an extensivecareer with Ciba Geigy and was mostrecently Chief Financial Officer ofCorange Limited, the holding companyof Boehringer Mannheim and DePuy.Mr Zeller is a Non-executive DirectorofHenkel and CieAG, Switzerland.

08 Suzanne V McLean * (aged 47)General Counsel and Company Secretary,joined SkyePharma in September 1999.She has 20 years of internationalcommercial legal experience incommerce and industry. Miss McLean‘smost recent appointment was as LegalDirector and Company Secretary atBiocompatibles International plc.

*Member of Executive Committee


Financial review

Turnover Turnover in the year ended 31 December2001 increased by 90% to £46.1 million,compared to £24.3 million in 2000. Thisrepresents a cumulative annual growthrate of 39% since 1996.

Contract research and developmentrevenue, including milestone payments,increased by 128% to £38.2 million.Milestone payments in 2001 include £12.4 million in respect of Solaraze and£9.0 million following DepoCyt Europeanapproval. Contract development incomeexcluding milestones also more thandoubled during the year to £9.9 million.Manufacturing and distribution revenuesincreased by 85% to £6.4 million mainlydue to the return of DepoCyt to the marketin March. Royalty income of £1.5 million is comprised of approximately £1.1 millionfrom Xatral OD and Solaraze, with £0.4 million from generics. This contrastswith 2000 where £3.7 million came fromgenerics and £0.3 million from non-generics. The Company also recognisedincome of £6.3 million during the yearunder its agreement to finance thedevelopment of DepoMorphine which isdiscussed further below under ‘Otheroperating income’.

During the past six months there has beenmuch public and professional debateabout revenue recognition. SkyePharmarecognises revenue only when it is earnedand non-refundable, and when there are nofuture obligations pursuant to the revenue,in accordance with the contract terms.

During 2001 some £11.7 million of turnoverand other income was deferred usingthis policy;

Contract development revenue £7.0 million

Other income £4.7 million

£11.7 million

During the period the Directors reviewedthe Group’s revenue recognition policy aspart of its review under FRS 18, AccountingPolicies. The Directors view the Group’srevenue recognition policy as appropriate,reflecting on the one hand theappropriateness of recording revenuewhere costs associated with the revenue

have been expensed and the deferral ofrevenue where there are future obligations.The FRS 18 review did not result in anychanges to the Group’s accounting policies.

Cost of salesCost of sales consists of research anddevelopment expenditures, including: thecosts of certain clinical trials incurred onbehalf of our collaborative partners; thedirect costs of contract manufacturing;direct costs of licensing arrangements and royalties payable. Cost of sales were£18.8 million in 2001 compared to £15.6 million in 2000. However, gross profittrebled for the secondsuccessive year to£27.3 million compared to £8.7 million in2000, primarily as a result of the increasedmilestones received.

ExpensesSelling, marketing and distributionexpenses were £4.8 million compared to£3.8 million in 2000, reflecting primarilySkyePharma’s share of expenses forDepoCyt under its collaborationagreement with Chiron Corporation.Research and development expensesincreased by £4.8 million to £17.9 million,due to increased expenditure onDepoMorphine, DepoCyt and on expandingthe Group patent portfolio. Amortisation ofintangible assets increased by £0.5 millionto £3.8 million in 2001 and otheradministration expenses were £12.2million in 2001 compared to £9.3 million in2000. The increase in administration costsreflects the growth of the business andincreased professional fees for significanttransactions entered into during the year.

Other operating income Under an agreement with Paul CapitalRoyalty Acquisition Fund, signed inDecember 2000, the Group will receive atotal of $30 million between 2000 and 2002to fund the clinical development andregulatory submission of DepoMorphine,in return for a proportion of potential futureroyalty and revenue streams fromDepoMorphine and certain SkyePharmaproducts. Income of £6.3 million wasrecognised during the year under thisagreement which essentially offsets theR&D expenses associated withDepoMorphine during the period.

Donald NicholsonFinance Director


Operating results Operating losses for the 12 months to 31 December 2001 fell by 72% to £5.1 million from £18.0 million in 2000. The Group’s loss on ordinary activitiesbefore tax was £9.4 million in 2001, aftera net interest payable increase of £2.0million, compared to £19.7 million in 2000.

More importantly, the Group made its firstoperating profit and net profit in the secondhalf of 2001. The two half years compareas follows;

Six months to Six months to30 June 2001 31 December 2001

£’000 £’000

Turnover 14,799 31,327

Gross profit 5,549 21,757

Operating (Loss)/Profit (9,919) 4,820

Net (Loss)/Profit (11,603) 2,151

The acquisition of RTP negatively impactedthe second half results by £0.6 million. The loss per share for the year fell by 54%to 1.8 pence compared to 3.9 pence in 2000.

Foreign currency exchange movementsdid not have a material impact on theresults of operations in 2001 comparedwith 2000.

Cash balances and cash flow SkyePharma met its objective of beingsubstantially cash neutral in the secondhalf of 2001. At 31 December 2001SkyePharma had cash and short-termdeposits of £26.9 million and bankoverdrafts of £1.6 million comparedwith £20.2 million and £0.7 million,respectively at 30 June. There was a netcash inflow from operating activities of£5.9 million for the full year compared toa net cash outflow in 2000 of £9.3 million.Purchases of tangible fixed assets were£7.7 million and purchases of intangibleassets amounted to £0.3 million.Purchases of fixed asset investmentswere £8.3 million, of which £7.5 millionrepresented the acquisition of convertiblepreferred shares in Astralis and £0.8million the purchase of SkyePharmashares by the SkyePharma PLC GeneralEmployee Benefit Trust on the introductionof the Deferred Share Bonus Plan as partof the Group’s hedging strategy. Cashreceived on the acquisition of RTP

amounted to £5.4 million; £1.3 million netof investment. The resulting total cashoutflow from operations (before financing)for the year was £10.9 million compared to£26.8 million in 2000.

Balance sheet The Group balance sheet at 31 December2001 shows shareholders’ funds of £95.1million. At 31 December 2001 goodwillrecorded within the profit and loss accountreserve amounted to £152.5 million.

In July 2001 the Group acquired an initial40.2% interest in RTP Pharma Inc. ofCanada (‘RTP’). On 13 March 2002 theGroup announced the substantialcompletion of the acquisition of theremaining voting shares of RTP. Given theDirectors’ intent to acquire 100% of RTPand SkyePharma’s control of RTP witheffect from 27 December 2001, RTP hasbeen consolidated at 31 December 2001.The total consideration for bothtransactions amounted to £39.4 millionincluding acquisition costs and comprisedapproximately 50 million Ordinary Sharesand £3.5 million in cash. This gives rise togoodwill of £29.9 million. Further detailsare provided in note 25, Acquisitions.

During the year the Group recordedfixed asset investments of £14.2 million,further details of which are provided innote 12, Investments.

As reported last year a settlementagreement was signed in March 2000establishing the full and final settlementof the deferred consideration payable onthe 1996 acquisition of Jago. Followingshareholder approval, some six millionOrdinary Shares and 24 million DeferredShares were issued, and the conversion ofDeferred Shares into 24 million OrdinaryShares is contingent upon the commercialsale of Paroxetine/Paxil CR and annualsales reaching $1,000 million.

The issue of the 24 million Deferred Shareshas been recorded on the balance sheet asnon-equity shares and non-equity sharepremium based upon a share value of94.25 pence, the price on the date of issue,20 July 2000. This assumes that the shareswill ultimately be issued.

In April 2001 a final payment of $3 millionwas made to Medac GmbH under thepurchase agreement for the transferof the nano-particulate technology.

Under US GAAP, the Company’s losson ordinary activities would have been£43.9 million, and shareholders’ fundswould be positive at £142.6 million.The differences from UK GAAP relateprincipally to the treatment of goodwill,acquired in-process research anddevelopment expenditure, revenuerecognition and the sale of royaltyinterests as explained more fully inthe Reconciliation to US Accounting Principles on pages 70 to 72.

Subsequent events On 13 March 2002 the Group announceda transaction under which Paul CapitalRoyalty Acquisition Fund ("Paul Capital")will pay SkyePharma US$30 million during2002 and 2003, principally to fund theclinical development of RTP’s propofoland SkyePharma’s HFA-formoterol.In return, SkyePharma has agreed to sella portion of the potential future royaltyand revenue streams from these, andseven other products from the twocompanies’ drug pipelines to Paul Capital.Further details are provided in note 29,subsequent events.

On 27 March 2002 SkyePharmaannounced that GlaxoSmithKline will belaunching Paxil CR by the end of April 2002.

Forward-looking statements The foregoing discussions containcertain forward-looking statements withrespect to certain development projects,potential collaborative partnerships,results of operations and certain plansand objectives of SkyePharma. By theirnature forward-looking statementsinvolve risk and uncertainty that couldcause actual results and developmentsto differ materially from those expressedor implied. The significant risks relatedto SkyePharma’s business are discussedin SkyePharma’s SEC filings under thecaption Risk Factors.

Donald NicholsonFinance Director


Report of the Directors

The Directors present their report on the affairs of the Group, together with the consolidated financial statements and auditor’s report for the year ended 31 December 2001.

Principal activities and business reviewA review of the Operating and Financialbusiness and future developments of theGroup is set out in the Chairman’sStatement, Review of Operations andFinancial Review on pages 10 to 23 and26 to 27.

The principal activities of the Group are the research and development,manufacture and sale of prescriptionpharmaceutical products.

Results and dividendsThe group made a loss for the year to31 December 2001 of £9.5 million (2000: £19.7 million). The Directors do notpropose to pay a dividend and the whole ofthe loss will be transferred to reserves.

Research and developmentThe Group incurred research anddevelopment costs of £17.9 million (2000:£13.1 million) during the year which hasbeen written off to the profit and lossaccount in accordance with the Group’saccounting policy.

Environmental policyThe Company is conscious of itsresponsibilities in respect of theenvironment and has produced a groupwide environmental policy.

Payment of creditorsThe Group’s policy is to pay its supplierswithin 30 days from receipt of invoiceunless otherwise agreed with suppliersprior to goods or services being ordered.Suppliers are made aware of the terms of payment and it is the Company’s policyto abide by the agreed terms subject to the terms and conditions being fulfilled by the supplier. At 31 December 2001creditor days outstanding in respect of the Company amounted to 31 days (2000: 25 days).

DirectorsThe membership of the Board on 9 April 2002 was as follows:

Ian Gowrie-Smith •Michael AshtonAir Chief Marshal Sir Michael Beavis * †Stephen Harris † •Dr Argeris (Jerry) Karabelas * •Dr Keith Mansford † Donald NicholsonWalter Zeller *

Suzanne V McLeanSecretary to the Board

* Audit Committee† Remuneration Committee• Nomination Committee

On 6 June 2001 Dr Jacques Gonellaretired as a Non-executive Director andon 26 November 2001 Tamar Howsonretired as a Non-executive Director.

The Directors retiring by rotation at theAnnual General Meeting are MessrsGowrie-Smith, Ashton and Nicholson who, being eligible, offer themselves for re-election. In accordance with theCompanies Act 1985, S. 293, Sir MichaelBeavis, Mr Walter Zeller and Dr KeithMansford, having respectively reachedthe ages of 72, 71, and 70 years of age,will offer themselves for re-election tobe appointed under a resolution of whichspecial notice will be given. Subject to theoverriding approval of the shareholders, Non-executive Directors hold theirappointments for a period of threeyears except for those aged over 70.In the opinion of the Board Sir MichaelBeavis, Mr Walter Zeller and Dr KeithMansford have been key in the successfuldevelopment of the Company and continueto provide a worthwhile contribution to itsfuture growth.

Details of Directors interests in the sharecapital of the Company together withdetails of the share options granted tothem are disclosed in the Report of theRemuneration Committee on pages 31 to36 of this Report and Accounts.

As at the date of this report, the Directors ofthe Company had an interest, beneficiallyand non-beneficially, in an aggregate of25,880,385 Ordinary Shares, representing4.6% of the Company’s issued share capital.

Directors’ and officers’ liability insuranceDuring the period under review, theCompany and the Group maintainedan insurance policy for its Directors andofficers in respect of liabilities which couldarise in the discharge of their duties in theordinary course of business.

Substantial shareholdingsIn addition to Directors’ interests asdisclosed in the Report of theRemuneration Committee on pages 31and 36 the Company has been advised ofthe following individual interest which at9 April 2002 exceeded 3% of the Company’sissued share capital:-

Dr J Gonella – 10.1%AEGON UK plc group – 3.1%Fidelity Investments – 3.1%

Employees and disabled personsThe Group is committed to a policyof promoting employees’ awarenessof its activities, encouraging employees’participation in the growth of the Groupand welcomes staff input at all levels.

It is recognised that by far the mostimportant form of involvement andinformation regarding the progress,performance and plans of the Group takeplace during informal daily discussionsbetween management and otheremployees. It is Group policy to offer thesame opportunity to disabled people as toall others in matters of recruitment andcareer advancement, provided they havethe ability to perform the tasks required,with training where appropriate, and toinstitute retraining where practical incases where disability is incurred duringemployment with the Group.

All employees may have the opportunity to participate in the Company’s relevantShare Option Schemes. Details of theschemes are provided in note 22 to thefinancial statements.


Report of the Directors continued/Statement of Directors’ responsibilities

Corporate governance

Charitable and political donationsNo contributions were made to charities(2000: £Nil). No contributions were madeto political organisations (2000: £Nil).

Close company provisionsThe Company is not a ‘close’ companywithin the meaning of the Income andCorporation Taxes Act 1988, and there havebeen no changes since the end of the year.

Annual General MeetingAt the Annual General Meeting to be heldon 30 May 2002, the Company proposesto seek the usual limited disapplication ofthe statutory pre-emption rights on theissue of new shares. The Company alsoproposes to adopt the rules of theSkyePharma PLC Share Purchase Plan;the Skyepharma PLC 2002 EmployeeStock Purchase Plan and the SkyePharmaPLC International Share Plan and to adoptnew Articles of Association.

A separate letter from the Chairmanexplains the reasons for these resolutions,and also contains the Notice of AnnualGeneral Meeting.

AuditorsPricewaterhouseCoopers have indicatedtheir willingness to continue in office and aresolution for their reappointment will beproposed at the Annual General Meeting.

By order of the Board

Suzanne V McLeanCompany Secretary9 April 2002

Statement of Directors’ responsibilityinrelation to the accountsThe Directors are required by law toprepare financial statements for eachfinancial period which give a true and fairview of the state of affairs of the Companyand the Group as at the end of the financialperiod and of the profit or loss for thatperiod. The Directors confirm that suitableaccounting policies have been consistentlyapplied and supported by reasonable andprudent judgements and estimates asnecessary; applicable accountingstandards have been followed, and thefinancial statements have been preparedon the going concern basis.

The Directors are responsible for ensuringthe maintenance of proper accountingrecords, which disclose with reasonableaccuracy the financial position of theCompany and the Group at any time andfrom which accounts can be preparedto comply with the Companies Act 1985.They are also responsible for ensuring theoperation of systems of internal control forsafeguarding the assets of the Group andfor taking reasonable steps to prevent anddetect fraud and other irregularities.

The financial statements for the yearended 31 December 2001 are includedin the Annual Report 2001, which ispublished by the Company in hard-copyprinted form and on the Company’swebsite on the Internet. The Directorsare responsible for the maintenanceand integrity of the Annual Report on thewebsite in accordance with UK legislationgoverning the preparation anddissemination of financial statements.Access to the website is available fromoutside the UK, where comparablelegislation may be different.

Ian Gowrie-SmithExecutive Chairman9 April 2002

The BoardThe Board of SkyePharma PLC isresponsible for the Group’s system ofcorporate governance and is ultimatelyaccountable for its activities throughoutthe world. The Board comprises threeExecutive and five Non-executiveDirectors. The roles of Chairman andChief Executive are distinct and are held bydifferent people. The role of Non-executiveDirectors is to bring independentjudgement to Board deliberationsand decisions. The Executive and Non-executive Directors are subjectto retirement by rotation and re-electionby shareholders in accordance with theArticles of Association whereby one thirdof the Directors retire by rotation each year.

All Directors have access to the adviceand services of the Company Secretaryand are able, if necessary, to takeindependent professional advice at theCompany’s expense. The Board meetsregularly throughout the year. It has aformal schedule of matters reserved toit for decision but otherwise delegatesspecific responsibilities to committees,as described below.

Board CommitteesThe Group Executive Committee isresponsible for the executive managementof the Group. It is chaired by the ChiefExecutive and comprises the ExecutiveDirectors and other Senior Managersas detailed on page 25. The Committeegenerally meets monthly and informsthe Board of key issues via the ChiefExecutive Officer.

The Audit Committee reviews the half yearand full year results and the Interim andAnnual Report and Accounts prior to theirsubmission to the Board and considers anymatters raised by the external auditors.The Committee is chaired by Mr WalterZeller. It meets formally twice a year withthe external auditors in attendance.

The Remuneration Committee meetsat least twice a year and approves theremuneration of the Executive Directorsand Senior Executives and is responsiblefor the policy and operation of theSkyePharma Share Option Schemes.


Corporate governance continued

The Committee is chaired by Sir MichaelBeavis. The Report of the RemunerationCommittee is presented on pages 31 to 36of the Report and Accounts.

The Nomination Committee considersand makes recommendations to theBoard on the appointment of Directorsand proposes which Non-executiveDirectors should be invited to retire,having regard to the changing needs ofthe Board as a whole. The Committeeis chaired by Mr Ian Gowrie-Smith.The Committee meets as required.

The members of the Audit Committee,Remuneration Committee andNomination Committee aredetailed on page 28.

Accountability and controlSkyePharma operates, and attachesimportance to, clear principles andprocedures designed to achieve theaccountability and control appropriate to a science based business operatinginternationally in a highly regulatedbusiness sector.

SkyePharma has established anorganisational structure with clearlydrawn lines of accountability anddelegation of authority. All Groupemployees are required to adhere tospecified codes of conduct, policiesand procedures. The identification andappraisal of risks is carried out throughthe annual process of preparing businessplans and budgets and through the closemonitoring of operations.

Financial results and key operationaland financial performance indicatorsare reported regularly throughout the yearand variances from plans and budgets areinvestigated and reported. The Group hasa system of high level financial controlprocedures which are supplemented bydetailed procedures at each operatingentity. Compliance with these proceduresis monitored by the corporate officesupplemented by external audit.

The Board has reviewed the effectivenessof internal financial, operational andcompliance controls and risk

management as they operated duringthe year. The Board receives regularreports on areas of significant risk tothe Company, and on related internalcontrols. In addition to its considerationof these reports the Board reviewsannually the overall framework andeffectiveness of controls. Such a systemcan provide only reasonable and notabsolute assurance against materialmisstatement or loss.

Going ConcernSkyePharma is an emergingpharmaceutical company and expectsto absorb cash until products are fullycommercialised. Much of the Group’scash requirement is of an investmentnature and is to a great extentdiscretionary. Further funding maytherefore be required dependent onthe timing of investments and thedevelopment and commercialisation ofthe Group’s own products. The Directorshave a reasonable expectation that theGroup and the Company have adequatecash resources to continue in operationalexistence for the foreseeable future.For this reason, they continue to adoptthe going concern basis in preparingthe financial statements.

Relations with shareholdersThe Company is committed to ongoingcommunication across the shareholderbase, whether to institutional investors,private or employee shareholders. This is achieved through annualand interim reports, other trading statements and the AGM. The websiteat www.skyepharma.com containscorporate and customer informationupdated on a regular basis.

The Combined CodeIn June 1998, the London Stock Exchangeissued the final version of the Principlesof Good Governance and Code of BestPractice (‘The Code’).

The Group is committed to the higheststandards of corporate governance.During 2001 the Board considers thatthe Company complied with all relevantprinciples and provisions of The Codecovered by the annual report and

accounts, save that there was not aSenior Independent Non-executiveDirector until Sir Michael Beavis wasappointed to this position in May 2001.In addition, and by reason of hisshareholding, Dr J Gonella may not havemet the criteria for independence asoutlined in The Code, up until the timeof his retirement at the AGM in 2001.

Walter Zeller Chairman, Audit Committee

9 April 2002


Remuneration report

The Remuneration Committee iscomprised wholly of independent Non-executive Directors of the Company:SirMichael Beavis (Chairman) MrR SHarris, Dr J Karabelas andDrKMansford. The principal function of theRemuneration Committee is todetermine,on behalf of the Board, theremunerationand other benefits ofallExecutive Directorsand senior executives including pensioncontributions, bonus payments,shareoptions and service contracts.Thefees paid to the Non-executiveDirectors are determined by the Board.

During the year the Company complied withthe recommendations of the CombinedCode on Directors’ remuneration asimplemented by the Financial ServicesAuthority in its Listing Rules for listedcompanies, including Section B of the BestPractice Provisions annexed thereto.

The Report of the Auditors to the Membersof SkyePharma PLC, on page 37 covers thedisclosures specified for audit by theListing Rules.

Executive Director remunerationThe Company’s policy on ExecutiveDirector remuneration is as follows:

Total Level of RemunerationThe Remuneration Committee is awarethat it must both attract and retainindividuals of the highest calibre by offeringremuneration that is competitive withcomparable publicly listed companies,without paying more than necessary, andfairly and responsibly reward individualsfor their contribution to the success of theCompany. When setting the remunerationof Directors, levels of remuneration withinthe Group as a whole are considered, anduse is made of Inbucon-Meis Limited, anexternal firm of remuneration consultants.

Base SalaryThe basic salary of each Executive Directorisdetermined by the RemunerationCommittee, taking into account theindividual’s performance and responsibilities.Directors’ emoluments for the year ended31st December 2001 resulted from anindependent review of Group remunerationpolicy on senior executives and

Non-executive Directors, carried out byInbucon-Meis Limited, and are set outin the emoluments table on page 33.

Performance BonusBonuses are paid, at the discretion of theRemuneration Committee, in recognitionof the Directors’ contribution to the successof the Company and the achievement ofspecified objectives. In 2001 the primaryperformance targets were a combination ofobjective corporate, divisional and specificindividual targets. A fundamental part of theannual bonus plan is the requirement that astated proportion of any cash bonusawarded under the bonus plan each year bedeferred through the Company’s DeferredShare Bonus Plan. During 2001 bonusesawarded to senior executives and ExecutiveDirectors ranged between 4% and 41% ofbase salary, half of which were paid in cashand the remainder used to purchase sharesin the Company on their behalf through theDeferred Share Bonus Plan described below.

Deferred Share Bonus PlanThe Deferred Share Bonus Plan wasintroduced in 2001 and operated for thewhole year. Approximately 25 seniorexecutives (including all the ExecutiveDirectors) participate in the Deferred ShareBonus Plan. It is designed to align theinterests of participants with those of theshareholders by encouraging executives tobuild up and maintain shareholdings whichare meaningful in the context of theirremuneration. The Deferred Share BonusPlan requires that there is a mandatorydeferral of part ofeach annual bonus, in theform of Company shares (executiveshares).The mandatory deferred proportionof the bonus is currently set at 50%. TheCompany currently provides one matchingshare for each executive share acquired(calculated on the gross bonus deferral).These matching shares will be released afterthree years provided that the executiveremains in employment and thecorresponding executive shares have notbeen sold. The release of matching sharesis not subject to additional performancecriteria because the maximum potentiallevelof annual bonus including matchingshares for2001 was 90% of salary andthe performance conditions for earningthis bonus were challenging. The actual


Remuneration report continued

maximum achieved, including MatchingShares, was 58.5%.

Option SchemesExecutive Directors and senior executivesparticipate in the SkyePharma ExecutiveShare Option Scheme, the European andNorth American Scheme and theSkyePharma PLC 1999 Share OptionScheme as appropriate. Followingpublication in March 2001 of revisedAssociation of British Insurers guidelinesfor Share Incentive Schemes, the Boardgained shareholder approval to makecertain changes to the Company’s Optionschemes at the Annual General Meetingof the Company in June 2001. In particular,the individual participation limits describedbelow were replaced by an annual limit of200% of remuneration and the performanceconditions were amended sothat exercise isdependent upon total shareholder returnperformance against acomparator group ofcompanies. All options granted to ExecutiveDirectors and senior executives during 2001were made on thisbasis and vest after threeyears on a scale between 0% and 100%depending on the Company’s performancerelative to the performance against thecomparator group of companies (in France,options granted during 2001 will still vestaccording to this three year performanceperiod but they will not be exercisable untilfour years from date of grant). A furtherchange approved by shareholders at theAnnual General Meeting in June 2001 wasthat future options will not be subject to re-testing. Accordingly, options granted in2001 will not be re-tested. If the stringentperformance requirements are not met atthe end of the performance period, alloptions will lapse.

Prior to 2001: Individual participationlimits under the schemes were set at fourtimes individual remuneration, with theexception of Super Options set ateight timesremuneration. Options granted under theschemes (other than Super Options), grantedat the market price ruling at the date of grant,are exercisable after three years and uptoamaximum of 10 years from date ofgrant.Options granted under each of theschemesmay be exercised only if,over aperiod ofthree consecutive years, theshareholderreturn of the Company exceeds the growth

in the FT-SE All Share Index over the sameperiod. Super Options, also granted at themarket price ruling at the date of grant, areexercisable after five years and are subjectto more challenging performanceconditions based upon top quartileperformance in the FT-SE 250 Index.

Share Purchase PlanThe Company’s intention is to encourageshare ownership at all levels of thebusiness, thereby aligning all employees’interests with those of the shareholders.Accordingly, the Company recentlyintroduced the SkyePharma InternationalShare Purchase Plan (“the Plan”) whichwas launched in February 2002.

All employees (including all the ExecutiveDirectors) are eligible to participate in thePlan under the arrangements introducedin their respective countries, full details ofwhich are contained in the accompanyingcircular to shareholders.

The Plan complements the Option Schemesas it is more focused on employee retentionand enables the same remuneration policyapplied to executives under the DeferredShare Bonus Plan to be applied at all-employee level, i.e. awarding matchingshares on the basis of the number ofemployee purchased shares.

Under the Plan, employees are given theopportunity of purchasing Company sharesup to a maximum of £1,500 per year(or localcurrency equivalent). The Company will thenmatch each share purchased with an awardof ‘Matching Shares’. The maximum ratioof Matching Shares to employee purchasedshares is two to one although the currentratio adopted by the Company is one MatchingShare for each share purchased. The MatchingShares are subject to a three year holdingperiod. Normally, the Matching Shares willonly be released at the end of this holdingperiod if the corresponding employeepurchased shares have not been sold and theemployee is still in employment at that time.

The shares required for the Plan arecurrently being purchased in the marketrather than being issued by the Company.The Company does, however, want to havethe flexibility to issue new shares for the

purposes of the Plan if this becomesnecessary or desirable in the future andhence shareholder approval isbeing soughtfor this amendment to the Plan at this time,full details of which are contained in theaccompanying circular toshareholders.

PensionThe Company makes contributions intoindividual personal pension schemes forUK Directors at a defined percentage ofsalary excluding bonus and other formsof remuneration.

Service contracts All Executive Directors’ contracts are fora fixed period of one year from date ofappointment, and will continue thereafterunless terminated by at least 12 months’written notice.

Non-executive DirectorsThe fees paid to the Non-executive Directorsare determined by the Board. In 2001 Non-executive Directors were remunerated at abasic rate of £25,000 (Mr W. Zeller £23,500),plus a fixed amount for membership of BoardCommittees, adjusted for the acceptance ofadditional and specific responsibilities.Non-executive Directors do not participatein the Company’s share schemes, nordothey receive pension contributionsorabonus. Non-executive Directors areappointed for three years, except for thoseaged over 70 who offer themselves for re-election annually. Non-executive Directorsdo not have service contracts.

EmployeesThe Group is committed to a policy ofencouraging employees’ participation inthegrowth of the Group. As a result, allemployees may have the opportunity toparticipate in the Company’s relevant shareoption schemes and the SkyePharmaInternational Share PurchasePlan describedabove. Employee remuneration is determinedon an annual basis by the ExecutiveCommittee upon guidelines agreed by theRemuneration Committee. The RemunerationCommittee is aware thatthe Group mustattract and retain employees of the highestcalibre by offering remuneration that isinline withthat offered by industrycompetitors and local practice in thecountries in which it operates.



Directors’ remuneration The table below sets out details of the Directors’ emoluments for the years ended 31 December 2001 and 31 December 2000.

2001 2000Fees Fees and and

Salary Benefits Bonuses Total Salary Benefits Bonuses Total£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000

Executive DirectorsI R Gowrie-Smith (Executive Chairman) 406 20 134 560 376 20 60 456

M Ashton 350 58 115 523 323 59 52 434

D Nicholson 180 10 70 260 161 10 26 197

936 88 319 1,343 860 89 138 1,087

Non-executive DirectorsSir M G Beavis 30 – – 30 25 – – 25

Dr J Gonella (to 6 June 2001) 11 – – 11 25 – – 25

R S Harris 28 – – 28 25 – – 25

T Howson(from 28 September 2000 to 26 November 2001) 71 – – 71 6 – – 6

A N Karabelas(from 30 November 2000) 28 – – 28 2 – – 2

Dr K Mansford 28 – – 28 25 – – 25

Dr T Rinderknecht(to 3 November 2000) – – – – 33 – – 33

N W Wray(to 30 November 2000) – – – – 21 – – 21

W Zeller 37 – – 37 37 – – 37

233 – – 233 199 – – 199

1,169 88 319 1,576 1,059 89 138 1,286

The emoluments of Dr T Rinderknecht and W Zeller include remuneration in respect of their capacity as Non-executive Directors of subsidiary companies.The emoluments of T Howson include remuneration in respect of consulting on business development during the year. Benefits for M Ashton include a livingallowance and school fees.

PensionsContributions made to defined contribution pension schemes on behalf of the Directors are set out below.

Year to Year to 31 December 2001 31 December 2000

£’000 £’000

I R Gowrie-Smith 51 47

M Ashton 44 40

D Nicholson 23 20

118 107

Total Directors’ emoluments, excluding pension contributions, amounted to £1,575,775 (2000: £1,285,707). No Director waived emoluments in the year ended31 December 2001 or 2000.



Directors’ interestsThe following table sets out the interests of Directors (including the interests of their immediate families and persons connected with the Directors) as at 31 December 2001 and 31 December 2000. All interests are beneficial unless otherwise stated in the notes to the table.

At31 December

2001

Ordinary ‘B’ Deferred Deferred ConvertibleShares ADRs Warrants ‘A’ Shares ‘B’ Shares Bonds

Executive Directors

I R Gowrie-Smith (1) 25,122,972 – 19,797,143 – – 20,000

M Ashton 110,000 – – – – –

D Nicholson 137,000 – – – – –

Non-executive Directors

Sir M G Beavis(2) 172,000 – 84,000 – – –

R S Harris (3) 101,500 – – – – –

A N Karabelas – 2,000 – – – –

Dr K Mansford (4) 16,000 – – – – –

W Zeller (5) 55,000 – – – – –

25,714,472 2,000 19,881,143 – – 20,000

At 31 December

2000

Ordinary ‘B’ Deferred Deferred ConvertibleShares ADRs Warrants ‘A’ Shares ‘B’ Shares Bonds

Executive DirectorsI R Gowrie-Smith (1) 25,122,972 – 19,797,143 – – 20,000

M Ashton 110,000 – – – – –

D Nicholson 137,000 – – – – –

Non-executive DirectorsSir M G Beavis (2) 172,000 – 84,000 – – –

Dr J Gonella 96,472,890 – – 12,000,000 12,000,000 –

R S Harris (3) 46,500 – – – – –

T Howson – – – – – –

A N Karabelas – 2,000 – – – –

Dr K Mansford (4) 16,000 – – – – –

W Zeller (5) 55,000 – – – – –

122,132,362 2,000 19,881,143 12,000,000 12,000,000 20,000

Interests in the Ordinary Shares, Deferred ‘A’ Shares and Deferred ‘B’ Shares held by Dr J Gonella and T Howson at 31 December 2001 are not shown as theyceased to be a Director during the year. The interests of N W Wray and Dr T Rinderknecht are not shown as at 31 December 2001 or 31 December 2000 as theyceased to be a Director during 2000.

Notes:(1) 1,340,718 of the Ordinary Shares in which Mr Gowrie-Smith is shown above as having an interest are owned by and registered in the name of Walkvale

Limited. The entire issued share capital of Walkvale Limited is held on behalf of The I R Gowrie-Smith Family Trust, the beneficiaries of which are certainmembers of Mr Gowrie-Smith’s family. 19,239,000 Ordinary Shares and 18,480,000 ‘B’ Warrants are registered in the name of Pellinore Holdings Limited.All of the existing Ordinary Shares and ‘B’ Warrants registered in the name of Pellinore Holdings Limited are owned by Cangary Limited as trustee ofThe I R Gowrie-Smith Family Trust. 4,543,254 Ordinary Shares and 1,317,143 ‘B’ Warrants are registered in the name of Estuary Investments Limited.The entire issued share capital of Estuary Investments Limited is also held on behalf of The I R Gowrie-Smith Family Trust, the beneficiaries of whichare certain members of Mr Gowrie-Smith’s family. The 20,000 convertible bonds due 2005 were acquired on issue in June 2000 and are registered inthe name of J M Finn Nominees account, Thornaby.



Directors’ interests (continued)

(2) The Ordinary Shares beneficially owned by Sir Michael Beavis are registered in the name of Duncan Lawrie Offshore Services Limited.

(3) 55,000 of the Ordinary Shares beneficially owned by Mr Harris are registered in the name of Pershing Keen Nominees Limited.

(4) 5,000 of the Ordinary Shares beneficially owned by Dr Mansford are registered in the name of Sharelink Nominees Limited.

(5) The Ordinary Shares beneficially owned by Mr Zeller are registered in the name of Rood Nominees Limited.

Save as disclosed in this paragraph, no interest exists which the Company is required pursuant to Section 325 of the Act to enter in the register maintainedpursuant to that section.

Options over shares in the Company Ordinary Options over shares of 10 pence each

Date fromwhich

options1 January 31 December Exercise can be Expiry

Directors 2001 Granted 2001 price exercised date

I R Gowrie-Smith 1,234,568 – 1,234,568 81.0p 06-12-99 06-12-06575,539 – 575,539 69.5p 19-04-02 19-04-09

– 1,008,313 1,008,313 80.6p 12-06-04 12-06-11

M Ashton 639,077 – 639,077 93.0p 31-03-01 31-03-08871,451 – 871,451 69.5p 19-04-02 19-04-09

– 868,486 868,486 80.6p 12-06-04 12-06-11

D Nicholson 533,333 – 533,333 75.0p 29-04-99 29-04-0686,022 – 86,022 93.0p 31-03-01 31-03-08

172,662 – 172,662 69.5p 19-04-02 19-04-09– 446,650 446,650 80.6p 12-06-04 12-06-11

Super Options over shares of 10 pence each

Date fromwhich

options1 January 31 December Exercise can be Expiry

Directors 2001 Granted 2001 price exercised date

I R Gowrie-Smith 2,385,009 – 2,385,009 56.67p 25-05-04 25-05-09M Ashton 2,044,293 – 2,044,293 56.67p 25-05-04 25-05-09D Nicholson 1,022,147 – 1,022,147 56.67p 25-05-04 25-05-09

The above options are granted to Directors under the terms of the SkyePharma Executive Share Option Scheme, the European and North AmericanScheme and the SkyePharma PLC 1999 Share Option Scheme described on page 58.

As at 31 December 2001, none of the Directors had any interests in shares of any other Group company. The market value of Ordinary Shares at 31 December 2001 was 61.25 pence. The market value of Ordinary Shares during 2001 ranged from the lowest closing mid-price of 49.0 penceto the highest closing mid-price of 108.0 pence.

The holdings of the Directors have not changed since 31 December 2001 except for the following:

SkyePharma PLC Share Purchase PlanAs a result of purchases on 28 February 2002 and 28 March 2002 by the SkyePharma PLC Share Purchase Plan (an Inland Revenue approved allemployee share purchase plan), Michael Ashton and Donald Nicholson, Directors of the Company, as trustees of the Plan became the non-beneficialowners of 6,038 Ordinary Shares of the Company.

Of these shares the Directors of the Company have the following beneficial interests as a result of their personal participation in the Plan:

Michael Ashton – 385 partnership shares (Ordinary Shares in the Company)Donald Nicholson – 385 partnership shares (Ordinary Shares in the Company).



SkyePharma PLC Share Purchase Plan (continued)

In accordance with the rules of the Plan these Directors have been awarded Matching Shares on the basis of one Matching Share for each Partnership Share.The beneficial ownership of these Matching Shares will pass to the Directors in three years’ time subject to continued employment and the retention of theunderlying Partnership Shares:

Michael Ashton – 385 Matching Shares (Ordinary Shares in the Company) Donald Nicholson – 385 Matching Shares (Ordinary Shares in the Company).

Partnership Shares were purchased at a price of 61 and 69 pence per share. Matching Shares were awarded at a price of 61 pence and 69 pence per share.

SkyePharma PLC Deferred Share Bonus PlanOn 30 January 2002, under the new SkyePharma PLC Deferred Share Bonus Plan (the “Plan”), approved by shareholders at the Company’s Annual GeneralMeeting held on 6 June 2001, the Executive Directors and other senior executives (“Plan Members”) have invested 50% of their gross bonus relating to theyear 2001 into Ordinary Shares in the Company (the “Executive Shares”). The total net number of Executive Shares allocated on 30 January 2002 to all PlanMembers was 300,904 at a price per share of £0.6575 (the three day average prior to 30 January 2002).

The Executive Shares for this first operation of the Plan have been provided by the Trustees of the SkyePharma PLC General Employee Benefit Trust. Underthe rules of the Plan, the Trustees are required to account for any income tax due on the allocation of shares on behalf of the Company. Therefore the actualnumber of Executive Shares retained by Plan Members is the net number shown below.

In addition, the Plan provides for the Company to allocate one Matching Share, subject to certain conditions, for every Executive Share (calculated on the grossbonus invested in shares). The conditions are that each Plan Member retains his or her Executive Shares, acquired with their bonus monies, for three years (in the case of the awards detailed here, until 30 January 2005) and that he or she has continuously remained an employee of the Company for those threeyears. In respect of the following Executive Directors the number of Executive Shares and conditional Matching Shares awarded are as follows:

ConditionalExecutive Matching

Shares Shares

Ian Gowrie Smith 61,184 101,973Michael Ashton 66,752 87,832Donald Nicholson 31,939 53,231

Sir Michael BeavisChairman, Remuneration Committee

9 April 2002


Independent auditors’ report to the members of SkyePharma PLC

We have audited the financial statementswhich comprise the profit and lossaccount, the balance sheets, the cashflow statement, the statement of totalrecognised gains and losses andthe relatednotes which have been prepared underthe historical cost convention and theaccounting policies set out in the statementof accounting policies. We have alsoaudited the amounts disclosed relatingtothe emoluments, share options, pensionsand interests of the Directors which formpart of the Remuneration report.

Respective responsibilities of directorsand auditorsThe Directors’ responsibilities forpreparing the Annual Report and thefinancial statements in accordance withapplicable United Kingdom law andaccounting standards are set out in thestatement of Directors’ responsibilities.

Our responsibility is to audit the financialstatements in accordance with relevantlegal and regulatory requirements, UnitedKingdom Auditing Standards issued by theAuditing Practices Board and the ListingRules of the Financial Services Authority.

We report to you our opinion as to whetherthe financial statements give a true and fairview and are properly prepared in accordancewith the Companies Act 1985. We also reporttoyou if, in our opinion, the Directors’ report isnot consistent with the consolidated financialstatements, if the Company has not keptproper accounting records, if we have notreceived all the information and explanationswe require for our audit, or if informationspecified by law or the Listing Rulesregarding Directors’ remuneration andtransactions is not disclosed.

We read the other information containedin the Annual Report and consider theimplications for our report if we becomeaware of any apparent misstatementsor material inconsistencies with thefinancial statements. The otherinformation comprises only the report ofthe Directors, Chairman’s statement, thereview of operations, the financial review,the Corporate Governance statement, theremuneration report and the reconciliationto US accounting principles.

We review whether the corporategovernance statement reflects theCompany’s compliance with the sevenprovisions of the Combined Code specifiedfor our review by the Listing Rules, and wereport if it does not. We are not required toconsider whether the Board’s statementson internal control cover all risks andcontrols, or to form an opinion on theeffectiveness of the Company’s or Group’scorporate governance procedures ortheir risk and control procedures.

Basis of audit opinionWe conducted our audit in accordance withAuditing Standards issued by the AuditingPractices Board. An audit includesexamination, on a test basis, of evidencerelevant to the amounts and disclosuresin the financial statements. It also includesan assessment of the significant estimatesand judgements made by the Directors inthe preparation of the financial statements,and of whether the accounting policiesare appropriate to the Company’scircumstances, consistently appliedand adequately disclosed.

We planned and performed our auditso as to obtain all the information andexplanations which we considerednecessary in order to provide us withsufficient evidence to give reasonableassurance that the financial statementsare free from material misstatement,whether caused by fraud or otherirregularity or error. In forming our opinionwe also evaluated the overall adequacy ofthe presentation of information in thefinancial statements.

OpinionIn our opinion the financial statements give a true and fair view of the state ofaffairs of the Company and the Group at31 December 2001 and of the loss andcash flows of the Group for the year thenended and have been properly preparedin accordance with the CompaniesAct 1985.

PricewaterhouseCoopersChartered Accountants andRegistered AuditorsLondon9 April 2002


Consolidated profit and loss account

Year to Year to31 December 2001 31 December 2000

Notes £’000 £’000

Turnover 2 46,126 24,292

Cost of sales 2 (18,820) (15,598)

Gross profit 27,306 8,694

Selling, marketing and distribution expenses (4,804) (3,844)

Administration expensesAmortisation (3,824) (3,339)Other administration expenses (12,201) (9,291)

(16,025) (12,630)

Research and development expenses (17,918) (13,104)

Other operating income 3 6,342 2,900

Group operating loss 2,4 (5,099) (17,984)

Associated undertakingShare of loss of associated undertaking (75) –Amortisation of goodwill (503) –

(578) –

Loss on ordinary activities before interest and taxation (5,677) (17,984)

Interest receivable 6 1,251 1,806

Interest payable 7 (4,951) (3,508)

Loss on ordinary activities before taxation (9,377) (19,686)

Taxation 8 (75) (4)

Retained loss (9,452) (19,690)

Basic and diluted loss per Ordinary Share 9 (1.8p) (3.9p)

There was no material difference between the loss on ordinary activities before taxation and the historical cost loss before taxation in 2001 and 2000. All resultsrepresent continuing activities.

See Notes to the Financial Statements.


Statement of total recognised gains and losses

Reconciliation of movements in shareholders’ funds


£’000 £’000

Loss attributable to shareholders (9,452) (19,690)

Net currency translation effect 28 758

Lapse of warrants 271 –

Total recognised gains and losses for the year (9,153) (18,932)

As described in note 22b Class ‘C’ Warrants relating to the debenture issue lapsed during the year. The fair value of the warrants at issue of £271,000 has beentransferred from non-distributable reserves to retained profits. The lapse of warrants represents a transfer of value from the warrant holders to existingshareholders. In accordance with FRS4, this is shown as a recognised gain, although total shareholders’ funds remain unchanged.


£’000 £’000

Shareholders’ funds at the beginning of the year 68,952 72,057

Total recognised gains and losses for the year (9,153) (18,932)

Goodwill adjustments on deferred consideration 148 3,618

Equity shares issued/allocated, net of expenses 30,058 22,581

Non-equity shares issued, net of expenses – 22,620

Increase/(decrease) in shares and warrants to be issued 5,780 (29,528)

Revaluation of shares and warrants to be issued (148) (3,618)

Issue of warrants – 154

Exercise of warrants (56) –

Lapse of warrants (436) –

Net movement in the year 26,193 (3,105)

Shareholders’ funds at the end of the year 95,145 68,952


Consolidated balance sheet


Notes £’000 £’000

Fixed assets

Intangible assets 10 98,228 72,086

Tangible assets 11 44,952 40,288

Investments 12 14,211 –

157,391 112,374

Current assets

Stock 13 2,278 1,636

Debtors 14 14,022 6,937

Cash and short-term bank deposits 26,892 42,878

43,192 51,451

Creditors – amounts falling due within one year 15 (35,188) (20,541)

Net current assets 8,004 30,910

Total assets less current liabilities 165,395 143,284

Creditors – amounts due after more than one year

Other creditors 16 (12,220) (14,667)

Convertible bonds due June 2005 16, 17 (57,962) (57,546)

(70,182) (72,213)

95,213 71,071

Provisions for liabilities and charges

Deferred consideration 18 – 2,008

Other 18 68 111

68 2,119

Capital and reserves

Share capital 22 58,402 54,132

Share premium 24 287,357 261,569

Currency translation reserve 24 (1,399) (1,427)

Shares and warrants to be issued 23 10,617 4,985

Other reserves 24 10,720 11,212

Profit and loss account 24 (270,552) (261,519)

Shareholders’ funds

Attributable to equity interests 72,525 46,332

Attributable to non-equity interests 22,620 22,620

95,145 68,952

95,213 71,071

Approved by the Board of Directors on 9 April 2002 and signed on its behalf by:

I R Gowrie-SmithExecutive Chairman

D NicholsonFinance Director

See Notes to the Financial Statements


Company balance sheet

31 December 2001 31 December 2000Notes £’000 £’000

Fixed assets

Tangible assets 11 143 214

Investments 12 385,191 338,038

385,334 338,252

Current assets

Debtors 14 14,054 6,457

Cash and short-term bank deposits 17,512 36,595

31,566 43,052

Creditors – amounts falling due within one year 15 (8,333) (7,860)

Net current assets 23,233 35,192

Total assets less current liabilities 408,567 373,444

Creditors – amounts due after more than one year

Convertible bonds due June 2005 16, 17 (57,962) (57,546)

350,605 315,898

Provisions for liabilities and charges

Deferred consideration 18 – 2,008

Other 18 3 26

3 2,034

Capital and reserves

Share capital 22 58,402 54,132

Share premium 24 287,357 261,569

Shares and warrants to be issued 23 10,617 4,985

Other reserves 24 10,720 11,212

Profit and loss account 24 (16,494) (18,034)

Shareholders’ funds

Attributable to equity interests 327,982 291,244

Attributable to non-equity interests 22,620 22,620

350,602 313,864

350,605 315,898

Approved by the Board of Directors on 9 April 2002 and signed on its behalf by:

I R Gowrie-SmithExecutive Chairman

D NicholsonFinance Director

See Notes to the Financial Statements


Consolidated cash flow statement


Notes £’000 £’000

Net cash inflow/(outflow) from operating activities (b) 5,909 (9,312)

Returns on investments and servicing of finance

Interest received 2,741 1,297

Interest paid (4,370) (2,941)

Interest element of finance lease payments (170) (232)

(1,799) (1,876)

Taxation (75) (8)

Capital expenditure and financial investment

Purchase of intangible fixed assets (310) (7,180)

Purchase of tangible fixed assets (7,673) (8,470)

Purchase of fixed asset investments (8,273) –

(16,256) (15,650)

Acquisitions

Purchase of RTP Pharma Inc. (4,118) –

Net cash acquired with RTP Pharma Inc. 5,436 –

(d) 1,318 –

Cash outflow before use of liquid resources and financing (10,903) (26,846)

Management of liquid resources

Net decrease/(increase) in amounts held on short-term bank deposit 14,668 (21,641)

Financing

Issue of Ordinary Share capital 468 2,088

Issue of convertible bonds – 59,400

Expenses of convertible bond issue – (2,022)

Debt due within one year:

Increase in borrowings – 1,187

Repayment of loans (4,502) (2,846)

Debt due beyond one year:

Repayment of loans (85) (1,226)

Repayment of capital element of finance lease payments (772) (891)

(4,891) 55,690

(Decrease)/increase in cash (1,126) 7,203


Notes to the consolidated cash flow statement

(a) Reconciliation of movements in net debtYear to Year to

31 December 2001 31 December 2000£’000 £’000

(Decrease)/increase in cash in the year (1,126) 7,203

Cash outflow from change in debt and lease financing 5,359 3,776

Cash (inflow)/outflow from increase in liquid resources (14,668) 21,641

Issue of convertible bonds – (57,378)

Change in net debt resulting from cash flows (10,435) (24,758)

Expenses of convertible bonds (416) (167)

Conversions of debentures – 103

Issue of loan note – (2,307)

Translation difference (21) (907)

Movement in net debt in the year (10,872) (28,036)

Net debt at beginning of the year (36,290) (8,254)

Net debt at end of the year (47,162) (36,290)

Net debt is defined as cash and liquid resources less borrowings.

(b)Reconciliation of operating loss to net cash inflow/(outflow) from operating activitiesYear to Year to


Group operating loss (5,099) (17,984)

Depreciation 4,778 3,945

Amortisation 3,824 3,339

Increase in stock and work in progress (642) (426)

(Increase)/decrease in debtors (7,478) 3,247

Increase in deferred income 11,690 –

Increase/(decrease) in other creditors 1,688 (1,283)

Decrease in provisions (2,051) (150)

Other (801) –

Net cash inflow/(outflow) from operating activities 5,909 (9,312)


Notes to the consolidated cash flow statement continued

(c) Analysis of net debtAt At

1 January Cash Non-cash Exchange 31 December2001 flow changes movement 2001£’000 £’000 £’000 £’000 £’000

Cash at bank and in hand 10,769 (1,502) – 184 9,451

Overdrafts (2,848) 376 828 26 (1,618)

Short-term bank deposits 32,109 (14,668) – – 17,441

40,030 (15,794) 828 210 25,274

Debt due within one year (6,231) 4,502 (2,936) (127) (4,792)

Debt due after one year (67,541) 85 1,692 (159) (65,923)

Finance leases (2,548) 772 – 55 (1,721)

(76,320) 5,359 (1,244) (231) (72,436)

Total (36,290) (10,435) (416) (21) (47,162)

Cash at bank and in hand and short-term deposits are aggregated on the balance sheet. Debt includes a secured mortgage and convertible bonds.

Other non-cash changes relate to the amortisation of the issue costs on the convertible bonds and transfers between categories.

(d) Major non-cash transactions

Part of the consideration for the purchase of RTP Pharma Inc. comprised shares (see note 25 – Acquisitions).


Notes to the financial statements

1Accounting policies

Accounting convention and presentationThe financial statements have been prepared under the historical cost convention and in accordance with applicable UK accounting standards. The principalaccounting policies, which have been applied consistently, are set out below. The results for the year all relate to continuing operations. The financialstatements have been prepared on a going concern basis.

New accounting policies and requirementsThe Group has implemented the transitional disclosure requirements of Financial Reporting Standard 17 ‘Retirement Benefits’. The FRS adopts a marketvalue approach to the measurement of retirement benefits and requires expanded disclosures. The Standard does not require implementation of the changein measurement approach until 2003.

The Group has implemented FRS 18 ‘Accounting Policies’. The FRS updates an existing standard and provides new guidance. It has not had any effect on theresults for the period or required any restatement of prior year comparatives.

ConsolidationThe consolidated financial information includes the financial statements for the Company, its subsidiary undertakings and the Group’s share of the net assetsand results of associated undertakings. Intra-group sales and profits are eliminated fully on consolidation. The results of subsidiaries sold or acquired areincluded in the consolidated profit and loss account up to the date of their sale or from their date of acquisition respectively. The share of results of associatedundertakings sold or acquired are included in the consolidated profit and loss account up to the date of their sale or from their date of acquisition respectively.

Investments which are held for the long term and where the Group exercises joint control, are accounted for using the gross equity method. Where the Grouphas certain contractual agreements with other participants to engage in joint activities that do not create an entity carrying on a trade or business of its own,they are accounted for as a joint arrangement. The Group includes its share of the assets, liabilities and cash flows in such joint arrangements measured inaccordance with the terms of each arrangement, which is usually pro-rata to the Group’s interest in the joint arrangement.

Revenue recognitionTurnover comprises contract development, manufacturing and distribution, and royalty income. Contract development income represents amounts invoicedto customers for services rendered under development contracts including milestone payments and technology access fees. Contract revenue is recognisedwhen earned and non-refundable, and when there are no future obligations pursuant to the revenue, in accordance with the contract terms. Refundablecontract revenue is treated as deferred until such time as it is no longer refundable. Manufacturing and distribution revenues principally comprise contractmanufacturing fees invoiced to third parties, non-contract manufacturing revenues under a collaboration agreement with Chiron Corporation, plus othercontract manufacturing revenue and income from product sales. Royalty income represents income earned as a percentage of product sales. Advanceroyalties received are treated as deferred income until earned, when they are recognised as income.

Research and development costsResearch costs are charged as an expense in the period in which they are incurred. Development costs are also recognised as an expense in the period inwhich they are incurred, unless all of the criteria are met for asset recognition. The major asset recognition criteria include: the ability to clearly define theproduct or process, demonstration of its technical feasibility and that a market for it exists. Development costs recognised as an asset do not exceed theprobable net amount to be recovered in marketing the product or process and they are amortised over the estimated economic life.

Financial InstrumentsThe Group uses derivative financial instruments to hedge its exposure to fluctuations in interest and foreign exchange rates. Specifically, the Group usesinterest rate swaps, forward currency contracts and currency options. Receipts and payments on interest rate swaps are recognised on an accruals basis,over the life of the swap, as an adjustment to interest payable. Gains and losses on forward currency contracts and currency options are not recogniseduntil the period that the foreign currency exposure is recognised. Option premia are deferred in the balance sheet and recognised upon the maturity of theoption agreement.

Foreign currenciesForeign currency transactions by Group companies are recorded in local currency at the exchange rate ruling on the date of transaction. Assets and liabilitiesexpressed in foreign currencies are translated into sterling at the exchange rates ruling at the balance sheet date. Exchange differences which relate to thetranslation of net assets of overseas companies are taken directly to reserves. All other foreign exchange differences are taken to the profit and loss accountin the year in which they arise. The Group uses the average of exchange rates prevailing during the year to translate the results of overseas subsidiaries intosterling and year-end rates to translate the net assets of those undertakings.

Tangible fixed assetsTangible fixed assets are included in the balance sheet at cost less accumulated depreciation. Depreciation is provided on tangible fixed assets at ratescalculated to write off the cost, less estimated residual value, of each asset over its expected useful life. The rates and bases are as follows:

Freehold land not depreciatedFreehold buildings 2% – 5% straight lineShort leasehold property period of leasePlant, equipment and fixtures 10% – 33% straight lineMotor vehicles 20% straight lineFinance leases period of lease


Notes to the financial statements continued

1Accounting policies (continued)

Intangible fixed assetsIntangible fixed assets comprise goodwill, intellectual property and capitalised development costs. Goodwill, both positive and negative, being the differencebetween the purchase consideration in subsidiary undertakings and the Group’s share of the fair value of the net assets acquired, is capitalised and amortisedover a period of 20 years or less in line with the Directors’ view of its useful economic life. Prior to the introduction of FRS 10, the policy adopted was to write offgoodwill to reserves. As permitted by FRS 10 goodwill written off to reserves in previous years has not been reinstated on the balance sheet and adjustments tosuch goodwill have been taken directly to reserves. Goodwill previously written off to reserves is charged to the profit and loss account in the event of disposalof the related business.

Intellectual property comprises acquired patents, trade marks, know-how and other similarly identified rights. These are recorded at their fair value atacquisition date and are amortised in equal instalments over their estimated economic lives, from the date when the transfer of technology is complete.The period over which the Group expects to derive economic benefits does not exceed 20 years. Costs associated with internally developed intellectualproperty are generally treated as research and development costs. Development costs are recognised under the criteria stated above.

Fixed asset investmentsGroup fixed asset investments are recorded at cost or Directors’ valuation, less provision for impairment. In addition, the Company has fixed asset investmentsrelating to equity and loan investments in subsidiaries.

Impairment of fixed assetsThe carrying values of fixed assets are reviewed for impairment when there is an indication that the assets may be impaired. First year impairment reviews areconducted for acquired goodwill and intangible assets. Impairment is determined by reference to the higher of net realisable value and value in use, which ismeasured by reference to discounted future cash flows. Any provision for impairment is charged to the profit and loss account in the year concerned.

Employee share plansIncentives in the form of shares are provided to employees under share option and share award schemes. In respect of award schemes the Group providesfinance to an employee share ownership trust to purchase company shares on the open market to meet the Group’s obligation to provide shares whenemployees exercise their award. The difference between the purchase price of the shares and the exercise price of the award is charged, or credited,to the profit and loss account over the periods of service in respect of which the award was granted.

The costs of running the employee share ownership trust are charged to the profit and loss account as they accrue.

Shares held by the employee share ownership trust are accounted for as fixed asset investments at cost less accrual for costs charged.

Stock and work-in-progressStock and work-in-progress are valued at the lower of cost and net realisable value and calculated using the first-in, first-out basis.

Liquid resourcesLiquid resources comprise short-term bank and commercial deposits with a maturity of less than one year.

Deferred considerationThe provision for deferred consideration comprises the fair value of contingent consideration arising from acquisitions. The eventual outcome is subject to theGroup’s future performance and certain contractual terms. The provision is reviewed annually by the Directors and changes to the estimated fair value of thecontingent consideration are recorded as an adjustment to goodwill or the underlying asset value. Where the effect of the time value of money is material the provisionis reflected at its present value and the interest element arising on discounting the liability is recorded as interest payable in the profit and loss account as it unwinds.

Deferred taxationDeferred taxation is provided on timing differences using the liability method where it is probable that tax liabilities or assets will crystallise within theforeseeable future.

Leased and hired assetsLeasing agreements which transfer to the Group substantially all of the risks and rewards of ownership of an asset are treated as finance leases, as if the assethad been purchased outright. The assets are included in tangible fixed assets and the capital element of amounts owed to the finance company at the balancesheet date is included in creditors as amounts falling due either within or after more than one year. Repayments are treated as consisting of both capital andinterest with the interest element being charged to the profit and loss account in proportion to the outstanding obligations. Payments under operating leasesand short-term hire contracts are charged to the profit and loss account as they fall due.

Pension costsThe costs of the Group’s defined contribution pension arrangements are charged to the profit and loss account in the year to which they relate. The costsof the Group’s defined benefit scheme are charged on a systematic basis allowing for the expected pension cost over the service lives of employees, basedon actuarial advice.

Convertible debtOn issue, convertible debt is stated at the amount of net proceeds after deducting issue costs. On conversion the amount recognised in shareholders’ funds inrespect of the shares issued is equal to the carrying value at the date of conversion. Interest payable on convertible debt is calculated to unwind the issue costsand any discount on issue at a constant rate over the term of the debt.



2Segmental analysis

The Group’s operations relate wholly to one class of business, pharmaceuticals. A further analysis of turnover, operating loss and net assets by geographicalarea is set out below, together with an analysis of cost of sales.


£’000 £’000

(a)Turnover

By class of business:

Pharmaceuticals

Contract development, including milestone payments 38,236 16,805

Manufacturing and distribution 6,422 3,476

Royalties receivable 1,468 4,011

46,126 24,292

Contract development split:

R&D costs recharged 9,857 4,808

Milestone payments 28,379 11,997

38,236 16,805

By location of customer:

UK 21,411 13,178

Europe 16,511 6,095

US 5,482 4,284

Rest of the world 2,722 735

46,126 24,292

By location of operation:

Europe 30,268 22,646

US 15,858 1,646

46,126 24,292


£’000 £’000

(b)Cost of sales


Pharmaceuticals

Contract development (7,917) (6,986)

Manufacturing and distribution (10,331) (7,073)

Royalties payable (572) (1,539)

(18,820) (15,598)



2Segmental analysis (continued)


£’000 £’000

(c)Operating loss


Pharmaceuticals (5,099) (17,984)


UK (6,840) (5,291)

Europe 6,985 973

US (5,205) (13,666)

Canada (39) –

(5,099) (17,984)


£’000 £’000

(d)Net assets


Pharmaceuticals 95,145 68,952


UK 136,410 95,764

Europe (74,268) (67,138)

US 27,425 40,326

Canada 5,578 –

95,145 68,952

3Other operating income

During the year £11.0 million ($16.0 million) (2000: £2.9 million ($4.4 million)) was received from Paul Capital Royalty Acquisition Fund, LP (‘PCRAF’) todevelop DepoMorphine. Of this £6.3 million ($9.1 million) (2000: £2.9 million ($4.4 million)) has been recognised as other operating income and the remaining £4.7 million ($6.9 million) (2000: £nil) deferred. Under the agreement, PCRAF will provide a total of $30 million between 2000 and 2002, to fund the clinicaldevelopment and regulatory submission of DepoMorphine, in return for the sale of a portion of future royalty and revenue streams from DepoMorphine,Xatral OD, Solaraze and DepoCyt. Between January 2003 and December 2014, PCRAF will receive 15% of the annual royalties and revenues from the statedproducts, up to an agreed ceiling. Once the predetermined ceiling is reached, the percentage participation will fall to 3% for the remainder of the period until31 December 2014.



4Operating loss

Operating loss is stated after charging:Year to Year to


Auditors’ remuneration

– audit of SkyePharma PLC 93 64

– audit of subsidiary undertakings – overseas 101 117

Fees to auditors for other work

– auditors’ UK firm 499 222

– auditors’ overseas firms 240 312

Depreciation of tangible fixed assets

– owned assets 4,343 3,501

– assets held under finance leases 435 441

Amortisation of intangible fixed assets

– amortisation of goodwill 2,341 2,099

– amortisation of intellectual property 1,282 1,082

Research and development expenses

– current year expenditure 17,918 13,104

– amortised from deferred expenditure 201 158

Operating lease rentals

– hire of plant and machinery 3,486 2,593

– other 439 373

It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where their expertise and experience withthe Group are important, principally tax advice and due diligence reporting on acquisitions, or where they are awarded assignments on a competitive basis.During the year PricewaterhouseCoopers earned the following fees from the Group:


£’000 £’000

Due diligence and other audit-related work 215 159

Tax advice 297 231

Accounting advice and regulatory returns 227 144

Total non-audit fees 739 534

5EmployeesYear to Year to


Employment costs:

Wages and salaries 15,502 13,506

Social security costs 2,451 2,011

Pension costs 822 532

18,775 16,049

The average number of persons employed by the Group during the year was as follows:Year to Year to

31 December 2001 31 December 2000Number Number

Pharmaceuticals 411 373



6Interest receivableYear to Year to


Interest 1,215 1,806

Share of interest receivable of associate 36 –

1,251 1,806

7Interest payableYear to Year to


Interest payable on bank loans, overdrafts and other loans:

Repayable within five years, not by instalments 91 268

Repayable within five years, by instalments 470 715

Repayable wholly or partly in more than five years 360 241

Finance leases 170 232

Interest on convertible bonds 3,860 2,052

4,951 3,508

8Taxation

Loss from ordinary activities before taxes, as shown in the consolidated profit and loss account, is analysed over its component parts as follows:


£’000 £’000

UK 1,269 4,069

Overseas (10,646) (23,755)

(9,377) (19,686)

Taxation charge based on profits for the year:

Overseas taxation (75) (19)

Under-provision in previous years – 15

(75) (4)

There was no deferred tax component in the tax charge for the years presented.

The Group has estimated total tax losses available to be set off against future taxable profits of £163.9 million (31 December 2000: £165.5 million). These lossesarise primarily in the UK, Switzerland and the US. Of the £163.9 million of losses carried forward, £2.0 million expire in 2002, £30.6 million expire between 2003and 2005, £122.8 million expire from 2006 onwards and £8.5 million of losses may be carried forward indefinitely.

The above charges reconcile with the applicable UK statutory corporation tax rate as follows:Year to Year to

31 December 2001 31 December 2000% %

Statutory UK Corporation tax rate 30.0 30.0

Tax rate differences 19.0 12.0

Tax losses not recognised as deferred tax assets (35.0) (21.9)

Other items not recognised as deferred tax assets (14.8) (35.2)

Other – 15.0

Prior year items – 0.1

Effective tax rate (0.8) 0.0



9Loss per Ordinary ShareYear to Year to

31 December 2001 31 December 2000

Attributable loss (£’000) (9,452) (19,690)

Weighted average number of shares in issue (’000) 526,250 508,228

Loss per share (1.8p) (3.9p)

There is no difference between basic and diluted loss per share since all potential Ordinary Shares including convertible bonds, warrants and options are anti-dilutive.

10Intangible fixed assets

Intellectual DevelopmentGoodwill property costs Total

Group £’000 £’000 £’000 £’000

Cost

At 1 January 2001 46,026 29,771 1,692 77,489

Exchange adjustments – 292 24 316

Additions 29,901 433 – 30,334

Lapse of warrants (165) – – (165)

At 31 December 2001 75,762 30,496 1,716 107,974

Amortisation

At 1 January 2001 3,310 1,679 414 5,403

Exchange adjustments – 13 3 16

Charge for the year 2,341 1,282 201 3,824

Transfer on acquisition of subsidiary interest 503 – – 503

At 31 December 2001 6,154 2,974 618 9,746

Net book value at 1 January 2001 42,716 28,092 1,278 72,086

Net book value at 31 December 2001 69,608 27,522 1,098 98,228

The acquisition of RTP gives rise to goodwill of £29.9 million (see note 25 – Acquisitions).



11Tangible fixed assets

Laboratory Assets in the OfficeLand and equipment course of and other Motorbuildings and machines construction equipment vehicles Total

Group £’000 £’000 £’000 £’000 £’000 £’000

Cost

At 1 January 2001 24,620 20,587 3,609 3,643 321 52,780

Exchange adjustments (258) 13 (31) 17 1 (258)

Additions 2,518 4,130 277 643 78 7,646

Acquisitions 384 1,516 – 118 – 2,018

Transfer 1,047 2,162 (2,393) (816) – –

Disposals – (8) – (69) (43) (120)

At 31 December 2001 28,311 28,400 1,462 3,536 357 62,066

Depreciation

At 1 January 2001 4,821 5,528 – 1,924 219 12,492

Exchange adjustments (83) (4) – 8 – (79)

Charge for the year 1,358 2,320 – 1,044 56 4,778

Transfer (886) 1,260 – (374) – –

Disposals – (8) – (40) (29) (77)

At 31 December 2001 5,210 9,096 – 2,562 246 17,114

Net book value at 1 January 2001 19,799 15,059 3,609 1,719 102 40,288

Net book value at 31 December 2001 23,101 19,304 1,462 974 111 44,952

Land and buildings, at net book value, is as follows:Group Group


Freehold property 19,084 17,365

Long leaseholds 384 –

Short leaseholds 3,633 2,434

23,101 19,799

Included in freehold property is an amount of £4,537,000 (31 December 2000: £4,561,000) in respect of land which is not depreciated.

Tangible fixed assets include net book value of £2,314,000 (31 December 2000: £2,922,000) in respect of assets held under finance leases and hire purchase contracts.

Land and Office and other Motorbuildings equipment vehicles Total

Company £’000 £’000 £’000 £’000

Cost

At 1 January 2001 107 461 75 643

Additions – 16 – 16

At 31 December 2001 107 477 75 659

Depreciation

At 1 January 2001 56 309 64 429

Charge for the year 9 68 10 87

At 31 December 2001 65 377 74 516

Net book value at 1 January 2001 51 152 11 214

Net book value at 31 December 2001 42 100 1 143



12Investments

(a) GroupInterest in Unlisted Ownassociate investments shares Total

£’000 £’000 £’000 £’000

Cost

At 1 January 2001 – – – –

Additions – 11,431 790 12,221

Acquisition of RTP Pharma Inc. 25,232 2,228 – 27,460

Net assets 1,914Goodwill 23,318

Share of losses retained (39) – – (39)

Transfer on acquisition of subsidiary interest (25,193) – – (25,193)

Charge for the year – – (238) (238)

At 31 December 2001 – 13,659 552 14,211

Amortisation

At 1 January 2001 – – – –

Charge for the year 503 – – 503

Transfer on acquisition of subsidiary interest (503) – – (503)

At 31 December 2001 – – – –

Net book value at 1 January 2001 – – – –

Net book value at 31 December 2001 – 13,659 552 14,211

Cade StrukturOn 28 October 1999 SkyePharma completed its acquisition of the tangible assets and intellectual property of Cade Struktur (formerly Hyal PharmaceuticalCorporation) of Mississauga, Ontario for a purchase price of Cdn$14.0 million. Consideration was satisfied by the set-off of Cdn$11.6 million of SkyePharma’ssecured and unsecured debt owed by Cade Struktur including the interest due and $2.4 million in cash. In addition, and because Cade Struktur was in receivershipat this time, SkyePharma indemnified the receiver to the extent that Cdn$11.6 million exceeded the amount that SkyePharma may ultimately be entitled toreceive as a creditor of Cade Struktur. This indemnity was secured by an irrevocable letter of credit open for up to one year in the amount of Cdn$1.0 million.

During 2000 the letter of credit was called to recover the shortfall in the receivership process. In return, SkyePharma, as one of the creditors of Cade Struktur,was awarded 8,005,038 shares in Cade Struktur representing seven Cade Struktur shares for every dollar shortfall in the process. In addition, SkyePharmaacquired the 685,834 shares issued to Meditech Research Limited, another creditor of Cade Struktur, for $Canadian 118,000 (£56,000) in 2001. As a result,the total SkyePharma holding is 869,086 following a 10 for 1 share consolidation representing approximately 16.8% of Cade Struktur. Since the shares arenot currently traded on a public market there is currently no value attributable to these shares and thus they have been recorded at zero cost.

AstralisDuring the year the Company acquired 200,000 ordinary shares and 1,000,000 series A convertible preferred shares of Astralis Limited, a US company,representing approximately 10.1% of the ordinary share capital assuming conversion, for £7.5 million.

WaratahAs part of the acquisition of RTP Pharma Inc. (see note 25 – Acquisitions), the Group acquired an investment in Waratah Pharmaceuticals Inc. (‘Waratah’) ofCanada, representing approximately 23.2% of the ordinary share capital, with a fair value of £2.2 million at acquisition. In the opinion of the Directors, the Groupis not in a position to exercise significant influence over the operating and financial policy of Waratah. As at 31 December 2000 Waratah had net assets of£4.7 million and a retained loss of £0.6 million. On 14 January 2002 Waratah merged with Transition Therapeutics Inc. (Transition) and Waratah shareholderswere awarded 0.83333 Transition shares for every one share of Waratah held. The total SkyePharma holding is 4,930,814 ordinary shares representingapproximately 11.9% of Transition.

Other investmentsThe Group has other investments of £3.9 million in a collaborative partner based in the US, representing approximately 14.2% of the ordinary share capitalassuming conversion, recorded at Directors’ valuation based on a number of considerations including comparable transactions and discounted futurecash flows.

Own sharesDuring the year the Company established an employee share ownership trust, the SkyePharma PLC General Employee Benefit Trust. The purpose ofthe trust is to hold shares in the Company, which may subsequently be awarded to Executive Directors and senior executives under the SkyePharma PLCDeferred Share Bonus Plan. Details of this plan are described in the Remuneration Report on pages 31 to 36. During the year, the trust purchased onemillion shares and 300,904 shares were allocated on 30 January 2002 at a price per share of 65.75 pence (the three day average prior to 30 January 2002).As at 31 December 2001 the trust held one million shares with a nominal value of £100,000 and a market value of £612,500.



12Investments (continued)

(b) CompanyShares in Loans to

Group Group Unlisted Ownundertakings undertakings investments shares Total

£’000 £’000 £’000 £’000 £’000

At 1 January 2001 164,727 173,311 – – 338,038

Additions 39,433 – 7,481 790 47,704

Lapse of warrants (165) – – – (165)

Revaluation of shares and warrants to be issued (note 23) (148) – – – (148)

Charge for the year – – – (238) (238)

At 31 December 2001 203,847 173,311 7,481 552 385,191

13StockGroup Group


Raw materials and consumables 896 1,428

Work in progress 1,313 206

Finished goods 69 2

2,278 1,636

The replacement cost of stock is not materially different from original cost.

14DebtorsGroup Group Company Company

31 December 2001 31 December 2000 31 December 2001 31 December 2000£’000 £’000 £’000 £’000

Trade debtors 8,662 1,118 – –

Amounts owed by subsidiary undertakings – – 13,273 4,181

Other debtors 1,829 1,261 92 448

Prepayments and accrued income 3,515 3,016 673 286

Interest receivable 16 1,542 16 1,542

14,022 6,937 14,054 6,457

15Creditors: amounts falling due within one year

Group Group Company Company31 December 2001 31 December 2000 31 December 2001 31 December 2000

£’000 £’000 £’000 £’000

Bank overdrafts 1,618 2,848 – –

Bank loans 1,521 3,120 – –

Current portion of secured mortgage (note 16) 248 165 – –

Current portion of Chiron loan note (note 16) 3,023 2,946 – –

Trade creditors 3,716 2,836 260 155

Amounts owed to fellow subsidiary undertakings – – 4,553 4,706

Corporation tax 3 3 – –

Other taxation and social security costs 1,031 233 53 55

Obligations under hire purchase and finance leases 847 861 – –

Deferred income 11,690 – – –

Accruals 11,491 7,529 3,467 2,944

35,188 20,541 8,333 7,860



15Creditors: amounts falling due within one year (continued)

At 31 December 2001 the Group had a secured overdraft facility of £1.2 million (CHF 3 million) with the Basellandschaftliche Kantonalbank. In addition, andincluded within bank loans, the Kantonalbank has extended a loan of £0.8 million (CHF 2 million) and a fixed credit facility of £0.6 million (CHF 1.5 million).These loans are renewable annually and bear interest at 6.5% and 6.0% respectively. The overdraft and bank loans are all secured on the assets of Jagowith the overdraft and credit facility also guaranteed by SkyePharma PLC.

At 31 December 2001 the Group also had an overdraft facility with Société Générale of £0.7 million (FF 8 million), secured by the trade debtors of SkyePharmaProduction SAS and guaranteed by SkyePharma PLC.

At 31 December 2001 the Group had £0.1 million outstanding on a loan payable to the Silicon Valley Bank. The loan is secured upon specific fixed assets ofSkyePharma Inc. and is guaranteed by SkyePharma PLC. The loan bears a floating rate of interest set at the US prime rate plus 0.5% and the principal isrepayable in monthly instalments until February 2002. As of February 2002 the loan was paid off and the guarantee cancelled.

16Creditors: amounts falling due after more than one yearGroup Group Company Company


Bank loans – 71 – –

Secured mortgage 7,159 6,197 – –

Chiron loan note 802 3,727 – –

Accrued rent 3,385 2,985 – –

Convertible bonds due June 2005 57,962 57,546 57,962 57,546

Obligations under finance leases 874 1,687 – –

70,182 72,213 57,962 57,546

Bank and other loans are repayable as follows:

Between one and two years 1,050 3,181 – –

Between two and three years 4,179 946 – –

Between three and four years 166 3,139 – –

Between four and five years 166 166 – –

After five years 2,400 2,563 – –

7,961 9,995 – –

Obligations under finance leases are repayable as follows:

Between one and two years 843 842 – –

Between two and three years 27 844 – –

Between three and four years 4 1 – –

Between four and five years – – – –

874 1,687 – –

At 31 December 2001 the Group had a property mortgage facility with the Basellandschaftliche Kantonalbank of £7.4 million (CHF 18.0 million) of which £0.2 million (CHF 0.6 million) is shown within current liabilities. The mortgage is in two tranches, both secured by the assets of Jago, and guaranteed bySkyePharma PLC. The first tranche bears interest at 4.75% and is repayable by instalments over 21 years semi-annually. The second tranche bearsinterest at 3.0% and is repayable in 2004.

At 31 December 2001 the Group had £3.8 million outstanding on the Chiron loan note of which £3.0 million is shown within current liabilities. The originalnote was issued in 1999 on the acquisition of SkyePharma Inc. (formerly DepoTech Corporation). Under a collaboration agreement with Chiron Corporation,DepoTech had an obligation to pay Chiron $11.7 million within six months of US or European marketing approval of DepoCyt. Consequent upon the acquisition,SkyePharma, DepoTech and Chiron further amended the agreement with Chiron in March 1999 such that the Group issued a note payable to Chiron for $9.7 million on the receipt of FDA approval of DepoCyt on 1 April 1999. During 2000, SkyePharma and Chiron amended the March 1999 agreement wherebySkyePharma would have issued a note payable for $3.5 million to Chiron upon the filing of an application for DepoCyt for paediatric indications in the US. Under the amendment dated 4 October 2000, the note became payable on the earlier of the filing of an application for DepoCyt for paediatric indicationsin the US or the date on which Phase IV clinical trials, required by the US FDA as a condition of product approval, commenced. The $3.5 million note wasissued in December 2000. The notes are secured on the rights to DepoCyt and bear a floating rate of interest based on LIBOR. The principals are payableon 30 June 2002 for the first tranche and in equal instalments on 30 June 2002 and 2003 for the second.



17Convertible Bonds

On 16 June 2000, the Company issued £59.4 million 6% Convertible Bonds (the ‘Bonds’) due 2005. The Bonds are convertible at the option of the holder intofully paid 10 pence Ordinary Shares in the Company at an initial conversion price of 132 pence at any time up to 19 June 2005. The initial conversion price wasrecalculated to the minimum 83 pence on 19 June 2001. Unless previously redeemed or converted, the Bonds will be redeemed by the Company at theirprincipal amount on 19 June 2005.

During 2001, £30 million of the Bond proceeds was subject to a cancellable interest rate swap agreement by which the Company swapped a fixed obligationto floating and paid 5.6% until 19 December 2001. The interest rate swap agreement was cancelled on 19 December 2001.

18Provisions for liabilities and chargesOther

Deferred National Totalconsideration Pension Insurance other

Group £’000 £’000 £’000 £’000

At 1 January 2001 2,008 85 26 111

Exchange adjustments – (10) – (10)

Charged in the year – – 149 149

Utilised (2,008) (24) (158) (182)

At 31 December 2001 – 51 17 68

Deferred Nationalconsideration Insurance

Company £’000 £’000

At 1 January 2001 2,008 26

Charged in the year – 135

Utilised (2,008) (158)

At 31 December 2001 – 3

Medac Deferred considerationOn 17 April 2001, US$3.0 million (£2.0 million) was paid to Medac GmbH as the final portion of the deferred consideration due under the terms of theacquisition agreement for the nano-particulate intellectual property acquired in 1999.

Pension provisionThe pension provision relates to the retirement commitments under a defined benefit scheme for SkyePharma Production SAS employees (note 27; Pension Arrangements).

National Insurance provisionFollowing the Social Security Act of 1998 and the introduction of a national insurance charge on UK employers on the gains made by employees upon theexercise of options issued under certain unapproved share schemes, a balance sheet provision of £17,000 has been recognised at 31 December 2001(31 December 2000: £26,000) in accordance with UITF 25.

19Deferred taxation

Group CompanyFull potential Full potential


Accelerated capital allowances 3,091 4,030 27 36

Other timing differences 21,085 10,891 9 14

UK tax benefits from losses carried forward 1,305 1,893 1,305 1,893

Overseas tax benefits from losses carried forward 34,881 31,480 – –

Potential deferred tax asset 60,362 48,294 1,341 1,943

No deferred tax asset is recognised, given the uncertainty of the recoverability of the Group’s tax losses carried forward.



20Contingent liabilities and guarantees

At 31 December 2001 the Company had provided guarantees on various bank borrowings of its subsidiaries as set out in note 15; Creditors – amounts fallingdue within one year and note 16; Creditors – amounts falling due after more than one year.

In December 1999 SkyePharma Production SAS entered into a leasing arrangement with Lombard North Central PLC by which certain pharmaceuticalmanufacturing and laboratory equipment was the subject of a four-year sale and leaseback arrangement. The Company has guaranteed the obligationsof the lessee under this lease to an amount of FF 30 million (£2.8 million).

On 13 June 2000, a summons was filed in respect of a claim by RTP Pharma Corporation against SkyePharma PLC and others in the US District Court for theDistrict of Columbia. The lawsuit seeks the correction of inventorship of a US patent, together with unspecified monetary damages on behalf of RTP PharmaCorporation. In March 2001 SkyePharma PLC together with the other defendants filed a motion to dismiss the claim. Following the purchase of the initial40.2% of RTP Pharma Inc. shares, the litigation was settled, with RTP agreeing to have the suit dismissed.

In common with most business enterprises, Group companies are subject to a number of claims and potential claims from third parties, the outcome of whichcannot at present be determined. These claims and potential claims are not considered to be material in the context of these Financial Statements. Provisionhas been made in these accounts for any liabilities which are expected to materialise from such potential claims.

21CommitmentsGroup Group Company Company


Capital commitments

Contracted for but not provided in the accounts 340 344 – –

Commitments under operating leases to pay rentals for the next year

Operating leases on land and buildings which expire:

In one year or less 187 238 21 17

In two to five years 1,304 642 559 640

In five years or more 2,532 2,378 – –

4,023 3,258 580 657

Other operating leases which expire:

In one year or less 42 152 – 5

In two to five years 47 69 17 13

In five years or more 2 – – –

91 221 17 18

22Share capital

Equity share capital

31 December 2001 31 December 2000 31 December 2001 31 December 2000Number of shares Number of shares £’000 £’000

Authorised

Ordinary Shares of 10p each 1,114,000,000 1,114,000,000 111,400 111,400

Ordinary shares of 10p each Nominal valueNumber £’000

Issued, allotted and fully paid

At 1 January 2001 517,322,768 51,732

Exercise of ‘B’ Warrants 22,008 2

Exercise of share options 736,644 74

Exercise of DepoTech Warrants 41,820 4

Shares allocated in respect of RTP Pharma Inc. 41,900,099 4,190

At 31 December 2001 560,023,339 56,002

The cash consideration received on the issue of Ordinary Shares during the year amounted to £468,000 (2000: £2,088,000).



22Share capital (continued)

Non-equity share capital

31 December 2001 31 December 2000 31 December 2001 31 December 2000Number of shares Number of shares £’000 £’000

Authorised and issued

Deferred ‘A’ Shares of 10p each 12,000,000 12,000,000 1,200 1,200

Deferred ‘B’ Shares of 10p each 12,000,000 12,000,000 1,200 1,200

24,000,000 24,000,000 2,400 2,400

The Deferred ‘A’ and ‘B’ Shares were issued to Dr Gonella, the vendor of Jago, on 20 July 2000 under the Settlement Agreement that established the full andfinal settlement of the deferred consideration payable on the acquisition of Jago. The holders of Deferred ‘A’ and ‘B’ Shares have no rights to participate in theprofits 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 OrdinaryShares in the capital of the Company have received the sum of £1,000,000 per Ordinary Share and, as such, are classified as non-equity shares.

The Deferred Shares automatically convert to Ordinary Shares on the happening of the following contingent events:

(i) 12 million ‘A’ Deferred Shares. These Deferred Shares automatically convert to 12 million Ordinary Shares on the first commercial sale ofParoxetine/Paxil in combination with GEOMATRIX technology under the current Licence Agreement;

(ii) 12 million ‘B’ Deferred Shares. These Deferred Shares automatically convert to 12 million Ordinary Shares on the Company’s receipt of a royaltystatement under the current Licence Agreement stating that reported sales of Paroxetine/Paxil in combination with the GEOMATRIX technology haveexceeded $1,000 million during any calendar period prior to 1 January 2006 or exceeded $337 million between 1 January 2006 and 3 May 2006.

In the event that the conditions set out in (i) and (ii) above are not satisfied prior to 3 May 2006, the Deferred ‘A’ and ‘B’ Shares will not be converted and willbe cancelled. The vendor will not be entitled to any other compensation nor additional compensation.

The Deferred Shares were issued on 20 July 2000 when the price of an Ordinary Share was 94.25 pence. The difference between the nominal value of theDeferred Shares and the fair value of those shares, taken to be 94.25 pence, at issue has been recorded as non-equity share premium. See note 24: Reserves.

WarrantsThe Company has the following warrants outstanding:

(a) ‘B’ WarrantsNumber

At 1 January 2001 56,745,495

Warrants exercised (220,080)

At 31 December 2001 56,525,415

The ‘B’ Warrants, which were issued in January 1996 on the basis of one warrant for every ten existing Ordinary Shares subscribed pursuant to the placing,rights issue and capitalisation of loan notes and in consideration for the outstanding warrants of Krypton, entitle the holders to subscribe for 5,652,542Ordinary Shares at any time during the period beginning six months after the date of issue and ending on 31 December 2002 at an effective price of 40p perOrdinary Share. Consequent upon the consolidation of existing Ordinary Shares in May 1996 the terms under which the ‘B’ Warrants may be exercised wereamended so that a holder is required to exercise ten ‘B’ Warrants to acquire one Ordinary Share.

The market value of ‘B’ Warrants as at 31 December 2001 was 3.25 pence (31 December 2000: 2.5 pence). The market value of ‘B’ Warrants during the periodfrom 1 January 2001 to 31 December 2001 ranged from the lowest mid-price of 2.75 pence to the highest mid-price of 8.5 pence per ‘B’ Warrant.

(b) ‘C’ WarrantsThe ‘C’ Warrants were issued in March 1998 in consideration of services provided in connection with the 1998 debenture issue. The fair value of the warrantsat issue was £271,000. All outstanding warrants lapsed unexercised on 11 March 2001.

(c) Warrants issued on the acquisition of DepoTechIn connection with the acquisition of DepoTech Corporation, the Company agreed that outstanding warrants to purchase DepoTech common stock onthe effective date of the merger would become warrants to purchase the Company’s Ordinary Shares. Subsequent to the acquisition, additional warrantswere issued to the former DepoTech shareholders, as contingent consideration became payable. The fair value of the warrants at issue was £212,000.All outstanding warrants were either exercised or lapsed unexercised during the year.

Share optionsThe Company encourages employee participation in its shares through ownership and continues to operate various Share Option Schemes and theUnapproved Share Option Scheme. Under the terms of these Schemes the Board may offer options to purchase Ordinary Shares in the Company toemployees, including Directors, at a price not less than the higher of the nominal value and the market value of the shares.



22Share capital (continued)

(c) Share options (continued)

Options granted to UK and European employees are only exercisable between the third and tenth anniversary of the date of grant, and are subject to theCompany’s Code of Conduct for dealing in Shares, and the Model Code. Options granted to US employees prior to 2001 vest at 25% per annum from the dateof grant and there were no performance criteria. UK and European options may only be exercised if the growth in the Company’s share price over a consecutivethree-year period exceeds the growth over the same period in the FT-SE All Share Index for options granted prior to 2001. This criteria was satisfied for the firsttime in March 2000. Employees with options that are within their exercise period are now able to exercise those options within any one-year period from thedate the performance condition is satisfied. Super Options are exercisable after five years and are subject to higher performance conditions in accordancewith those recommended by the Association of British Insurers.

Following changes to the option plans approved at the Annual General Meeting June 2001, options granted since that date to Directors and senior employeesare subject to performance conditions linked to the total shareholder return of a comparator group of companies, and are not subject to retesting. Optionsgranted to other US employees continue to vest at 25% per annum with no performance criteria, and other European employees who are not Directors orsenior employees can exercise their options after three years and are not subject to performance conditions.

The following table summarises the activity in share options for the year to 31 December 2001:

Share options Option price

At 1 January 2001 26,316,828 44.8p – 93.0p

Granted 9,962,366 55.1p – 80.6p

Exercised (736,644) 44.8p – 75.0p

Cancelled or expired (818,435) 44.8p – 91.3p

At 31 December 2001 34,724,115 44.8p – 93.0p

On 19 July 2001 the Group acquired its initial 40.2% interest in RTP Pharma Inc., and achieved control on 27 December 2001 when agreement was reached toacquire the majority of the outstanding voting shares in RTP. Under the terms of the acquisition, all RTP share options were cancelled. SkyePharma has madea commitment to the employees formerly with RTP share options to issue SkyePharma share options at the earliest opportunity.

The market value of Ordinary Shares as at 31 December 2001 was 61.25 pence. The market value of Ordinary Shares during 2001 ranged from the lowestclosing mid-price of 49.0 pence to the highest closing mid-price of 108.0 pence per share.

At 31 December 2001 the following Ordinary Shares were under option to employees or former employees of the Group:

Option price for each Number of options overOrdinary Share of 10p Ordinary shares of 10p Expiry date

75.0 p 1,427,676 29 April 2006

92.0 p 417,255 28 May 2006

81.0 p 1,234,568 6 December 2006

66.5 p 836,580 7 April 2007

51.0 p 124,073 28 January 2008

93.0 p 872,974 31 March 2008

44.8 p 2,170,041 5 October 2008

69.5 p 3,444,211 19 April 2009

56.7 p 9,480,399 25 May 2009

56.9 p 1,194,066 7 September 2009

91.3p 1,283,609 6 June 2010

81.7p 2,276,297 3 November 2010

80.6p 7,801,493 12 June 2011

55.6p 1,608,359 31 October 2011

55.1p 552,514 24 December 2011



23Shares and warrants to be issued

Group and Company £’000

At 1 January 2001 4,985

Revaluation (148)

Additions (note 25) 5,780

At 31 December 2001 10,617

Krypton Deferred ConsiderationThe deferred consideration on the acquisition of Krypton was revised on 26 April 1996, such that a maximum of 37.5 million Ordinary Shares and 37.5 million‘B’ Warrants would be issued contingent on a change in control of the Company at a share price of not less than 80 pence compounded at an annual rate of10%, or satisfaction of the following conditions and hurdles:

(i) 2.5 million Ordinary Shares and 2.5 million ‘B’ Warrants on each Krypton product obtaining ANDA approval subject to a maximum of 7.5 million Ordinaryshares and 7.5 million ‘B’ Warrants;

(ii) an additional 10 million Ordinary Shares and 10 million ‘B’ Warrants in the event that the aggregate annual sales of the Krypton products exceeds $50 million and the Company is profitable in respect of these products before 31 December 2003;

(iii) an additional 10 million Ordinary Shares and 10 million ‘B’ Warrants in the event that the aggregate annual sales of the Krypton products and annualrevenues of the Company exceeds $200 million and the Company is profitable in respect of these products before 31 December 2003;

(iv) an additional 10 million Ordinary Shares and 10 million ‘B’ Warrants in the event that the aggregate annual sales of the Krypton products and annualrevenues of the Company exceeds $275 million and the Company is profitable in respect of these products before 31 December 2003.

In the event that two of hurdles (i), (ii) and (iii) are satisfied in relation to any single year’s sales, only the first such hurdle will be considered as having been satisfied.

Certain of the hurdles relating to the Krypton acquisition were not formulated to take account of the detailed arrangements currently envisagedby the Company. Should any of the Krypton products be approved and marketed, SkyePharma will need to renegotiate elements of the Kryptonacquisition agreement.

The Directors have formed the opinion that until products are marketed and agreement is reached with the Krypton vendors, certain elements of deferredconsideration cannot be estimated with any degree of certainty. Therefore the deferred consideration recognised in the accounts at 31 December 2001relates only to the extent that hurdle (i) is reasonably expected to be met.

Consequently, an estimate of £4.8 million (2000: £5.0 million) has been recognised as deferred consideration based on market prices on 31 December 2001for 7.5 million Ordinary shares and 7.5 million ‘B’ Warrants.

24Reserves

Equity Non-equity Currency Profit andshare share Other translation loss

premium premium reserves reserve accountGroup £’000 £’000 £’000 £’000 £’000

At 1 January 2001 241,349 20,220 11,212 (1,427) (261,519)

Exchange adjustments – – – 28 –

On issue of shares and warrants 25,736 – – – –

On exercise of warrants 52 – (56) – –

On lapse of warrants – – (436) – 271

Goodwill adjustments on deferred consideration – – – – 148

Loss for the year – – – – (9,452)

At 31 December 2001 267,137 20,220 10,720 (1,399) (270,552)



24Reserves (continued)

As at 31 December 2001 the cumulative amount of goodwill eliminated against reserves was £152,469,000 (2000: £152,617,000).

Equity Non-equity Profit andshare share Other loss

premium premium reserves accountCompany £’000 £’000 £’000 £’000

At 1 January 2001 241,349 20,220 11,212 (18,034)

On issue of shares and warrants 25,736 – – –

On exercise of warrants 52 – (56) –

On lapse of warrants – – (436) 271

Profit for the year – – – 1,269

At 31 December 2001 267,137 20,220 10,720 (16,494)

As permitted by Section 230 of the Companies Act 1985, the Profit and Loss Account of the Company is not presented. The profit attributable to shareholdersdealt with in the accounts of the Company is £1,269,000 (2000: £4,069,000).

25Acquisitions

RTP Pharma Inc.On 19 July 2001 the Group acquired an initial 40.2% interest in RTP Pharma Inc. of Canada (‘RTP’) for US$20 million (£14.2 million) in SkyePharma OrdinaryShares and acquired US$5.0 million (£3.5 million) of preferred shares in RTP for cash.

The Group acquired US$10 million (£6.9 million) of preferred shares in RTP in return for the issue of SkyePharma Ordinary Shares during the 90 days following 19 July 2001.

SkyePharma achieved control of RTP on 27 December 2001 when agreement was reached to acquire the majority of the outstanding voting shares in RTP.On 13 March 2002 SkyePharma announced the acquisition of the outstanding voting shares in RTP in return for the issue of SkyePharma Ordinary Shares tothe value of $20.6 million (£14.2 million). Given the Directors’ intent to acquire 100% of RTP and SkyePharma’s control, the Group has consolidated RTP from27 December 2001, the date it achieved control. The total consideration of US$56.5 million (£39.4 million) including acquisition costs comprised 49,959,367Ordinary Shares and US$5.0 million (£3.5 million) cash.

The equity method of accounting was adopted between 19 July 2001 and 27 December 2001 and the acquisition method during the period thereafter. Goodwillof £29.9 million has been capitalised according to the Company’s accounting policy. By consideration of the likely commercial life of the technology acquiredwith RTP, the Directors have determined that a suitable period over which to amortise the goodwill is 20 years.



25Acquisitions (continued)

RTP Pharma Inc. (continued)Provisional

Book values at fair values at27 December 27 December

2001 Adjustments 2001£’000 £’000 £’000

Fixed assets

Intangible assets 1,451 (1,451) –

Tangible assets 2,018 – 2,018

Investments 705 1,523 2,228

4,174 72 4,246

Current assets

Debtors 1,162 – 1,162

Cash 5,436 – 5,436

6,598 – 6,598

Current liabilities (1,311) – (1,311)

Demand notes (3,598) – (3,598)

Net assets 5,863 72 5,935

Satisfied by:

Shares issued/allocated 29,536

Shares to be issued/allocated (note 23) 5,780

Cash 3,528

Expenses relating to the transaction 590

Deferred consideration –

Consideration 39,434

Demand notes (3,598)

Net consideration 35,836

Goodwill 29,901

The provisional material fair value adjustments made to the net assets of RTP were as follows:

(a) An adjustment of £1,451,000 to eliminate RTP’s intangible assets as at 27 December 2001.

(b) A revaluation of £1,523,000 to reflect RTP’s investment in Waratah Pharmaceuticals Inc. at its fair value at 27 December 2001.

Deferred ConsiderationIn consideration for the loss of the former RTP shareholders’ certain option rights, which were agreed on 19 July 2001 when the Group acquired an initial 40.2%interest in RTP, deferred consideration has been agreed. If the SkyePharma share price is below 82 pence on 30 June 2003, then the Company is requiredto issue 200,000 additional shares, or pay an amount in cash, for each penny difference between the actual share price and 82 pence. In the opinion of theDirectors, the deferred consideration cannot be estimated with any degree of certainty. Therefore this deferred consideration has not been recognisedas at 31 December 2001.

Initial estimates of the deferred consideration will be revised as further and more certain information becomes available with potential correspondingadjustments to goodwill.

Results of RTPThe results of RTP for the period 1 January 2001 to 27 December 2001 and for the preceding year ended 31 December 2000 are set out below:

Period ended Year ended27 December 2001 31 December 2000

£’000 £’000

Retained loss for the period 4,837 11,147

During the period 27 December 2001 to 31 December 2001 RTP contributed £nil to turnover and a loss of £39,000 to the group operating loss.



26Financial instruments

The Group holds financial instruments to finance its operations and to manage the currency risk that arises from these operations. The Group finances itsoperations through a combination of shareholders’ funds, convertible bonds, bank loans and long-term borrowings. The main risks arising from the Group’sfinancial instruments are liquidity risk, foreign currency risk, interest rate risk and credit risk.

Liquidity risksThe Group’s policy is to maintain continuity of funding through a mixture of long-term debt and bank loans, raised to cover specific projects, and through theissue of shares to collaborative partners, where necessary, to obtain development contracts. Short-term flexibility is provided through the use of overdrafts.The maturity profile of the Group’s debt is set out below at note (c).

Foreign currency riskAll of the Group’s operations are based overseas in Continental Europe, the US and Canada giving rise to exposures to changes in foreign exchange ratesnotably the Swiss Franc, Euro, US Dollar and Canadian Dollar. To minimise the impact of any fluctuations, the Group’s policy has historically been to maintainnatural hedges by relating the structure of borrowings to the trading cash flows that generate them. Where subsidiaries are funded centrally, this is achievedby the use of long-term loans the exchange differences on which are taken to reserves. Where it was not possible to use natural hedges, forward currencycontracts were used. The Group has used forward currency contracts and currency options during the year to minimise the currency exposure on operationaltransactions. Foreign currency exchange movements did not have a material impact on the results of operations in 2001 compared with 2000.

Interest rate riskThe Group borrows at fixed and floating rates of interest as deemed appropriate for its circumstances. Where necessary the Group uses interest rate swaps toachieve the desired interest rate profile. During the year the Group had a cancellable, floating rate, interest rate swap on £30 million of the 6% convertible bondliability. The interest rate swap agreement was cancelled on 19 December 2001. The interest rate profile of the Group’s financial assets and liabilities is set outin notes (a) and (b) respectively.

Credit riskThe Group is exposed to credit related losses in the event of non-performance by third parties to financial instruments. The Group does not expect any thirdparties to fail to meet their obligations given the policy of selecting only parties with high credit ratings and minimising its exposure to any one institution.

In the numerical disclosures that follow, short-term debtors and creditors that arise directly as a result of the Group’s operations are excluded from alldisclosures with the exception of note (f) on currency exposures.

(a) Interest rate and currency profile of financial assets

31 December 2001Non-interest

Floating rate Fixed rate bearing Total financialfinancial assets financial assets financial assets assets

Currency £’000 £’000 £’000 £’000

Sterling 5,690 – 62 5,752

$US 14,977 – 35 15,012

Euro 48 – – 48

Swiss francs 549 – 93 642

$Canadian 48 5,389 1 5,438

21,312 5,389 191 26,892

Financial assets primarily comprise cash and short-term bank deposits.

Included within the sterling denominated financial assets shown above for 2001, is £4 million, placed on deposit for 18 months in December 2000, at a cappedrate. The Group will receive 6.5% for each successive week that the two-year sterling swap rate stays below 7.0%. If the two-year sterling swap rate sets above7.0%, no coupon will accrue for that week.

The $Canadian denominated fixed rate financial assets shown above for 2001 of £5.4 million have a 2.06% weighted average interest rate and 3.65 monthsweighted average time for which the rate is fixed.



26Financial instruments (continued)

(a) Interest rate and currency profile of financial assets (continued)

All other of the Group’s financial assets, in both 2001 and 2002, either bear interest at floating rates based upon the floating bank rate in the country in whichthe funds are held or are non-interest bearing. Non-interest bearing financial assets consist of balances held in short-term current accounts.

31 December 2000Non-interest

Floating rate bearing Total financialfinancial assets financial assets assets

Currency £’000 £’000 £’000

Sterling 32,170 252 32,422

$US 8,993 215 9,208

French francs 7 – 7

Swiss francs 23 – 23

Other 1,218 – 1,218

42,411 467 42,878

(b) Interest rate and currency profile of financial liabilities

31 December 2001Weighted average

interest rate WeightedFixed rate Floating rate Total on fixed average timefinancial financial financial financial for which rateliabilities liabilities liabilities liabilities is fixed

Currency £’000 £’000 £’000 % (months)

Sterling 59,400 – 59,400 6.00 41.5

$US – 3,898 3,898 – –

French Francs 1,599 745 2,344 6.25 23.0

Swiss francs 4,302 5,548 9,850 3.63 23.6

65,301 10,191 75,492 5.85 39.9

Financial liabilities primarily comprise bank and other loans and convertible bonds.

Total financial liabilities does not agree to the total of the balance sheet captions due to the presence of £1,438,000 (2000: £1,854,000) of unamortised issuecosts within the value shown on the balance sheet for convertible bonds. Certain financial instruments, such as currency options, are excluded from theanalysis above where they do not alter the interest basis or currency of financial liabilities. The terms and conditions that relate to those instruments are setout in note 26(g).

All other floating rate financial liabilities, in both 2001 and 2000, are interest bearing financial liabilities that bear interest at interest rates based on LIBOR,prime and other bank based lending rates in the country in which the liability arises, which are fixed for periods of up to 12 months.

The non-equity Deferred ‘A’ and ‘B’ Shares hold no rights to dividends. See note 22: Share Capital.

31 December 2000Weighted average

interest rate WeightedFixed rate Floating rate Total on fixed average timefinancial financial financial financial for which rateliabilities liabilities liabilities liabilities is fixed

Currency £’000 £’000 £’000 % (months)

Sterling 29,400 30,000 59,400 6.00 53.5

$US – 7,989 7,989 – –

French francs 2,391 767 3,158 6.25 27.9

Swiss francs 4,386 6,089 10,475 3.04 35.0

36,177 44,845 81,022 5.66 49.2




(c)Maturity of financial liabilities31 December 2001 31 December 2000

£’000 £’000

Within one year 7,257 9,940

Between one and two years 1,893 4,023

Between two and five years 63,942 64,496

Beyond five years 2,400 2,563

75,492 81,022

The non-equity Deferred ‘A’ and ‘B’ Shares will convert to Ordinary Shares on the occurrence of certain future contingent events. See note 22: Share Capital.

(d)Borrowing facilities

As at 31 December 2001 the Group had the following undrawn committed borrowing facilities available.


Expiring within one year 369 –

(e)Fair values

The comparison of fair and book values of all the Group’s financial instruments as at 31 December 2001 is set out below. Market values have been used todetermine the fair values of all swaps and foreign currency contracts. The fair value of the non-equity Deferred ‘A’ and ‘B’ Shares has been calculated byreference to the Ordinary Share price at 31 December 2001, based upon the Directors’ opinion that 24 million Ordinary Shares will be issued in settlement ofthe deferred consideration payable on the acquisition of Jago. See note 22: Share capital for details of the contingencies that shall determine the issuance ofthe Ordinary Shares. The fair values of all other items have been calculated by discounting future cash flows at interest rates prevailing at 31 December 2001.

31 December 2001Book values Fair values

Financial instruments held or issued to finance the Group’s operations £’000 £’000

Cash at bank and in hand 4,534 4,534

Short-term bank deposits 22,358 22,358

Short-term borrowings and current portion of long-term borrowings (7,257) (7,257)

Long-term convertible debt (59,400) (50,194)

Other long-term debt (8,835) (8,602)

Non-equity Deferred ‘A’ and ‘B’ Shares (22,620) (14,700)

(71,220) (53,861)


Derivative financial instruments held to manage the Group’s currency profile £’000 £’000

Euro currency options – 38

US$ currency options (20) (23)

Forward currency contracts – (46)

(20) (31)



(e)Fair values (continued)


Financial instruments held or issued to finance the Group’s operations £’000 £’000

Cash at bank and in hand 10,769 10,769

Short-term bank deposits 32,109 32,109

Short-term borrowings and current portion of long-term borrowings (9,940) (9,940)

Long-term convertible debt (59,400) (46,022)

Other long-term debt (11,682) (10,942)

Non-equity Deferred ‘A’ and ‘B’ Shares (22,620) (15,360)

(60,764) (39,386)


Derivative financial instruments held to manage the Group’s interest rate and currency profile £’000 £’000

Interest rate swap – 822

Euro currency options – 221

US$ currency options – (104)

– 939

(f)Currency exposures

The following analysis shows the net monetary assets and liabilities of Group companies that are not denominated in their functional currency and thereforegive rise to exchange gains and losses in the profit and loss account in both 2001 and 2000.

31 December 2001Net foreign currency monetary assets/(liabilities)

French SwissSterling $US francs francs Other Total

Functional currency of Operating Company £’000 £’000 £’000 £’000 £’000 £’000

Sterling – 11,527 – – (49) 11,478

$US (5,231) – – – – (5,231)

French francs (2,260) 102 – 25 – (2,133)

Swiss francs 3,568 4,087 406 – 10 8,071

$Canadian – 477 – – – 477

(3,923) 16,193 406 25 (39) 12,662

31 December 2000Net foreign currency monetary assets/(liabilities)

French SwissSterling $US francs francs Other Total

Functional currency of Operating Company £’000 £’000 £’000 £’000 £’000 £’000

Sterling – 4,179 7 – – 4,186

$US (2,254) – – – – (2,254)

French francs (1,528) 80 – – – (1,448)

Swiss francs (1,445) (870) – – 1,197 (1,118)

(5,227) 3,389 7 – 1,197 (634)





(g)Hedging

As explained above, the Group’s policy is to hedge interest rate exposures through the use of interest rate swaps and currency exposures through the use ofcurrency options, accrual forward options and forward currency contracts. The table below shows the extent to which the Group has off-balance sheet(unrecognised) and on-balance sheet (deferred) gains and losses in respect of hedges at the beginning and end of the year.

Unrecognised DeferredGains Losses Net Total Gains Losses Net Total£’000 £’000 £’000 £’000 £’000 £’000

Gains/(losses) on hedges at 1 January 2001 1,043 (104) 939 – – –

Changes in value from 1 January 2001 to settlement (923) 104 (819) – – –

Gains/(losses) arising in 2000 recognised in 2001 120 – 120 – – –

Gains/(losses) not recognised in 2001 arising before 1 January 2001 – – – – – –

Arising in 2001 – (31) (31) (20) – (20)

Gains/(losses) on hedges at 31 December 2001 – (31) (31) (20) – (20)

At 31 December 2001, the Company had currency options to sell £2.8 million US dollars. These outstanding contracts has maturities of less than 12 months.

At 31 December 2001, the Company had accrual forward options to purchase £0.2 million Swiss francs each week for 31 weeks ending 19 June 2002 and£0.2 million Euro each week for 26 weeks ending 22 May 2002.

At 31 December 2001, the Company had forward currency contracts to purchase £2.7 million Swiss francs. These open contracts at 31 December 2001 havematurities of less than 12 months.

The excess of fair values over book values for currency options and forward currency contracts shown in note 26(e) represents the unrecognised hedging gainon these instruments as at 31 December 2001. The actual gains or losses arising on these currency options will be dependent on future exchange rates andwill be recognised in the profit and loss account, in 2002, as the operational transactions to which they are linked occur.

Unrecognised gains at 1 January 2001 including £0.8 million in relation to the cancellable interest rate swap agreement. This was based upon the agreementcontinuing for the life of the convertible bonds and as such the gain would have been spread in the profit and loss account until 2005. The Royal Bank ofScotland cancelled the agreement on 19 December 2001. As a result, only £0.1m of the gain was recognised in the 2001 and £0.7m of the gain is shown aboveas a change in value before settlement.

27Pension arrangements

The Group operates various defined contribution plans for its employees in the UK, Switzerland and the US. The Group’s contributions to these plans arecharged to the income statement in the period to which they relate, and the assets are held in separate trustee administered funds. The charge for the yearamounted to £822,000 (2000: £532,000).

The Group operates an unfunded defined benefit scheme in respect of its employees in France based on the national collective agreement of thepharmaceutical industry. A provision of £51,000 is included in Provisions for liabilities and charges (note 18).

Under the transitional provisions of FRS 17 ‘Retirement Benefits’ certain disclosures are required as follows:

At 31 December 2001 a valuation was performed by professionally qualified actuaries on the present value of the accrued liabilities calculated under theprojected unit credit actuarial cost method.

The principal assumptions made by the actuaries were:

% per annum

Inflation rate 2.0

Rate of increase in salaries 3.0

Discount rate 5.5

Analysis of amounts charged to operating profit in respect of the defined benefit scheme2001

£’000

Current service cost 18

Interest on pension scheme liabilities 19

Total operating charge 37



27Pension arrangements (continued)

Movement in deficit during the year2001

£’000

At 1 January 2001 364

Exchange adjustment (10)

Current service cost 18

Interest on pension scheme liabilities 19

Payments (9)

At 31 December 2001 382

28Related party transactions

At the end of December 1998, Ian Gowrie-Smith (through a family-owned trust) acquired a 50% interest in 10 East 63rd Street Inc., the company which owns10 East 63rd Street, a property in New York. SkyePharma PLC has been in occupation of that property since January 1997, subject to a tenancy agreementwhich expired in January 1999, under which it paid a rent of US$300,000 per annum. In January 1999 the lease was renewed on the same terms. In February2001 the lease was renewed for two years based upon an independent valuation. The annual rent was increased to US$360,000 per annum with effect from 1 February 2001. Approximately one-third of the premises are subleased to Fifth Avenue Capital Inc., an unrelated company.

29Subsequent events

On 13 March 2002 the Group announced a transaction under which Paul Capital Royalty Acquisition Fund (‘Paul Capital’) will pay SkyePharma US$30 millionduring 2002 and 2003, principally to fund the clinical development of RTP’s propofol and SkyePharma’s HFA-formoterol. In return, SkyePharma has agreedtosell a portion of the potential future royalty and revenue streams from these, and seven other products from the two companies’ drug pipelines to Paul Capital.

Between January 2002 and December 2015, Paul Capital could receive between 4% and 20% of the annual royalties and revenues from the total of nine RTPand SkyePharma products. Based on management’s current projections, the 20% rate will apply from 2004 to 2008. The percentage then falls, when anagreed return is achieved, to 12.5% until a second ceiling is reached, before falling to 4% for the remainder of the period until 31 December 2015. During2002 and 2003, the 20% rate will be reduced based on the percentage of the total US$30 million already funded. The other products referred to above arethe lipid-lowering drug fenofibrate, an anti-cancer agent busulfan, an intravenous formulation of the antibiotic oxytetracycline, oral budesonide totreat inflammatory bowel disease, HFA-budesonide and Foradil, both treating asthma, and the anti-depressant Paxil CR.

In addition, should the share of royalties received by Paul Capital not meet minimum returns, SkyePharma may issue SkyePharma Ordinary Sharesup to a value of US$7.5 million. The number of Ordinary Shares to be issued is capped based upon a minimum price of 55 pence per share.

Also under the terms of these agreements, Paul Capital has been issued warrants carrying rights to subscribe for 5 million SkyePharma Ordinary Sharesat an exercise price of 73.75 pence, representing a 25% premium to the average trading price for the five trading days immediately prior to the closing date.

On 27 March 2002 SkyePharma announced that GlaxoSmithKline will be launching Paxil CR prior to the end of April 2002.



30Principal subsidiary undertakings

Company Country of incorporation % Held Principal activities

SkyePharma Canada Holding Inc(1) Canada 100% Holding company

RTP Pharma Inc(2) Canada 100% Research and development

SkyePharma Production SAS(1) France 100% Manufacturing of pharmaceuticals

Krypton Limited Gibraltar 100% Exploitation of intellectual property

SkyePharma Holding AG(1) Switzerland 100% Holding company

Jago Holding AG Switzerland 100% Holding company

SkyePharma AG Switzerland 100% Research and development

Jago Research AG Switzerland 100% Exploitation of intellectual property

Jagotec AG Switzerland 100% Exploitation of intellectual property

SkyePharma Holding Inc(1) US 100% Holding company

Brightstone Pharma Inc US 100% Development of pharmaceuticals and licensing

SkyePharma Inc US 100% Development of pharmaceuticals

(1) Denotes investment directly held by the Company

(2) SkyePharma achieved control of RTP Pharma Inc. on 27 December 2001 when agreement was reached to acquire the majority of the remainingoutstanding voting shares in RTP. Agreement was reached with the remaining shareholders and the remaining shares issued by March 2002 orare held in escrow pending satisfaction of certain Canadian tax requirements.

Full details of all subsidiary undertakings will be attached to the Company’s Annual Return to be filed with the Registrar of Companies.


Reconciliation to US accounting principles

The financial statements of the Group are prepared in accordance with UK GAAP (Generally Accepted Accounting Principles) which differs in certain respectsfrom US GAAP. The tables below summarise the material adjustments to the loss for the year and shareholders’ funds which would be required if US GAAPhad been applied instead of UK GAAP.


Notes £’000 £’000

Loss under UK GAAP (9,452) (19,690)

US GAAP adjustments:

Purchase accounting and goodwill

Amortisation of goodwill i, iii (5,708) (5,873)

Depreciation of fixed tangible assets ii 488 727

Write-off of acquired in-process research and development costs iii (18,893) –

Results in equity investments (RTP) vi (559) –

Stock-based compensation ix (215) (734)

Revenue recognition vii (1,934) (189)

Sale of royalty interest

Revenue recognition viii (6,342) (2,900)

Interest expense viii (1,222) –

Financial instruments xi (31) –

Loss before cumulative effect of change in accounting principles under US GAAP (43,868) (28,659)

Cumulative effect of change in accounting principles (SAB 101) – (542)

Net loss under US GAAP (43,868) (29,201)

Loss per ordinary share under US GAAP before cumulative effect of change in accounting principle (pence) (8.3p) (5.6 p)

Cumulative effect of change in accounting principle per ordinary share (pence) – (0.1 p)

Net loss per ordinary share under US GAAP (pence) (8.3p) (5.7 p)

Shareholders' fundsYear to Year to

31 December 2001 31 December 2000Notes £’000 £’000

Shareholders' funds under UK GAAP 95,145 68,952

US GAAP adjustments:

Purchase accounting and goodwill

Goodwill (net of accumulated amortisation of 33,896 and 28,188, respectively) i, iii 73,259 89,267

Other intangible fixed assets (net of accumulated amortisation of 54 and nil, respectively) i, iii 5,174 –

Tangible fixed assets (net of accumulated amortisation of 3,530 and 3,003, respectively) ii (7,192) (7,925)

Investments in associates iii 796 –

Deferred taxes iii (2,738) –

Contingent consideration charged to goodwill reserve v 27,457 33,260

Shares and warrants to be issued and deferred shares iv (34,070) (33,260)

Stock-based compensation ix (193) (734)

Employee Benefit Trust x (552) –

Deferred revenue vii 771 (731)

Funding liabilities viii (15,256) (2,900)

Financial instruments xi (31) –

Shareholders' funds under US GAAP 142,570 145,929

Certain adjustments as of and for the year ended 31 December 2000 have been reclassified for comparative purposes.


Reconciliation to US accounting principles continued

Summary of Material Differences between UK and US GAAP

(i) Goodwill and other intangible fixed assets Prior to the introduction of FRS10, as permissible under UK GAAP, no intangible assets have been recognised as a result of purchaseaccounting as the intangible assets were considered to be an integral part of the business acquired and were, therefore, included within goodwill and eliminated against shareholders’funds. Where the aggregate of the fair values of the net assets acquired exceeded the cost of the acquired net assets resulting in negative goodwill, such excess has credited directly toreserves. The Group has adopted transitional provisions under FRS10 to not reinstate goodwill previously eliminated against reserves as an intangible asset.

US GAAP requires an allocation of consideration to identifiable intangible assets, including any resulting from research and development. For business combinations subsequent to theadoption of FAS141 ‘Business Combinations’ on 1 July 2001, goodwill is no longer amortised under US GAAP, but instead subject to annual impairment tests. This will result in a reversalof goodwill amortisation charged under UK GAAP. Intangible fixed assets recognised under US GAAP purchase accounting requirements are depreciated over their estimated revenueearning life. Negative goodwill, if any, is eliminated by proportionately reducing the value of the non-current assets acquired.

(ii) Tangible fixed assets Prior to the introduction of FRS10 under UK GAAP for business acquisitions, where the aggregate of the fair values of the net assets acquired exceeded the costof the acquired net assets resulting in negative goodwill, such excess was credited directly to reserves. Under US GAAP such excess is eliminated by proportionately reducing the valueof the non-current assets acquired.

(iii) Acquisition of RTP In 2001, the Group purchased the majority interest of RTP through a two-step acquisition effected in July and December 2001. Under UK GAAP, the aggregatepurchase price was £39.4 million, including £35.4 million of ordinary shares, £3.5 million of cash, and £0.5 million in acquisition costs. The acquisition was recorded using the purchasemethod of accounting under both UK and US GAAP.

The adjustments between UK and US GAAP related to the RTP acquisition relate mainly to differences in (i) the valuation of purchase price consideration, (ii) the methods of purchaseprice allocation and (iii) amortisation of goodwill. This has resulted in a £5.3 million increase in purchase consideration and differences in the amounts assigned to certain tangibleand intangible fixed assets, equity investments and related deferred taxes. Under US GAAP amounts allocated to acquired in-process research and development that do not havean alternative use have been expensed through earnings in the period of acquisition. Under UK GAAP, these amounts are not separately identified but considered part of goodwill.In addition, under UK GAAP goodwill is being amortised over 20 years on a straight-line basis. Under US GAAP, goodwill is not amortised but is subject to regular impairment tests.

The Group has determined the fair values of the acquired in-process research and development, assets acquired and liabilities assumed from RTP based on preliminary independentappraisals, information currently available and current assumptions as to future operations. The Group is completing the review and determination of the fair values of all assetsacquired and liabilities assumed. Accordingly, the allocation of the purchase price is subject to revision, which is not expected to be material, based on the final determination ofappraised and other fair values.

(iv) Shares and warrants to be issued and deferred shares Under US GAAP, consideration payable in future in connection with the acquisition of Krypton and Jago is included withinshareholders’ funds as "shares and warrants to be issued" and "deferred shares", respectively. Under US GAAP, contingent consideration is recognised only when determined beyondreasonable doubt.

In addition, under UK GAAP in connection with the acquisition of RTP, £5.8 million of the total consideration is payable in shares which will be issued subsequent to 31 December 2001.These shares have been included within shareholders’ funds as shares and warrants to be issued. Under US GAAP, such amounts would be recorded as a liability until the ordinaryshares are actually issued.

(v) Contingent consideration charged to goodwill The Group effected the acquisition of Krypton and Jago through the exchange of warrants and shares. The issuance of certain of thesewarrants and shares is contingent upon the occurrence of certain future events. Under UK GAAP, the Group estimated the fair value of the contingent consideration to determine theacquisition cost. The resulting goodwill was eliminated against shareholders’ funds. Under US GAAP the acquisition cost has been adjusted to remove the contingent consideration,which is only recognised when it is determinable beyond reasonable doubt.

(vi) Results of equity investments (RTP) In accordance with the equity method of accounting under UK and US GAAP, the Group records its relative share of profits and losses reportedby associated companies. Accordingly, this adjustment includes the Group’s proportionate share of UK to US GAAP adjustments related to net income of RTP between 19 July and27 December 2001.

(vii) Revenue recognition Under UK GAAP, contract revenue is recognised when it is earned and non-refundable and when there are no future obligations under the contract terms.Under US GAAP, the more prescriptive criteria of SAB 101 have been applied to assess whether the culmination of the earnings process has been completed and the Group’scontinuing obligation throughout the contract term. As a result, under US GAAP certain non-refundable fees have been deferred over the contract terms.

Deferred Revenue includes the amount of revenue not currently eligible for recognition under SAB 101 but also the reversal of £4.8 million deferred revenue related to the sale of royaltyinterests, which is treated as debt under US GAAP.

(viii) Sale of royalty interests Under UK GAAP payments received from a third party to fund the internal research and development of a product in return for the sale of a proportion ofpotential future royalty streams from a selection of products are reflected within other operating income when the risk of reimbursement has effectively been transferred to the thirdparty. Under US GAAP, Emerging Issues Task Force (EITF) 88-18, ‘Sales of Future Revenues’ requires such payments to be recorded as debt where there is continuing involvement inthe generation of the cash flows due to the third party. The adjustment for the statement of operations for US GAAP includes the reversal of revenue recorded from the third-party aswell as recording the interest charge for the period on the outstanding funding liability balance.

(ix) Stock-based compensation Under US GAAP, the Group applies Accounting Principles Board Opinion (APB) No. 25, ‘Accounting for Stock Issued to Employees’, and relatedinterpretations in accounting for its plans. Accordingly, a compensation expense has been recognised for performance-based compensation plans where it is probable that theperformance criteria will be met and the options exercised prior to the expiration of the options issued under these plans. No compensation expense has been recognised for thoseplans which are considered fixed option plans under APB 25 and where the options granted under the plans are granted at a price which equals the market price at the date of grant.

(x) Employee Benefit Trust Under UK GAAP shares of the Company’s stock held by the SkyePharma PLC General Employee Benefit Trust are recorded at cost and accounted foras investments. The value of the investment is reduced based on the cost of the shares that are allocated to certain Executive Directors and other senior executives under theDeferred Share Bonus Plan.

Under US GAAP shares of the Company’s stock purchased by the Employee Benefit Trust are accounted for at cost as treasury shares which reduce shareholder’s equity. Gains or lossesarising on subsequent issuance of the shares to employees are recorded as adjustments to shareholders’ equity.


Reconciliation to US accounting principles continued

Summary of Material Differences between UK and US GAAP (continued)

(xi) Financial Instruments Under UK GAAP, periodic gains and losses on interest and foreign currency derivatives are not recognised until the operational transactions to which they arelinked occur. On 1 January, 2001 for US GAAP reporting purposes, the Group adopted Financial Accounting Standard No. 133 Accounting for Derivative Instruments and HedgingActivities ("FAS 133") as amended by FAS 137 and FAS 138. Accordingly, all derivative instruments are recorded on the balance sheet at fair value. Changes in fair values are recorded inearnings or other comprehensive income, depending on whether the derivative instrument is part of a hedge transaction and, if it is, the type of hedge transaction. The Group has alsoreviewed its contractual arrangements for the existence of embedded derivatives that should be separately accounted for under SFAS 133. If embedded derivatives are identified as aresult of this review, they are recorded separately from their host contracts at fair value, with changes in fair value recognised in current earnings. The Group did not identify any suchembedded derivatives as of 1 January or 31 December 2001.

In accordance with the transition provisions of FAS 133 on 1 January 2001, the Group recorded a cumulative-effect-type adjustment of £643,000 within Other Comprehensive Incomein connection with certain foreign currency derivative instruments. During 2001 the Group reclassified within earnings all the transition adjustment that was recorded in AccumulatedOther Comprehensive Income.

In addition, the difference between the previous carrying amount of certain interest rate derivatives and their fair values has been reported as a cumulative-effect-type adjustment ofnet income of £820,000. The Group has also recognised an offsetting amount on the related hedged liabilities by adjusting their carrying amounts at that date. The adjustment of thecarrying amount of the hedged liability has been amortised to earnings over the period of the derivative.

(xii) Recent US GAAP Pronouncements On 20 July 2001 the FASB issued Statement No. 141, ‘Business Combinations’, and Statement No. 142 ‘Goodwill and Other Intangible Assets’ whichare required to be implemented with effect from 1 July 2001 and 1 January 2002, respectively. FASB Statement No. 141 requires that all business combinations be accounted for underthe purchase method. FASB Statement No. 142 requires that goodwill will no longer be amortised over its estimated useful life. The Group must instead identify and value its reportingunits for the purpose of assessing, at least annually, potential impairment of goodwill allocated to each reporting unit. Additionally, the Group will need to reassess the useful livesof existing recognised intangible assets. Intangible assets deemed to have indefinite lives will no longer be amortised, instead tested annually for potential impairment. Separateintangible assets with finite lives will continue to be amortised over their useful lives. The Group will adopt SFAS 142 prospectively as of 1 January 2002. Since an extensive effort isneeded to adopt SFAS 142, it is not practical to fully estimate the impact of adopting SFAS 142 on the Group’s financial statements. At 31 December 2001, the Group had unamortisedgoodwill of approximately £149.0 million. Total goodwill amortisation was approximately £8.6 million for the year ended 31 December 2001 which will not be incurred in 2002 underUS GAAP.

In August 2001, the FASB issued FASB Statement No. 143, ‘Accounting for Obligations Associated with the Retirement of Long-Lived Assets’. This standard will be effective for theGroup’s fiscal year beginning 1 January 2003. The standard requires that such obligations be capitalised as part of the assets’ cost at the time of initial recognition, with the relatedliability discounted to its fair value at the date of recognition. The income statement impact of adopting this standard will be presented as a cumulative effect of a change in accountingprinciple. The Group is assessing the impact that this new standard will have on its financial position and results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS 144). SFAS 144supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS 144 develops an accounting model, based on theframework previously established in SFAS 121, for long-lived assets to be disposed of by sale. The accounting model applies to all long-lived assets, including discontinued operations,and it supersedes the provisions of APB Opinion No. 30, ‘Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,’ for disposal of segments of a business. SFAS 144 requires that long-lived assets be measured at the lower of carrying amount or fairvalue less cost to sell, whether reported in continuing operations or discontinued operations. SFAS 144 also broadens the definition of discontinued operations. The Company will adoptSFAS 144 from 1 January 2002, and is currently assessing the impact that this new standard will have on it financial position and results of operations.

(xiii) Joint arrangements Under UK GAAP, where the Group has certain contractual agreements with other participants to engage in joint activities that do not create an entity carrying on atrade or business of its own, they are accounted for as a joint arrangement. The Group includes its share of the assets, liabilities and cash flows in such joint arrangements measured inaccordance with the terms of each arrangement which is usually pro rata to the Group’s interest in the joint arrangement. Under US GAAP, such arrangements are viewed as syntheticJoint Ventures and accounted for under the gross equity method. This difference does not have an impact on the overall net loss of the Group but under US GAAP selling and marketingcosts would be reduced by £2,896,000 and £2,250,000 in 2001 and 2000 respectively, and be shown as the Group’s share of the operating loss in the Joint Venture.

Company information and advisors

Registered and Head Office105 Piccadilly, London W1J 7NJTelephone: 020 7491 1777Fax: 020 7491 3338Registered No:107582Secretary: Suzanne V. McLean

AuditorsPricewaterhouseCoopersChartered Accountants1 Embankment PlaceLondon WC2N 6RH

SolicitorsUKStringer Saul17 Hanover SquareLondon W1R 9AJ

Investment BankersMerrill Lynch International1 King Edward StreetLondon EC1M 3NH

Joint Corporate BrokersMerrill Lynch International1 King Edward StreetLondon EC1M 3NH

BankersNational Westminster Bank plcBishopsgate Business CentrePO Box 3415 BishopsgateLondon EC2P 2AP

RegistrarsCapita HarfordBourne House34 Beckenham RoadBeckenhamKent BR3 4TU

DepositoryThe Bank of New York101 Barclay StreetNew YorkNY 10286USA

USSullivan & CromwellSt. Olave’s House9a Ironmonger LaneLondon EC2V 8EY

Société GénéraleExchange HousePrimrose StreetLondon EC2A 2DD

www.skyepharma.com

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annual report 2001 -...

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