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Liposomes are phospholipid bilayer vesicles that have been explored in pharmaceutical research as drug delivery systems for >50 years. Despite being important to their morphology and drug release pattern, the physical state of the drug within liposomes (liquid, solid, crystalline form) is often overlooked. This review focuses on precipitation of drug within liposomes, which can result in the formation of confined nanocrystals, and consequent changes in liposome morphology and drug release patterns. The type of drugs that form nanocrystals within liposomes, preparation and characterisation of liposomal drug nanocrystals, and the in vitro drug release behaviour from these systems are communicated, with a discussion of their potential as drug delivery systems.