Announcement of Results for year ended 31/12/12

10 April 2013

LSE: VER

Announcement of Results for the year ended 31 December 2012

Vernalis plc (LSE: VER) today announces its audited results for the year ended 31 December 2012.

Financial Highlights

• Revenue up 20 per cent to £14.6 million (2011: £12.2 million) driven by 65 per cent increase in research collaboration income

• Research collaboration income was £8.7 million (2011: £5.3 million) including milestone income of £2.6 million (2011: £1.1 million)

• Frovatriptan royalty income was £5.7 million (2011: £6.5 million) down 11% primarily due to exchange rates with underlying sales made by Menarini flat

• Operating costs remain in-line with 2011

• Pre-exceptional loss for the year reduced by 19 per cent

• Balance sheet strengthened through £68.5 million of new equity financing (March 2012)

• Underlying net cash burn reduced to £4.5 million (2011: £6.0 million)

Operational Highlights

Cough Cold Commercial Pipeline:

• Collaboration commenced March 2012

• CCP-01 proof-of-concept achieved and milestone paid to Tris in March 2013

• First NDA filing anticipated mid-2014

• Four further programmes now in active development at Tris, with 505(b)(2) pathway based on comparative bioavailability confirmed on all five with FDA

• 2012-13 prescription cough cold season up substantially on 2011-12 with approximately 33.2 million prescriptions written in the 12 months to February 2013

NCE Development Pipeline:

Frovatriptan (marketed) (Migraine):

• Underlying Menarini sales €26.5 million (2011: €27.1 million)

• Menarini outlook for 2013 is for flat underlying sales vs 2012

V81444 (CNS diseases)

• Positive Phase I and Receptor Occupancy studies completed (May and Dec 2012 respectively)

• Plans underway to initiate Phase Ib/II POC study in H1 2013

V158866 (Pain)

• Positive results from Phase I study published at 14th World Congress on Pain (August 2012)

• Announced today, patients being recruited into a Phase II POC study (April 2013)

AUY922 (Cancer)

• Continues in multiple Phase I and Phase II studies with Novartis in a variety of cancers including breast, non-small-cell lung, gastric, colon and colorectal cancers

Tosedostat - CHR2797 (Cancer)

• Phase II trials in AML and MDS continue through Chroma/Cell Therapeutics, Inc

RPL554

• Anti-inflammatory study results announced by Verona Pharma (March 2013)

• Future development focussing on bronchodilator properties of RPL554

Servier

• Addition to pre-clinical NCE pipeline of first product candidate from collaboration

Research Collaborations:

• New collaborations with Genentech and Servier (January 2012)

• Ongoing collaboration with Servier extended again (March 2013)

• Genentech milestones of $4.0 million in cash already earned in 2013

Expected Newsflow:

• Achieve multiple proofs-of-concept in cough cold pipeline

• Progress CCP-01 towards NDA filing

• AUY922 (Cancer) - Multiple Phase I and II study results (Novartis) (timing not disclosed)

• V81444 (CNS diseases)

• Initiate Phase Ib/II POC study (H1 2013)

• Complete Phase II POC study (H1 2014)

• V158866 (Pain) - Complete Phase II POC study (H1 2014)

• Tosedostat - CHR2797 (Cancer)- Phase II study results (Chroma) (undisclosed)

• Achieve milestones under existing collaborations (undisclosed)

• Secure new research collaborations (undisclosed)

Ian Garland, Chief Executive Officer, commented, "We performed very strongly in 2012, both financially and operationally, with significant progress in all three elements of our strategy. Revenues were up sharply and our loss and underlying cash burn were both reduced. We delivered proof-of-concept in the most advanced of our cough cold programmes and now have five active cough cold programmes in development with a first NDA submission planned for the middle of next year. We had a record 12 months in our research business, growing revenue for the fifth consecutive year, and reported positive results from two V81444 studies in our NCE pipeline. The outlook for 2013 and beyond is strong as we continue to build our self-sustaining pharmaceutical company."

Presentation & Conference Call

Vernalis management will host a presentation at 09.00am (UK) at Brunswick's offices, 16 Lincoln's Inn Fields, London WC2A 3ED today. It will also be available via webcast at http://www.vernalis.com/investor-centre/presentations-and-webcasts and www.cantos.com and via conference call, which can be joined by dialling: +44 (0) 20 3139 4830, Passcode 13117720#.

-- ends --

Enquiries:

Notes to Editors

About Vernalis

Vernalis is a revenue generating development stage pharmaceutical company with significant expertise in drug development. The Group has one marketed product, frovatriptan for the acute treatment of migraine, an exclusive licensing agreement to develop and commercialise multiple novel products focussed on the US prescription cough/cold market as well as seven programmes in its NCE development pipeline. Vernalis has significant expertise in fragment and structure based drug discovery which it leverages to enter into collaborations with larger pharmaceutical companies. The Company's technologies, capabilities and products are endorsed by collaborations with Endo, Genentech, Lundbeck, Menarini, Novartis, Servier and Tris.

For further information about Vernalis, please visit www.vernalis.com

Vernalis Forward-Looking Statement

This news release may contain forward-looking statements that reflect the Company's current expectations regarding future events including the clinical development and regulatory clearance of the Company's products, the Company's ability to find partners for the development and commercialisation of its products, as well as the Company's future capital raising activities. Forward-looking statements involve risks and uncertainties. Actual events could differ materially from those projected herein and depend on a number of factors including the success of the Company's research strategies, the applicability of the discoveries made therein, the successful and timely completion of clinical studies, the uncertainties related to the regulatory process, the ability of the Company to identify and agree beneficial terms with suitable partners for the commercialisation and/or development of its products, as well as the achievement of expected synergies from such transactions, the acceptance of frovatriptan and other products by consumers and medical professionals, the successful integration of completed mergers and acquisitions and achievement of expected synergies from such transactions, and the ability of the Company to identify and consummate suitable strategic and business combination transactions.

Operational Review

We have made excellent progress in the last year across all three tiers of our strategy to build a diversified, self-sustaining pharmaceutical company. One year on from our transformational licensing agreement and financing, we now have a broad pipeline of late-stage low-risk drugs in development, complementing our maturing pipeline of new chemical entities (NCE) and our successful research group.

A priority for 2012 was the implementation of the Tris Pharma development and licensing deal under which we exclusively licensed Tris Pharma's extended release liquid drug delivery technology for application within the US prescription cough cold market. Under that agreement, Tris Pharma is developing up to six novel long-acting formulations of prescription cough cold products that we plan to commercialise in the US. We announced in March 2013 that the most advanced of these products, CCP-01, had achieved proof-of-concept and has moved into the final stages of development, with a planned NDA filing in mid 2014. In parallel with the development of this lead product, we have progressed with Tris Pharma exploratory development of up to nine more potential products, from which we have selected four preferred products for further development. Tris Pharma will continue development of these four products in 2013, aiming to achieve proof-of-concept for all of them over the next 24 months.

The commercial opportunity in the US prescription cough cold market for the products being developed by Tris Pharma continues to be significant. Following a mild cough cold season in 2011/2012, the season so far in 2012/2013 has been moderately severe, with prescriptions for cough cold products up 21 per cent in the eight months to February 2013 compared to the same period in the prior year. There were 33.2 million prescriptions in the 12 months to February 2013 indicating a potential US$2 billion market for extended-release liquid products.

In our NCE pipeline, we are continuing to pursue the early clinical development of our adenosine A2A receptor antagonist, V81444 for CNS diseases. Following successful completion of a Phase I study in May 2012, we initiated and successfully completed a receptor occupancy study to confirm A2A target engagement in man. We are now moving this programme into a Phase Ib/II POC study in an undisclosed CNS indication that will be initiated in 2013, with data likely to be available in 2014. Our other priority in-house programme, a FAAH inhibitor, V158866, is now recruiting patients into a Phase II proof-of-concept study to treat neuropathic pain experienced by patients with spinal cord injury. This study is also scheduled to report data in 2014. Our strategy is to partner all of our new chemical entity programmes, including both of these and our Phase I-ready Chk1 oncology programme.

Our novel Hsp90 programme, AUY922, is already partnered with Novartis and continues to be investigated in a number of Phase I and Phase II cancer studies. Novartis is undertaking studies in a broad range of cancers, including breast, non-small-cell lung, gastric, colon and colorectal cancers. We remain very excited about the prospects for this programme and, based on timelines indicated by Novartis on clinicaltrials.gov, hope to see news from these ongoing studies over the coming two years.

Our balanced approach to investment in research has been rewarded in 2012 with a record year in terms of revenue from research collaborations. Leveraging our skills in the fragment- and structure-based drug design field, we have collaborated successfully with leading global pharmaceutical companies, earning both fees and success milestones for our work. The most advanced of our collaborations has a candidate in pre-clinical development which, if successful, could enter Phase I clinical studies in 2013. We will continue our balanced strategy in 2013 and aim to secure further collaborations to add to those already in progress.

Financially, we remain exceptionally strong with £81.6 million of cash resources and no debt at the year end. We continue to receive a steady royalty stream from frovatriptan under our collaboration with Menarini. This income stream, together with the success-based structure of our licensing agreement with Tris Pharma, and our balanced approaches to NCE development and research, enabled us to limit our 2012 underlying net cash burn to just £4.5 million. We will continue to manage costs and cash tightly.

In April 2012, the Company moved to AIM from the LSE Main Market as the concentration of its shares among a few key investors meant that the Company did not satisfy the "free float" requirements of the Main Market.

Our outlook for 2013 is very encouraging with potential for further significant progress in our Tris Pharma programmes and positive developments in both our NCE and research operations. We would like to thank our Board members and staff for their contributions during a successful year and our shareholders for their continued support.

Financial Review:

Successful research collaborations drive 20 per cent overall revenue growth

Revenue from continuing operations totalled £14.6 million (2011: £12.2 million) up 20 per cent year-on-year. Revenue included £5.7 million from the supply of frovatriptan (2011: £6.5 million) and £8.9 million (2011: £5.7 million) in respect of collaborations and the release of deferred revenue.

Research collaboration income (including milestones) increased 65 per cent to £8.7 million (2011: £5.3 million). At the end of the year, we had five active collaborations underpinning this growth. These collaborations generated £6.1 million of FTE income (2011: £4.2 million) and a further £2.6 million of milestones (2011: £1.1 million). Because of the long investment time horizons for these activities, the goal for the last five years has been to make this part of the business self-financing whilst delivering potential upside through research and clinical milestones as well as royalties on commercialisation. Following five years of growth in research collaboration income (at a CAGR of 38 per cent), this goal was achieved during 2012.

Frovatriptan royalties flat in euros

Underlying sales of frovatriptan by Menarini in Europe and Central America were €26.5 million, flat compared to 2011 (2011: €27.1 million). Underlying volumes of tablet sales in 2012 were also flat compared to 2011 at 9.6 million (2011: 9.4 million). Vernalis receives 25.25 per cent of Menarini sales via a royalty linked to the supply of active pharmaceutical ingredients (API) so the reported royalties do not necessarily track the underlying performance of Menarini in the market.

The reported Menarini frovatriptan royalties of £5.7 million were 11 per cent below 2011 (£6.5 million). Included in both years were three batches of bulk API and one batch of tablets shipped to Menarini for the Central American markets. The decrease in income is due primarily to a weakening of the euro during 2012, as shipments are invoiced in euros and then translated into sterling for financial reporting purposes. The average euro:sterling exchange rate for 2012 was 1.2410, down 9 per cent versus 1.1436 in 2011.

External development costs focused on V158866 and V81444

Research and development expenditure from continuing operations decreased 5 per cent to £13.0 million (2011: £13.6 million) and comprised £11.2 million (2011: £10.9 million) of internally funded research and development costs and £1.8 million (2011: £2.7 million) of external costs associated with the development pipeline. The external costs remain focused on clinical development of V158866 and V81444 with proof-of-concept studies being conducted during 2013.

G&A expenditure continues to be tightly managed

General and administrative expenditure before exceptional items was £5.2 million (2011: £4.8 million), an increase of £0.4 million for the year. Adjusting for one-off items for foreign exchange and Tris Pharma related expenses, the underlying G&A was £4.8 million (2011: £4.4 million), an increase of 9 per cent. This increase is largely explained by the fluctuation in the share option charge which was £0.3 million higher in 2012 (2012: £0.8 million; 2011: £0.5 million) following the introduction of the value builder plan in the year.

The 2011 exceptional item of £2.4 million included £1.9 million related to aborted acquisition costs as well as an adjustment to the existing vacant lease provision of £0.5 million.

Operating loss reduced by 38 per cent on a pre-exceptional basis and 52 per cent on a post exceptional basis

The operating loss for the year from continuing operations before exceptional items was £5.2 million (2011: £8.3 million) a decrease of 38 per cent year-on-year. The operating loss from continuing operations after exceptional items was £5.2 million (2011: £10.7 million) a decrease of 52 per cent.

Weakness in US dollar distorts finance costs and underlying trading performance

With the current economic uncertainty, we have minimised our exposure operationally to foreign exchange movements by using forward contracts for our euro income stream but also by matching the currency in which our cash is held with our future obligations, where possible. Immediately following the equity issue in March 2012, we purchased US$100 million, to match our Tris Pharma and US commercial financing requirements. As a consequence of holding these US dollar deposits, there will be a financial reporting foreign exchange exposure on the retranslation of the US dollar cash balances back into sterling at each reporting date, but critically any changes in foreign exchange rates between sterling and the US dollar will not impact our ability to execute on the US commercial plan.

At 31 December 2012, the US dollar had weakened against sterling, compared to the purchased rate in March 2012 of 1.5763, creating a £1.8 million unrealised retranslation loss for the year. Consequently the finance cost and the loss for the year include this £1.8 million unrealised retranslation loss. Excluding the impact of this foreign exchange loss, finance expense for the year was flat at £0.2 million. Since the year end the US dollar has strengthened significantly against sterling eliminating this loss.

R&D tax credit remains flat

The tax credit of £1.6 million (2011: £1.7 million) represents amounts that are expected to be received under current legislation on research and development tax credits for small- and medium-sized companies. The tax credit for the year was £1.4 million (2011: £1.6 million) and the balance of £0.2 million (2011: £0.1 million) represents claims in relation to prior years.

Pre-exceptional loss for the year reduced by 19 per cent

The loss for the year before exceptional items was £5.2 million (2011: £6.4 million), a reduction of 19 per cent. Excluding the impact of the £1.9 million total exchange loss on all non-sterling cash balances, the pre-exceptional loss for the year was £3.3 million, a reduction of 48 per cent.

The loss for the year from continuing operations after exceptional items in 2011 was £8.9 million and the loss after discontinued operations and exceptional items was £7.7 million. There were no exceptional or discontinued items in the current year.

Balance sheet

Further strengthening of the balance sheet through £68.5 million new equity issue

Non-current assets increased to £6.9 million (2011: £4.3 million) due to the US$5 million upfront payment to Tris Pharma on signing the development and licensing agreement and in consideration for the development of products. This increase was partially offset by the continued amortisation of the frovatriptan intangible asset.

Current assets increased to £88.6 million (2011: £32.4 million) primarily due to the £65.9 million, net of expenses, equity issue in March 2012. Total liabilities decreased to £10.1 million (2011: £12.7 million) and, importantly, we remain debt free.

Cash key to executing commercial strategy

Cash resources, comprising held-to-maturity financial assets and cash and cash equivalents increased by £56.9 million to £81.6 million (2011: £24.7 million).

Underlying net cash burn for the year (representing the movement in cash resources but excluding one off items, discontinued operations and milestones) was £6.3 million and £4.5 million excluding the impact of the £1.8 million retranslation loss on US dollar denominated cash deposits (2011: £6.0 million). The decrease in cash burn primarily reflects reduced investment in our NCE pipeline during 2012 as well as increased FTE income from our research collaborations.

Outlook for 2013 and beyond

Fully funded for future success

The Company is now on an exceptionally strong financial footing with £81.6 million of cash and no debt. The balance sheet has been strengthened over the last 12 months through the equity fundraising and the performance of the underlying business continues to be strong. The Company has mitigated the risk of fluctuations in the US dollar by buying US$100 million following the fundraising and consequently the Company is very well positioned for 2013 and beyond as we build a diversified, self-sustaining pharmaceutical company.

Risks and Uncertainties

Like all businesses we face risks and uncertainties, many of which are inherent within any pharmaceutical development company looking to establish commercial operations. Below are those principal risks and uncertainties that we consider could have a material impact on our operational results, financial condition and prospects. These risks are not in any particular order of priority and there may be other risks that are either currently unknown or not considered material which could have a similar impact on our business in the future. Our risk management process is explained in the corporate governance report.

Clinical and regulatory risk

There are significant inherent risks in developing drugs for commercialisation due to the long and complex development process. Any drug which we or our partners wish to offer commercially to the public must be put through extensive research, pre-clinical and clinical development all of which takes several years and is extremely costly. We and/or our collaborators may fail to successfully develop a drug candidate because of:

·; The failure of the drug in pre-clinical studies.

·; The inability of clinical trials to demonstrate the drug is safe and effective in humans.

·; The failure of the drug in bioequivalence studies.

·; The failure to develop a viable formulation with differing characteristics from existing drugs.

·; The failure to find a collaborator to take the drug candidate into expensive later stage studies.

·; The failure to manufacture the drug substance in sufficient quantities and at commercially acceptable prices.

In addition, the complexity and multijurisdictional nature of the regulatory processes could result in either delays

in achieving regulatory approval or non-approval. If a product is approved, the regulators may impose additional

requirements, for example, restrictions on the products' indicated uses or the levels of reimbursement receivable, that could impact on the commercial viability of the drug. Once approved, the product and its manufacture will continue to be reviewed by the regulators and may be withdrawn or restricted in the future.

Pricing, reimbursement and competition

Our commercial success depends on the acceptance of our/and our collaborators' products by the market, including physicians, third-party payers and patients. We may be adversely affected by third-party reimbursement and healthcare cost containment initiatives. Third-party payers including government and private health insurers are increasingly attempting to contain healthcare costs through measures that are likely to impact the products we are developing, including:

·; Challenging the prices charged for healthcare products.

·; Limiting both coverage and the amount of reimbursement for new therapeutic products.

·; Refusing to provide coverage when an approved drug is used in a way that has not received regulatory marketing approval.

·; Moving towards a reference pricing model, particularly in Europe where the amount of reimbursement is determined in light of reimbursement levels for comparable drugs in other countries, which can severely restrict the potential per unit price for many drugs unless there is significant differentiation from existing products.

These or other healthcare reforms that may be adopted in the future could harm our business and, in particular, could have a material adverse effect on the amounts that public and private payers will pay for our or our collaborators' commercialised products. If we and/or our collaborators develop products that are not covered by government or third-party reimbursement schemes, are reimbursed at prices lower than those expected or become subject to legislation controlling treatments or pricing, we and/or our partners may not be able to generate significant revenues or attain profitability for any products which are approved for marketing.

Our business faces intense competition from major pharmaceutical companies and specialised biotechnology companies developing drugs for the same market opportunities. Some factors that may affect the rate and level of market acceptance of any of our or our collaborators' products include:

·; The existence or entry into the market of superior competing products or therapies.

·; Entry to the market of competing products earlier than our or our collaborators' products.

·; The price of our or our collaborators' products compared to competing products.

·; Public perception and publicity concerning the safety, efficacy and benefits of our or our collaborators' products, compared to competing products and therapies.

·; The effectiveness of the sale and marketing efforts of our sales force (once established) or our collaborators' sales force.

·; Regulatory developments relating to manufacturing or use of our or our collaborators' products.

·; The willingness of physicians to adopt a new treatment regime.

Intellectual property

Intellectual property protection remains fundamental to our strategy of developing novel drug candidates. Our ability to stop others making a drug, using it or selling the invention or proprietary rights by obtaining and maintaining protection is critical to our success. We own a portfolio of patents and patent applications which underpin our research and development programmes. We invest significantly in maintaining and protecting this intellectual property to reduce the risks over the validity and enforceability of our patents. However, the patent position is always uncertain and often involves complex legal issues. Therefore, there is a risk that intellectual property may become invalid and/or expire before, or soon after, commercialisation of a drug product and we may be blocked by other companies' patents and intellectual property.

Manufacturing risk

The supply of frovatriptan API to Menarini for the EU and Central American markets is a substantial proportion of our income and so our ability to manufacture and supply this product on schedule is critical. In addition, our ability to successfully scale-up production processes to viable clinical trial or commercial levels is vital to the commercial viability of any product. Availability of raw materials is extremely important to ensure that manufacturing campaigns are performed on schedule and therefore dual sourcing is used where possible. Product manufacture is subject to continual regulatory control and products must be manufactured in accordance with good manufacturing practice.

Any changes to the approved process may require further regulatory approval which may incur substantial cost and delays. These potential issues could adversely impact on the results from operations and our cash liquidity.

In-licensing complementary products 

Our strategy is to augment the low-risk, late-stage Tris Pharma portfolio of products through in-licensing complementary products to our commercial pipeline. This is an extremely competitive area, with many large and mid-sized pharmaceutical companies also looking to execute a similar strategy, and consequently this may be difficult to achieve with our current financial resources and infrastructure. A failure to succeed in successfully in-licencing complementary products may affect our ability to grow revenues and attain profitability.

Financial risks

Cash flow

We have a history of operating losses which are anticipated to continue in the near term. Following the £65.9 million (net of expenses) equity fundraising announced in February 2012, the Company is well capitalised to execute its transition into a profitable and cash generative pharmaceutical company over time. However, the Group may need to seek further capital through equity or debt financings in the future and if this is not successful, the financial condition of the Group may be adversely affected.

Counterparty credit risk

The Company is exposed to credit-related losses on cash deposits in the event of non-performance by counterparties.

With the current economic uncertainty, counterparty credit risk is a key consideration when placing cash funds on deposit. The creditworthiness of counterparties is assessed prior to placing funds on deposit and is monitored through to maturity. Under the Company treasury policy there is a maximum amount that can be placed with any one counterparty. If any counterparty were to experience financial difficulties this may impact the Company's liquidity in the future.

Foreign exchange

We record our transactions and prepare our financial statements in sterling but almost all of our revenue is from licensing and collaborative agreements and frovatriptan royalties which are received in US dollars or euros. A proportion of our expenditure is incurred in US dollars and other currencies, relating principally to clinical trials and the Tris Pharma agreement. Our cash balances are predominantly held in sterling, US dollars and euros.

With the current economic uncertainty, we have minimised our exposure operationally, to foreign exchange movements by matching the currency in which our cash is held with our future obligations. Immediately following the equity issue in March 2012, we purchased US$100 million, to match our Tris Pharma and US commercial financing requirements. As a consequence of holding these foreign currency deposits, we will have a financial reporting foreign exchange exposure on the retranslation of the US dollar cash balances back into sterling at each reporting date, but critically any changes in foreign exchange rates between sterling and the US dollar will not impact our ability to execute on the US commercial plan.

To the extent that income and expenditure in currencies other than sterling and US dollars are not matched, fluctuations in exchange rates between sterling and these currencies, principally euros, may result in realised or unrealised foreign exchange gains and losses. Simple derivative contracts have been used to mitigate the risk of fluctuations in exchange rates where there has been certainty over the amount and timing of the income.

Where the timing and/or the amount to be received is uncertain, risk management is more difficult but the Group has used derivatives where possible and will continue to do so. To the extent that derivative instruments are considered too costly, because of the flexibility required or the time over which protection is sought, any fluctuations in foreign exchange movements may have a material adverse impact on the results from operations and our cash liquidity in the future.

Return on investment

As already mentioned, the drug development process is inherently risky and because it is conducted over several years it can be extremely costly. Many drug candidates fail in development due to the clinical and regulatory risks, and even in those circumstances where drugs are approved, sales levels can be disappointing due to competition, healthcare regulation and/or intellectual property challenges. As a result the returns achieved may be insufficient to cover the costs incurred. The Group looks to mitigate the development and commercial risk of its NCE pipeline by partnering drug candidates at an appropriate stage. This partnering event crystallises part of the programme's value, with the goal of retaining an attractive proportion of the commercial upside through future milestones and an ongoing royalty interest from commercial sales.

Related Parties

Related parties disclosures are given in note 10.

Statement of directors' responsibilities 

Each of the directors, whose names and functions are listed in the management and governance section of the annual report, confirm that, to the best of their knowledge:

·; the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and

·; the directors' report contained on pages 30 to 33 of the annual report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face.

Consolidated income statement

For the year ended 31 December 2012

Consolidated statement of comprehensive income

For the year ended 31 December 2012

Balance sheet

For the year ended 31 December 2012

Statements of changes in shareholders' equity

Cash flow statements

For the year ended 31 December 2012

Notes to the financial statements

1. Accounting policies and basis of preparation

This financial information for the years ended 31 December 2012 and 31 December 2011 does not comprise statutory financial statements but is derived from these financial statements. This financial information and announcement was approved for issue on 9 April 2013 and has been extracted from the 31 December 2012 audited statutory financial statements that were also approved by the Board on the same date and are available on the Company's website www.vernalis.com. These statutory financial statements have not yet been delivered to the Registrar of Companies. Statutory financial statements for the year ended 31 December 2011 were approved by the Board of directors on 3 April 2012 and delivered to the Registrar of Companies. The auditors' reports on the financial statements for the years ended 31 December 2012 and 31 December 2011 were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The financial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations and with the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements are prepared on a going concern basis in accordance with the historical cost convention as modified by revaluation of derivative financial instruments. Whilst the financial information included in this announcement has been prepared in accordance with IFRSs adopted for use in the European Union, this announcement does not itself contain sufficient information to comply with IFRSs.

The accounting policies applied are consistent with those of the audited financial statements for the year ended 31 December 2012 and 31 December 2011, as described in those annual financial statements.

Copies of this announcement are available from the company secretary and the announcement is also on the Company's website at www.vernalis.com. The audited Annual Report and Accounts are available on the investor's section of the Company's website and has been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.hemscott.com/nsm.do.

The Group's Annual Report and Accounts will be posted to shareholders on 18 April 2012.

2. Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Executive Committee.

The Group has only one segment, being the research, development and commercialisation of pharmaceutical products for a range of medical disorders. All costs to acquire property, plant, equipment and intangible assets as well as all related depreciation, impairment and amortisation expense borne by the Group relate to this one segment. In addition, all other non-cash expenses incurred by the Group relate to this one segment.

The Group disclose the following other information, not all of which represents segmental information required by IFRS 8.

Revenue analysis

3. Exceptional items

Exceptional items represent significant items of income and expense, which, due to their size, nature or the expected infrequency of the events giving rise to them, are presented separately on the face of the income statement to give a better understanding to shareholders of the elements of financial performance in the year, so as to facilitate comparison with prior years and to better assess trends in financial performance. Exceptional items include, but are not limited to, impairments of goodwill and intangible assets, restructuring costs and the provision for vacant leases. In 2011 an exceptional £1,921,000 cost related to an aborted acquisition of a US specialty pharmaceutical business.

4. Finance income/expense

5. Loss per share

Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. For diluted loss per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion for all dilutive potential ordinary shares.

For diluted loss per share, all potential ordinary shares including options and deferred shares are antidilutive as they would decrease the loss per share.

6. Discontinued operations

On 1 July 2008, the Group announced that it had completed the sale of Apokyn® and Vernalis Pharmaceuticals Inc., its US commercial operations, to Ipsen SA for an initial consideration of US$6.5 million with up to a further US$6.0 million of milestones payable. Ipsen SA also subscribed for US$5.0 million of Vernalis plc shares at a 20 per cent premium.

Since the sale completed the Group received US$1.0 million of the additional milestones in 2008 and US$0.7 million in 2009. A profit of £1,208,000 was recognised in the year to 31 December 2011 due to the receipt of a US$1.9 million milestone. This was the only income statement item and cash flow relating to discontinued operations in 2011. There will be no further milestones from this transaction.

Earnings per share relating to discontinued operations are shown below:

7. Intangible assets

In accordance with IAS 21 "The effects of changes in foreign exchange rates", goodwill and other intangible assets that are created in relation to the acquisition of a foreign subsidiary are maintained in the functional currency of that subsidiary.

Additions

Additions of £3.5 million were made during the year ended 31 December 2012 (£nil in the year ended 31 December 2011). These additions relate to a US$5.0 million upfront milestone paid to Tris Pharma in consideration for development of potential product candidates together with professional fees incurred in relation to the Tris Pharma agreement. These additions represent the majority of the balance included in assets not yet in use.

8. Provisions

Property provisions

Where leasehold properties become vacant the Group provides for all costs, net of anticipated income, to the end of the lease or the anticipated date of the disposal or sublease. This provision relates to properties in Oxfordshire and Cambridge and is expected to be utilised over the life of the related leases to 2015 and 2019 respectively and has been discounted to fair value at the balance sheet date. Discount rates are based on Bank of England risk-free rates over the period of each lease. Included in the onerous lease provision is a dilapidation provision which principally relates to costs associated with the Group's obligation to reinstate leased buildings to their original state. An addition to short leasehold buildings of £100,000 has been provided in relation to a new lease entered into during the year. In 2011, £150,000 was provided following a reassessment of the assumptions used to calculate the provision. In 2011 there was a net additional income statement exceptional charge of £518,000.

9. Share capital

Issue of shares - 2012

On 2 March 2012, the Group listed 342,528,564 ordinary shares of 1 pence each in connection with a Firm Placing and Placing and Open Offer announced on 10 February 2012, and priced at 20p per share.

Issue of shares - 2011

During 2011 shares were issued following the exercise of an option under the Long Term Incentive Plan.

Removal of share capital limits

An ordinary resolution to remove the limit on the Company's ability to issue shares in the capital of the Company was passed at the General Meeting on 1 March 2010.

10. Related party transactions

Identity of related parties

The Group consists of a parent, Vernalis plc and principally two wholly owned trading subsidiaries. The main trading company is Vernalis (R&D) Limited.

Group

At 31 December 2012, an amount of £3,246 (2011: £17,269) was due from Dr Fellner and companies where Dr Fellner is a board member, in respect of certain travel costs. Of the amount due at 31 December 2012, £1,706 had been repaid at 28 February 2013. The amount due at 31 December 2011 was repaid in full by 31 July 2012.

11. Post-balance sheet events

In February 2013, the Group announced the achievement of a milestone in their drug discovery collaboration with Genentech, a member of the Roche Group, which resulted in the Group receiving a US$1.5 million payment from Genentech.

In March 2013, the Group announced that it had received a US$2.5 million final payment under its drug discovery collaboration with Genentech.

In March 2013, the Group announced an extension of the ongoing oncology collaboration with Servier, initiated in May 2007.

In March 2013, the Group announced the payment of a milestone to Tris Pharma as a result of the first product in its cough cold pipeline achieving proof-of-concept.