Skyepharma PLC Responds To Allegations Made By North Atlantic Value Group

LONDON, March 3 /PRNewswire-FirstCall/ -- SkyePharma PLC wishes to respond to certain unsubstantiated allegations made yesterday by a minority group of shareholders ("the NAV group") in a circular to SkyePharma's shareholders. The vast majority of the shareholdings held by the NAV group have been acquired in the last nine months.

Until today the Company has not been able to respond with a detailed rebuttal as the EGM requisition and subsequent letters from the NAV group have only cited unspecified "corporate governance issues."

* The allegations made by the NAV group are without substance and they continue to offer no strategy for taking SkyePharma forward. * All NAV group's claims concern matters detailed in SkyePharma's reports and accounts and other documents before NAV group invested. NAV group cannot claim they were unaware of these facts unless they failed to review these publicly available documents. * We agree with their statement that SkyePharma has an "excellent and potentially very valuable product portfolio." This has been built by the current Board. * SkyePharma has appointed a new non-Executive Chairman, Chief Executive and Chief Operating Officer. The appointment of an Executive Chairman would make them redundant no matter what the NAV group has implied in the media. * The NAV group's activity has severely undermined the current share price in the Board's opinion. * The Board of SkyePharma continues to advise shareholders to vote AGAINST the resolutions proposed at the EGM. Summary response details follow: "A history of disappointing its shareholders"

Drug development is a long-term process. Predicting the timing of commercialisation is difficult. SkyePharma has always provided the clearest most accurate estimates possible. SkyePharma has a new Chairman and management team dedicated to delivering on its new strategy which is designed to move the Company into sustainable profitability as soon as possible.

"Contracts with questionable value to shareholders"

All investments are made as part of the Company's commercial relationships and usually as part payment to SkyePharma. Some have resulted in capital gains and others have not. To protect its investments, SkyePharma requests a board position, after -- not before -- it invests, which is a common practice. All information on this has been detailed in the Annual Reports.

"An inflated corporate cost base"

SkyePharma's New York offices were rented on an arm's length basis on terms based on independent real estate valuations. The cost of the London office is 42 pounds Sterling per sq ft over five years, not 80 pounds as suggested by NAV. These offices are not expensive or lavish, but management is already reviewing all corporate overheads, including the London and New York offices.

"Robert Thian's suitability"

In the view of the Board, Robert Thian is unsuitable to be Executive Chairman. His last executive pharmaceutical experience dates back to 1989. He lacks the technical training, experience and qualifications. Dr. Karabelas and his newly appointed team have current, relevant experience. They are highly qualified and have exemplary track records.

Dr. Jerry Karabelas, Chairman said:

"NAV offers no substance, no strategy, just distortion. NAV would destroy SkyePharma with an 18 month review when new management is already moving the Company forward rapidly.

"This is a crucial moment for shareholders. The choice is to back the Company's coherent strategy or to listen to vague unsubstantiated slurs.

"The Board of SkyePharma believes that all of the above allegations are completely unfounded and have no basis in fact. They have been contrived by the NAV group for their own ends."

For further information please contact: SkyePharma PLC +44 207 491 1777 Frank Condella, Chief Executive Officer Peter Laing, Director of Corporate Communications +44 207 491 5124 Sandra Haughton, US Investor Relations +1 212 753 5780 Buchanan Communications +44 207 466 5000 Tim Anderson / Mark Court

SkyePharma wishes to remind shareholders that they are entitled to attend and vote at the meeting and/or may appoint a proxy to attend on their behalf. The Board strongly advises shareholders to vote AGAINST the resolutions by completing, signing and returning the Form of Proxy (which was sent together with the Notice of Extraordinary General Meeting dated 16 February 2006). The completed proxies should be returned as soon as possible so as to arrive at Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU not later than 11 am on 7 March 2006.

SkyePharma plc has appointed Salisbury Associates as its Shareholder

Communications Advisor. Salisbury Associates have established the following

Toll Free Shareholder Helplines:

If you have any questions regarding the contents of the documents you have

received, please call the appropriate Shareholder Information Hotline In the UK 0800-035-2220 In North America 011800-3231-3233 From other International sites +44 1494 840 812 The helpline hours are: 9:00am - 5:00pm UK time Monday to Friday from 17 February 2006 9.00am - 5.00pm EST in North America

Please note that your call may be recorded for quality assurance and training

purposes. The helpline cannot provide individual shareholder financial advice. Detailed Response "A history of disappointing its shareholders"

SkyePharma was initially a contract drug delivery company which developed enhanced formulations of pharmaceuticals for partners on a contract basis. However in 2000 SkyePharma's Board decided that although this business model had low risk, the returns offered little long-term growth potential. The Board therefore decided, with shareholder approval, to adopt a strategy of using its delivery technologies to develop certain of its own products for subsequent out-licence. SkyePharma therefore became much more of a speciality pharmaceutical company.

The development of pharmaceuticals requires many years of investment before commercial sales can commence. Even though SkyePharma mainly works on improving formulations of drugs that have already been shown to be safe and effective, thereby avoiding the need for early-stage development, there remains an unavoidable period of developmental losses during late-stage clinical trials. No pharmaceutical company can avoid or shorten this development time-scale.

Furthermore while the Company can control its expenditure, which is mainly R&D, it sets its R&D budget each year based on estimated income from its marketing partners. Certain products have been less successful initially than had been previously expected and therefore revenues have fallen short of levels needed to support the development expenditure. Therefore the Company's previous expectations of sustainable profitability have proved optimistic with the wisdom of hindsight. However this is the nature of early-stage development and the Board is firmly of the opinion that Mr. Thian's lack of experience would place him at a disadvantage to change this compared to Dr. Karabelas and his team.

Finally the Company has no sales and marketing organisation of its own and is dependent on licensees for the sales of these products. SkyePharma therefore has to appoint such licensees. Negotiations with potential partners may take several months or even years and there is an inevitable uncertainty about whether a particular deal will be successfully completed. This is particularly true when a development partner is being sought to fund part or all of clinical development costs -- as has been the case with negotiations to identify a partner for Flutiform. The Company is naturally unable to predict the timing or terms of licence agreements still in negotiation. The Company has historically tried to provide guidance using its best estimates for completion of various deals. However these caveats are often overlooked. This factor accounts for a good deal of the uncertainty, and investor disappointments, surrounding SkyePharma.

"Contracts with questionable value to shareholders"

Relationship with certain companies

It is not uncommon in the pharmaceutical industry for reimbursement for technologies, products or services to involve the issue of shares -- and, for example, the shareholdings in SkyePharma held by GlaxoSmithKline, Novartis and Kowa all arose as a consequence of the terms of product licence agreements. SkyePharma has also accepted shares or convertible debentures in certain partner companies in partial or total payment for products or services, especially where the partner company is at an early stage of development and has cash or revenue limitations. However, SkyePharma wishes to clarify that it does not make speculative investments in companies.

Shares acquired through such arrangements can sometimes result in capital gains (as has happened with SkyePharma's investments in Vectura Ltd and Transition Inc.). However the nature of early-stage development means that there will inevitably also be disappointments as well as successes. The Company notes that the NAV group has been selective in its reference to such shareholdings by citing just four examples where the value of SkyePharma's holding has declined. In all four cases the Company has earned revenue income and/or acquired product rights from partnerships with these companies and it is misleading to focus solely on the value of SkyePharma's shareholding. In addition, all these contracts have been fully disclosed in the Company's Report and Accounts and US filings. It is worth noting that the NAV group became shareholders a substantial time after these investments were made. These cases are explained below.

1.1 Relationship with Vital Living

In December 2001, the Company entered into a licence and development agreement with a US nutraceuticals company, e-nutriceuticals, Inc., for the use of the Company's Geomatrix(TM) controlled-release delivery technology in the development of advanced nutritional products ("nutraceuticals"). In connection with this agreement, SkyePharma was issued convertible preferred stock in e-nutraceuticals. In August 2003, e-nutriceuticals merged with a competing nutraceutical company, Vital Living Inc., as a result of which SkyePharma held shares in Vital Living. Vital Living develops or licences nutraceuticals and markets them for distribution through physicians, medical groups, chiropractic offices and retail outlets. Vital Living has rights to the use of SkyePharma's Geomatrix(TM) technology for the development of nutraceuticals on a global basis. To date SkyePharma has developed five proprietary products for Vital Living and Michael Ashton, then SkyePharma's Chief Executive, was appointed to the board of Vital Living as a non-executive director in order to protect SkyePharma's interests. This appointment followed the merger with e-nutriceuticals.

The Company refutes allegations that SkyePharma's investment in Vital Living was speculative. Furthermore Mr. Ashton's appointment to the board of Vital Living followed SkyePharma's investment rather than came before as alleged by the NAV group.

1.2 Relationship with Micap

In 2002, SkyePharma was introduced to Micap plc by a leading UK investment institution that was a shareholder in both companies. In January 2003, SkyePharma and Micap announced that they had entered into several agreements concerning the application of Micap's proprietary yeast-based microencapsulation technology to drug delivery. SkyePharma also subscribed 2 million pounds as part of a fundraising and, at Micap's request, Ian Gowrie-Smith, at that time SkyePharma's Executive Chairman, was appointed to Micap's Board as Non-Executive Chairman. Later in 2003 Micap undertook an initial public offering. Following the offering, SkyePharma's shareholding represented approximately 18.2% of Micap's ordinary share capital.

During 2003, SkyePharma investigated the pharmaceutical applications of Micap's microencapsulation technology in the areas of oral and topical drug delivery. The Company was paid for its services. In March 2004, the Company exercised an option to allow SkyePharma to use Micap's encapsulation technology in up to ten nominated pharmaceutical products to be selected by SkyePharma. In August 2004 SkyePharma selected its first option product and in March 2005 completed the selection of all ten nominated compounds. However after further development it became apparent that the area in which the Micap technology was most appropriately applicable was topical delivery. Following the 2004 sale of SkyePharma's interests in dermatological pharmaceuticals to Trigenesis (now part of Dr Reddy's), topical delivery now lies outside SkyePharma's core business interests. SkyePharma therefore agreed with Micap in September 2005 to surrender all rights under the licence agreement back to Micap, leaving Micap free to appoint other licensees for the pharmaceutical applications of its yeast technology. Mr. Gowrie-Smith resigned as a director of Micap in September 2005. Following a share placing by Micap in December 2005, SkyePharma's shareholding was reduced to approximately 9.4% of Micap's issued share capital.

The Company refutes the implied suggestion that SkyePharma's investment in Micap was made for the benefit of Mr. Gowrie-Smith. Mr. Gowrie-Smith's sole connection with Micap was through accepting that company's invitation to become Non-Executive Chairman after SkyePharma's investment in Micap.

1.3 Relationship with Astralis

In December 2001, the Company entered into several agreements with Astralis Ltd concerning the development of a novel injectable vaccine therapy, Psoraxine(TM), for the treatment of psoriasis, a chronic skin disorder. The treatment of psoriasis has been transformed in recent years by the introduction of biological drugs that target the cause of the condition and this has become an important commercial market. Furthermore, both SkyePharma and Astralis believed that Psoraxine(TM) could ultimately benefit from SkyePharma's sustained-release injectable delivery technology. Astralis had completed clinical studies in Venezuela in nearly 3000 patients treated with a first generation of Psoraxine(TM), with encouraging results, and the product was considered to have high potential. SkyePharma agreed to provide development, manufacturing, pre-clinical and clinical development services to Astralis and acquired an option to acquire the worldwide licencing and distribution rights to Psoraxine(TM) on the conclusion of Phase II trials. In January 2002, Michael Ashton, then SkyePharma's Chief Executive, was appointed to the Astralis Board.

In September 2003, Astralis initiated a Phase I clinical trial of Psoraxine(TM) in the United States. This trial was successfully completed. In January 2004 SkyePharma converted its initial holding in convertible preferred shares into common shares representing approximately 35.7% of the common shares of Astralis.

In March 2004 Astralis initiated a Phase II clinical trial of Psoraxine(TM) in mild to moderate psoriasis in the United States. During 2004 SkyePharma became increasingly concerned about the way in which the clinical development was being conducted, which was not in accordance with its recommendations. SkyePharma therefore decided that the best option for influencing the future direction of the business was to gain control of Astralis. In December 2004, SkyePharma entered into an agreement to purchase shares in Astralis from two former directors of Astralis. The consideration for these additional shares was approximately 5.5 million SkyePharma shares. This agreement became unconditional on 3 March 2005, bringing SkyePharma's stake up to approximately 49.7%.

On 14 March 2005, Astralis announced that the Phase II clinical trial had not met the primary study endpoints. The Company has since worked with Astralis to investigate and resolve the possible reasons why the outcome of the US Phase II trial was so different from the results of previous large-scale trials in Venezuela. Dr. Gordon Schooley, SkyePharma's Chief Scientific Officer, was appointed to the board of Astralis in April 2005 in order to provide his expertise on clinical trial design and execution. The proposed ongoing divestment of SkyePharma's injectable business will include the rights to Psoraxine(TM).

In August 2005 Astralis obtained funding from a company called Blue Cedar Ltd, diluting SkyePharma's stake to approximately 39.7%.

The Company refutes the allegation that it increased its investment in Astralis after the announcement of the Phase II results.

1.4 Relationship with GeneMedix

In 2002 SkyePharma was seeking sources of biological drugs for the development of sustained-release injectable versions of these proteins based on its DepoFoam(TM) and Biosphere(TM) technologies. In June 2002, SkyePharma signed an agreement with GeneMedix to develop an extended release formulation of interferon alpha-2b, a commercially important antiviral drug and the primary weapon in the treatment of the most common form of hepatitis. Prior to entering into this agreement, SkyePharma had already successfully formulated interferon alpha-2b with its DepoFoam(TM) technology.

In 2005, SkyePharma and GeneMedix mutually agreed to terminate the collaboration because of protracted technical problems with the source material that affected the development programme. SkyePharma is in active discussions with several potential partners for the further development of this project.

Stephen Harris, a non-executive director of SkyePharma since 1995 and is also a director of several other biopharmaceutical companies in the UK, became a non-executive director of GeneMedix in 2002 after an approach by an executive search firm. This was after a letter of intent had been agreed between the two companies for the interferon project. Mr. Harris was not involved in the negotiations between the companies.

The Company refutes the inference that the agreement with GeneMedix was entered into for the benefit of or, was due to Mr. Harris being a Board member of GeneMedix.

"An inflated corporate cost base"

SkyePharma's New York offices

Since January 1997 SkyePharma PLC has occupied an office in New York at 10 East 63rd Street. SkyePharma currently occupies three of the seven floors of this building with the remainder sub-let to other tenants. The total floor space in this building is approximately 8,900 square feet. The 2,800 square feet of offices occupied by SkyePharma house the US business development and investor relations staff and provide meeting rooms for use by SkyePharma's executive management team when meeting with actual and prospective partners in the key US market.

At the end of December 1998, the Company's former Chairman Ian Gowrie-Smith (through a family-owned trust) acquired a 51% interest in 10 East 63rd Street Inc., the company that owns this building. In December 2002, Mr. Gowrie-Smith acquired the remaining 49% interest and became sole owner.

From 1997 to 1999 the rental on the three floors occupied by the Company was $300,000 per annum. The rental was increased to $360,000 per annum in 2001, and when the Company took additional space in 2002, it rose to $420,000 per annum. When the rental agreement came up for renewal in August 2003, the Company was contemplating future expansion of its US business and therefore decided to enter into a new eight year tenancy agreement for the entire building. The annual rental for the entire building is $720,000 per annum until August 2008, and $942,500 per annum from August 2008 to August 2011. However SkyePharma subsequently decided not to expand occupancy beyond three floors and therefore other floors are sublet. The Company is currently in the process of vacating this office.

The terms of all tenancy agreements, both between SkyePharma and Mr. Gowrie-Smith and between SkyePharma and sub-tenants, have been based upon independent real estate valuations and have been negotiated by independent realtors. Furthermore both the rental terms and the relationship with Mr. Gowrie-Smith have been fully disclosed in SkyePharma's Annual Reports and Form 20-F reports since 1998.

A single room studio apartment (total floor area 360 square feet) on the roof of this building is used by members of the Company's staff while visiting New York on Company business as an alternative to hotel accommodation. This room had occasionally been used by Mr. Gowrie-Smith while Chairman of SkyePharma when it was not required by other Company staff.

The Company refutes any allegation that the rental of the New York office was undertaken on anything other than an arm's length basis or that the one-room "apartment" was "used primarily" by or for the benefit of, Mr. Gowrie-Smith.

SkyePharma's London offices

The Company's headquarters is located at 105 Piccadilly London W1. This office of approximately 9000 square feet on two floors houses the Chief Executive and Finance Director (and will also house the Chief Operating Officer after he joins the Company in April) and the Company's head office staff. It also provides meeting rooms, including the room used for most Board meetings. Up to the end of 2005, these premises were occupied on a 10 year lease at a total annual rent of 522,000 pounds per annum. This lease was renewed in December 2005 and the new annual rent is approximately 281,000 pounds per annum in 2006, 316,000 pounds per annum in 2007 and 422,000 pounds per annum in 2008-10. This means that the current average rental over five years is approximately 42 pounds per square foot -- significantly less than the 80 pounds cited by the NAV Group. The terms of this lease were reviewed by external property advisors and the rental was reported to be significantly below the current rental level for offices in this area as confirmed by the NAV Group. The Company also receives income from the sub-letting of certain unused offices on one floor.

The Company refutes any suggestion that the London premises are unduly expensive or inappropriate. In addition management is currently examining all items of corporate overhead expense and this may include relocation of the Company's headquarters if suitable cost-effective alternative accommodation can be identified.

SkyePharma's other offices

The NAV group states that, "The Company maintains offices in Canada, Japan, Switzerland, and two offices in the USA." SkyePharma's two operating centres are in Muttenz, Switzerland and San Diego, USA. Both of these centres comprise research and manufacturing facilities. In addition the Company has a dedicated manufacturing centre in Lyon, France. The San Diego facility will be included in the injectables business that the Company intends to divest. The USA is by far the most important pharmaceutical market in the world and with most of the industry based on the East Coast it is important for business development purposes to have an East Coast office as well as the San Diego facility. The office in Canada came with the 2001-3 acquisition of RTP Inc. and was closed when that company's operations were relocated to San Diego in 2004. The "office" in Japan consists of a single room in Osaka used by SkyePharma's Japanese business development executive.

Non-executive directors' fees

The Company has a strong record of following best practice on executive remuneration and has received overwhelming support from shareholders for its policy, levels and structure demonstrated by the Company's shareholder votes on the relevant year's Remuneration Committee report: 2005 Report 99.35% support, 2004 Report 98.90% support and 2003 Report 91.55% support. In addition, the main shareholder voting guidance services from the ABI and NAPF have given the Company a clean bill of health each year.

In line with the policy agreed with the overwhelming majority of shareholders the Company sets its levels of Non-Executive fees against a comparator group agreed by shareholders and set out in the Remuneration Committee report. The figure provided by the NAV group on the total pay and benefits received by the Non-Executive Directors in 2004 is misleading as it includes some of the compensation paid to Mr. Gowrie-Smith when he was Executive Chairman (stepping down to Non-Executive Chairman half way through the financial year at the 2005 AGM). This fact is expressly stated as a note to the table in the relevant part of the 2004 Remuneration Committee report as is the fact that Mr. Gowrie Smith's fees as Non-Executive Chairman would be 140,000 pounds. Therefore on an annual basis and taking into account a full year for Mr. Bray (appointed on 29th September 2004) the average Company Non-Executive fee paid in 2004 (excluding the Chairman) was approximately 50,000 pounds not 68,000 pounds as stated in the letter provided by NAV group. The median level of Non-Executive fee in the Company's comparator group for 2004 was 49,000 pounds. The Chairman's fee of 140,000 pounds was also in line with the Company's policy. It should be noted that these fees were approved by shareholders when voting on the 2004 Remuneration Committee report.

In addition, in the current corporate governance environment it is generally seen as an advantage to have a significant number of independent Non-Executive Directors.

Auditors' fees

SkyePharma paid audit fees of 480,000 pounds to our auditors in 2004 comprising 290,000 pounds for the UK statutory audit and 190,000 pounds for reporting on the Company's 20-F filing with the SEC and the interim statement. As an SEC registrant, all non-audit work undertaken by the auditors requires pre-approval by the Audit Committee. The Audit Committee regularly reviews the provision of non-audit services by its auditors and provides details of its policy in this area in the Company's 2004 Annual Report. The level of non-audit fees was higher in 2004 than in previous years due to the fact that the Company undertook certain non-recurring projects in that year, including work on potential acquisitions/strategic alliances and preparing for the conversion to IFRS.

The Company refutes the implication that it has an "inflated cost base."

"Robert Thian's suitability"

The NAV group claims that Mr. Thian has over twenty years' experience in the pharmaceutical industry although does not state that this is recent. Mr. Thian, then aged 25, joined the Glaxo Welcome company in 1968 as a legal advisor while still studying to qualify as a barrister. He worked in various managerial roles at that company until 1980 when he left to join the European operations of Abbott Laboratories. In 1987, he joined the Danish company Novo Industri. Since leaving Novo in 1989 to join a water utility he has not worked in an executive capacity in the pharmaceutical industry. The Board therefore believes that Mr. Thian lacks the technical training, current experience or high-level managerial contacts that it feels are essential qualifications for its Chairman

The Board of SkyePharma continues to believe that Mr. Thian would not be an appropriate choice as Chairman and that Dr. Jerry Karabelas is far better qualified.

Dr. Karabelas' track record

Dr. Karabelas is a non-executive chairman of five companies in addition to SkyePharma. The NAV group states that, "The performance of some of these companies since Dr. Karabelas appointment does not inspire confidence that he will lead SkyePharma to commercial success." SkyePharma wishes to point out that since leaving Novartis in 2000 Dr. Karabelas has been a partner in Care Capital LLP, a US venture capital fund investing in development-stage healthcare companies. Venture capital funds typically invest in early-stage pre-profitability companies and nurture them to the stage where other more risk-averse investors (such as the members of the NAV group) can consider investment and ultimately groom them for public flotation. In the US in particular it is common for venture-backed technology-based companies to obtain a public market quotation while still loss-making as US investors are often prepared to accept short-term losses for the prospect of long-term gain. Therefore the NAV group's statement that, "Dr. Karabelas and investors in companies chaired by him are used to losses: he is chairman of three public companies, all of which lose money," suggests a profound ignorance of the venture capital process.

Further, the share price has increased by 50% at Human Genome Sciences, Inc. in the 18 months Dr. Karabelas has been Chairman and by 30% at NitroMed, Inc. in the 27 months since he has been Chairman. Dr. Karabelas is not Chairman of any other public companies.

In addition, Dr. Karabelas' knowledge of the US pharmaceutical industry is seen as an asset not as a liability as the NAV group appears to suggest.

In conclusion, the Board of SkyePharma believes that all of the above allegations are completely unfounded and have no basis in fact. They have been contrived by the NAV group for their own ends.

Trading Update

The Company had been considering the issue of a Trading Update. Since this was primarily a replacement for the product news that would have been disclosed at the R&D Days planned for January that had to be postponed because of the Strategic Review, this statement should more accurately have been titled a Product Update. It has now become apparent that this Update cannot be made in isolation from the Company's Preliminary Results for 2005, which are expected to be announced in April. The R&D Days will be held as soon as practicable after this and details will be circulated in due course.


Dr. Karabelas, SkyePharma's Chairman, is leading an excellent new management team, with outstanding pharmaceutical experience and track records. Dr. Karabelas, Mr. Condella and Dr. Cunningham are poised to implement a new strategy to achieve sustainable profitability within the shortest reasonable time and deliver maximum shareholder value.

The Board totally rejects the unsubstantiated allegations levelled against the Company and its directors by the minority NAV group which in the Board's opinion, serve only to disrupt the implementation of the new strategy and drive down the Company's share price and delay the achievement of sustainable profitability to the detriment of shareholders. The NAV group itself conceded that the Company has an excellent and potentially very valuable portfolio of drug licencing opportunities. However the NAV group does not have a strategy to develop these. The Board does and seeks the endorsement of shareholders to achieve this objective without further delay or disruption.

The Board also recommends that shareholders are not lulled into a false sense of security by recent statements by the NAV group suggesting that they are seeking to make "housekeeping" changes only. It remains the firm opinion of the Board that it continues to be the intention of the NAV group to change the control of the Company.

Accordingly, the Board reiterates its reco

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