Final Results

Vectura Group plc - Preliminary Results

Strong financial performance; significant progress on respiratory programmes; breakthrough for generic respiratory products; pipeline augmented

Chippenham, UK - 21 May 2014: Vectura Group plc (LSE: VEC) ("Vectura"), which specialises in the development of products for the treatment of airway-related diseases, announces today its preliminary results for the year ended 31 March 2014.

Financial Highlights

Strong financial performance

· Revenues up 20% at £36.5m (2012/13: £30.5m)

· Positive EBITDA1 of £5.2m (2012/13: loss of £3.4m)

· Loss before tax decreased by 54% to £4.8m (2012/13: £10.4m)

· Balance sheet strength maintained with cash and cash equivalents of £81.7m (£70.1m at 31 March 2013)

Operational Highlights

Significant progress on respiratory programmes

· Seebri® Breezhaler® (glycopyrronium bromide, NVA237) approved in over 60 countries, including EU, Japan, Canada and Australia

o Q1 2014 net sales of $30m; 12 months to 31 March 2014 of $82m (Source: Novartis)

· Ultibro® Breezhaler® (indacaterol/glycopyrronium bromide, QVA149) launched in seven countries to date and approved in over 30, including EU, Japan, Canada and Australia

o Q1 2014 net sales of $14m; total of $20m since launch (Source: Novartis)

· Approvals of GSK's BREO™ ELLIPTA™ and ANORO™ ELLIPTA™ signalled new royalty streams

Breakthrough for generic respiratory products

· AirFluSal® Forspiro® (VR315) approved in Denmark, Germany, Belgium, Sweden, Hungary, Romania, Norway, Bulgaria and South Korea; product now launched in most of these markets

· VR315 development in the US continues to make progress; additional milestone received

· FDA guidelines were a positive step for development of inhaled generics in the US

Pipeline augmented

· Acquisition of Activaero GmbH strengthens development pipeline and enhances technology offering

· Initiated co-development deal with UCB for a novel molecule (VR942) currently at the pre-clinical stage

· The establishment of Kinnovata JV formed in China; extracting additional value from our mature assets. Kinnovata joint venture is still awaiting formal completion. Final local Government approval expected later in 2014, upon which an exceptional non-cash gain will be recognised.

Other highlights

· Placing completed 13 March 2014 and raised gross proceeds of £52m

· Two changes to the Board during the year:

o Jack Cashman retired as Non-executive Chairman of the Board and Bruno Angelici was appointed as Non-executive Chairman in February 2014

o July 2013, Anne Hyland stepped down as Chief Financial Officer and Company Secretary and Paul Oliver was appointed Chief Financial Officer and Company Secretary

Post-period event

· US launch of ANORO™ ELLIPTA™ triggered a £2m milestone associated with a licence agreement with GSK

Dr Chris Blackwell, Chief Executive of Vectura:

"The past year has been very significant for Vectura, driven by the tremendous progress made from the approvals and commercialisation of partnered assets and in the acquisition of Activaero. Looking ahead, we anticipate the continued commercialisation of Seebri® Breezhaler®, Ultibro® Breezhaler® and AirFluSal® Forspiro®, which will augment our growing royalty streams. We are determined to create further value in our Company and believe we are well-placed with our strategy to build a specialty pharmaceutical company focussed on airways-related diseases."

- Ends -

1 Earnings before investment income, finance (costs) / gains, tax, depreciation, amortisation, share-based compensation and adjusted for non-recurring expenditure items

Chris Blackwell, Chief Executive and Paul Oliver, Chief Financial Officer, will host an analyst briefing today at 9.30am BST at the offices of FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD. A live webcast of the meeting, with the presentation slides, will be available on Vectura's website: http://www.vectura.com/investors/reports-presentations/2014.aspx. For further details please contact Victoria Foster-Mitchell at FTI on +44(0)20 3077 0486.

Enquiries

About Vectura

Vectura is a product development company that focuses on the development of pharmaceutical therapies for the treatment of airways-related diseases (airways diseases). This growing market includes asthma and chronic obstructive pulmonary disease (COPD) and is estimated to be worth in excess of $46 billion worldwide.2

Vectura has eight products marketed by its partners and a portfolio of drugs in clinical development, a number of which have been licensed to major pharmaceutical companies. Vectura has disclosed development collaborations and licence agreements with several pharmaceutical and biotechnology companies, including Novartis, Sandoz (the generics arm of Novartis), Baxter, GlaxoSmithKline, UCB, Ablynx, Grifols and Tianjin KingYork Group Company Limited.

Vectura seeks to develop certain programmes itself where this will optimise value. Vectura's formulation and inhalation technologies are available to other pharmaceutical companies on an out-licensing basis where this complements Vectura's business strategy. For further information, please visit Vectura's website at www.vectura.com.

2 Pharmaview Commercial Landscape Series Respiratory Decision Resources 2014

Forward-looking statements

This press release contains forward-looking statements, including statements about the discovery, development and commercialisation of products. Various risks may cause Vectura's actual results to differ materially from those expressed or implied by the forward-looking statements, including: adverse results in clinical development programmes; failure to obtain patent protection for inventions; commercial limitations imposed by patents owned or controlled by third parties; dependence upon strategic alliance partners to develop and commercialise products and services; difficulties or delays in obtaining regulatory approvals to market products and services resulting from development efforts; the requirement for substantial funding to conduct research and development and to expand commercialisation activities; and product initiatives by competitors. As a result of these factors, prospective investors are cautioned not to rely on any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Delivered Strong Results

Operating Review

· Seebri® Breezhaler® (glycopyrronium bromide, NVA237) launched in over 60 countries

o Q1 2014 net sales of $30m (Source: Novartis)

· Ultibro® Breezhaler® (indacaterol/glycopyrronium bromide, QVA149) launched in seven countries to date

o Q1 2014 net sales of $14m (Source: Novartis)

· Approvals of GSK's BREO™ ELLIPTA™ and ANORO™ ELLIPTA™ signalled new royalty streams

· AirFluSal® Forspiro® (VR315) approved in Denmark, Germany, Belgium, Sweden, Hungary, Romania, Norway, Bulgaria and South Korea

o Product now launched in most of these markets

· VR315 development in the US continues to make progress

o Additional milestone received

· FDA guidelines were a positive step for development of inhaled generics in the US

· Acquisition of Activaero GmbH strengthens development pipeline and enhances technology offering

· Initiated a co-development deal with UCB for a novel molecule currently at the pre-clinical stage, utilising our innovative technology which allows delivery of biologic molecules to the lung via inhalation and also exploits our clinical development expertise in airways disease.

· Kinnovata JV formed in China

o Extracting additional value from our mature assets

Operational Highlights

Building on the royalty revenue Vectura received from sales of Seebri® Breezhaler® by Novartis, there were a number of additional achievements that will add to Vectura's royalty streams:

· Novartis; approvals and launches of Ultibro® Breezhaler® in Japan and Europe

· Sandoz; launch of AirFluSal® Forspiro®

· GSK; launch of products generated milestone and royalty revenue

Vectura will focus its business development activities on the acquisition and in-licensing of products and compounds that offer a good strategic fit and have the potential to deliver demonstrable value to the Company's stakeholders. The past year has demonstrated some significant progress:

· The acquisition of Activaero, which added late-stage assets, a broad development pipeline and a proprietary smart nebulisation platform

· A co-development deal with UCB, demonstrating our innovative technology which allows delivery of biologic molecules to the lung via inhalation and also endorses our clinical development expertise in airways disease - currently in pre-clinical development

· Kinnovata, our JV in China which aims to leverage our assets over the longer term in the growing asthma and COPD marketplace in China

Evolution of our Business and Future Growth

Vectura has increased its focus on developing and commercialising innovative specialty medicines to meet significant unmet patient needs in airways diseases. The past year has continued that evolution. The Board believes that Vectura is well-placed to exploit future growth and value opportunities and in the year ahead, we will utilise our recently expanded proprietary technology base to target disease segments where we can lead the way in developing treatments of benefit to patients.

Executing the Strategy

The history of Vectura, since its formation in 1997, has been one of change, adapting to the needs of the industry in which we work. Vectura continues to evolve to maximise the value potential for our shareholders. This capability, to embrace and incorporate change, is key to our success.

Assets that are important for growth and value must:

· Focus on airways disease

· Add balance to our development pipeline

· Increase the breadth of our product-enabling technology base

· Have the potential to generate revenue in the short term and increase economics through partnering, co-development or focused, cost-effective self-commercialisation

Assets must also leverage existing capabilities, such as our expertise in drug-device combinations and our nascent expertise in commercialisation.

Towards the end of this financial year, we announced a significant strategic acquisition of a private German company, Activaero GmbH, for €130m in cash and shares. This transaction aligned closely with our stated strategic intent and enhances our medium- to long-term growth prospects. The acquisition brought us a proprietary smart nebuliser-based technology, FAVORITE, that facilitates targeting inhaled drugs into pre-selected areas of the lung. FAVORITE is incorporated into a range of products, with application to branded and generic drugs, for small molecules and for biologics. Our enhanced technology offering now spans both dry powder and liquid/aerosol forms of delivery to the lung. The acquisition also brought us a balanced pipeline of partnered and un-partnered assets through seven clinical and several pre-clinical stage programmes.

A significant attribute of the deal was that it augmented our pipeline through a single transaction, not only providing a balance of drug assets across development phases, but doing so with limited use of human and financial capital when compared to the cash outlay that would be required to acquire a similar asset base through a series of individual transactions.

Organisational Change

As a result of the enlarged organisation and the evolution from development to a product-focused organisation, we also made some changes to the way we manage the business - reconstituting the Executive Management Team; (EMT: formerly known as the Leadership Team), responsible for the overall management of the Group's strategy and its execution. The changes include Gerhard Scheuch joining the EMT as Chief Scientific Officer. The role of CSO will be key to ensuring the appropriate scientific input and liaison for our technologies. Gerhard will be an ambassador for our science, technology and products, both within and outside the business.

In preparation for laying out our strategy to derive future revenues from self-commercialisation of products, Roger Heerman has joined the EMT as Chief Commercial Officer. Roger brings significant experience of the commercialisation of respiratory products.

We look forward to working closely with Gerhard and Roger on the EMT and grateful that the Company has a strong, experienced and cohesive executive team to manage the next phase of growth for our Company.

Our people

We would like to thank everyone in Vectura for their tremendous contribution this year, which has been another demanding yet exciting year. Their hard work and drive to succeed has formed the bedrock of our continued growth. We welcome our new colleagues and thank them for their support during the integration process which is progressing well and forms the foundation for future progression.

Financial review

Summary

It has been an important financial year for Vectura. Total revenues of £36.5m have increased by £6m (20%) when compared to the prior year, principally due to the 25% (£3.3m) increase in royalty revenues. Total royalty revenue of £16.3m (2012/13: £13m) includes royalties earned from three newly marketed products, Ultibro® Breezhaler®, BREO™ ELLIPTA™ and AirFluSal® Forspiro®. In addition, royalty income earned from Seebri® Breezhaler® has increased as Vectura has earned royalty income for a full twelve months in the year ended 31 March 2014 and there has been a sustained increase in underlying sales of the product.

Significant milestone revenues were earned during the year, including £7.8m ($12.5m) following approval of Ultibro® Breezhaler® in Europe and Japan, a £1.8m ($3m) development milestone earned in relation to VR315 US, and £3.7m (€4.5m) following the approval of AirFluSal® Forspiro® in Germany, Romania and Belgium.

The Group continues to allocate its resources in an efficient manner and research and development (R&D) expenditure of £28m is down 9% (£2.9m) compared with last year (2012/13: £30.9m). Other administrative expenses of £3.4m are in-line with the prior year (2012/13: £3.3m); however total administrative expenses include £2.5m of one-off costs associated with the acquisition of Activaero GmbH. Underlying non-cash items, such as share-based compensation and the amortisation charge associated with the pre-existing intangible assets, are consistent with the prior year, but overall amortisation is up by £0.6m, due mainly to the £0.5m amortisation charge recognised for the intangible assets acquired with Activaero.

The increase in revenues and reduction of R&D expenditure have improved the Group's loss before tax by £5.6m, to a loss of £4.8m (2012/13: £10.4m) and the Group has generated a positive EBITDA of £5.2m (2012/13: £3.4m loss).

In accordance with IFRS, the Group has consolidated the revenues and expenditure of Activaero in its financial results from the date of acquisition to the end of the financial year. The underlying revenues from the Activaero business constitute a mix of product and technology licensing revenues, as well as development services and device sales. These underlying revenues are supplemented by milestone receipts from partnered projects, as and when certain milestone events occur. Following the acquisition of Activaero and the placing of additional shares to raise gross proceeds of £52m on 18 March 2014, the Group has maintained a strong balance sheet position with a cash balance at 31 March 2014 of £81.7m (2013: £70.1m).

Revenue

The Group has five revenue streams; royalty revenue, product licensing revenue, technology licensing revenue, development services revenue and device sales revenue.

Royalties

Total royalty revenue of £16.3m (2012/13: £13m) has increased by 25% compared to the prior year. This increase is driven primarily by royalty revenue from Novartis relating to sales of Seebri® Breezhaler®.

In addition, Vectura received its first royalties from Novartis for sales of Ultibro® Breezhaler®, from GlaxoSmithKline (GSK) for sales of BREO™ ELIPTA™, and from Sandoz for sales of AirFluSal® Forspiro®.

Other royalty income is mainly derived from the three products licensed to Baxter. ADVATE®, for haemophilia A, contributed royalties of £11.2m (2012/13: £11.1m). Extraneal®, for peritoneal dialysis, earned royalties of £1m (2012/13: £0.8m) and Adept®, for the prevention of surgical adhesions, earned royalties of £0.6m (2012/13: £0.6m). The Group does not expect to receive any future royalties from sales of Extraneal.

Product licensing

Product licensing revenue earned in the year was £13.3m (2012/13: £12.8m), which includes milestone payments from Novartis of $10m (£6.2m) and $2.5m (£1.6m) relating to the respective European and Japanese approvals for QVA149.

In December 2013, Vectura's partner Sandoz announced it received marketing authorisation for AirFluSal® Forspiro® (formerly known as VR315 EU) in Denmark. Following the initial announcement, the product was approved in Germany, Hungary, Sweden, Norway, Belgium, Bulgaria, Romania and South Korea. The approvals in Germany, Romania and Belgium each triggered a milestone to Vectura of €1.5m, and therefore a total of €4.5m (£3.7m) has been recognised as revenue during the year ended 31 March 2014.

During the year, Vectura earned a milestone of £1.8m ($3m) in relation to progress with VR315 development in the US. Vectura is eligible to receive a further $29m upon achievement of future, pre-determined development milestones. In addition, Vectura will receive a royalty from all VR315 US sales.

Technology licensing

Technology licensing revenue of £4.3m (2012/13: £3.7m) is higher than the previous year. £2m relates to milestones defined in a non-exclusive licence agreement with GSK. Under the terms of the agreement, Vectura has received a £10m upfront payment in 2010/11 and at 31 March 2014, a further £8m of a potential total of £10m, from development milestones.

In August 2013, a £2m change of control milestone was earned under a technology licensing agreement following the acquisition of ProFibrix BV by The Medicines Company.

Development services

Development services revenue has increased to £1.7m (2012/13: £0.6m). This was the result of higher demand for these services from our current licensing partners. Future revenues will depend on the number and nature of feasibility studies and new licensing deals. The development of inhalation products is a very specialised area, with partners frequently requiring Vectura's involvement for a period after licensing.

Device sales

Device sales of £0.9m were higher than the prior period (2012/13: £0.4m) due to the approval of AirFluSal® Forspiro® in a number of European countries. AirFluSal® Forspiro® uses Vectura's GyroHaler device.

Research and development expenses

Total investment in research and development was £28m, representing a 9% decrease on the previous year (2012/13: £30.9m). This decrease is partly due to the timing of certain development expenditure and partly due to an on-going focus on cost control throughout the Group. Research and development expenses will increase during the 2014/15 financial year as we develop our newly acquired assets.

Taxation

During the year ended 31 March 2014, research and development tax credits totalling £4.7m were received in relation to the 2012/13 tax returns.

A receivable of £3.8m was included in the balance sheet as at 31 March 2013, resulting in a current year tax credit of £0.9m. Research and development tax credits of £3.3m have been recognised in respect of the 2013/14 financial year. As the Group's taxable losses reduce, research and development tax credit cash receipts will continue to decline.

A net deferred tax liability of £33.9m was recognised during the year, this includes a £34.7m (€38.9m) liability recognised in respect of the assets acquired with Activaero at an effective tax rate of 27%. The deferred tax liability resulting from the acquisition will be released to the income statement as the acquired intangible assets are amortised, and as the tax losses brought forward are utilised. £0.1m of this balance has been released to the income statement in the current year, relating to the £0.5m amortisation recognised in the year.

An additional liability of £1.8m has been charged to the income statement in respect of the intangible assets acquired from Innovata. The liability will reduce as the intangible assets are fully amortised over the next two years.

Intangible assets

Intangible assets of £138.9m include £10.7m relating to the Innovata acquisition and assets of £128.2m relating to the recent acquisition of Activaero.

The intangible assets of £10.7m (2013: £17.1m) relating to the Innovata acquisition have been amortised by £6.4m (2012/13: £6.3m) during the year. These assets will be fully written down over the next two years.

Intangible assets of €155.7m (£130.7m) were recognised on the acquisition of Activaero. These assets have been amortised by €0.6m (£0.5m) since acquisition and the remaining net book value of €155.1m has been translated at the prevailing exchange rate on the balance sheet date, giving a carrying value of £128.2m.

These acquired intangible assets relate to in-progress R&D programmes, which include FAVOLIR®, and they will continue to be amortised over their remaining expected useful life. In accordance with accounting standards and as set out in Note 12, due to the proximity of the acquisition to Vectura's year end the initial accounting outlined above is deemed to be provisional pending finalisation of the fair value exercise. On that basis the assets, liabilities or items of consideration may be restated at any time up to the anniversary of the acquisition date in March 2015.

Translation reserve

The assets and liabilities acquired from Activaero are denominated in Euros and therefore in accordance with accounting standards, the Group has recognised a net foreign exchange difference of £1.6m within reserves as a result of the movement in the exchange rate between 18 March 2014 and 31 March 2014. In future periods, the movement in this reserve will be dependent upon the £/€ exchange rate at the relevant balance sheet dates.

Property, plant and equipment

Vectura has invested £2.5m in its inhaled product manufacturing capabilities during the year (2013: £4m). In addition, the Group acquired property plant and equipment of £1.2m as part of the acquisition of Activaero.

Deferred income

Deferred income relates to milestones received in cash but not yet recognised as revenue. Of the £1.8m on the balance sheet at 31 March 2014 (2013: £1.4m), £0.1m will be recognised as revenue in 2014/15 and £1.7m, of which £1.3m relates to the VR315 RoW deal with Sandoz, will be recognised as revenue in later periods.

Deferred consideration

The deferred liability of £28.7m relates to the €35m payment in cash which is due to be paid to the former Activaero shareholders in August 2015 as part of the acquisition consideration.

Cash flow

Vectura continues to maintain a strong cash position with cash and cash equivalents at 31 March 2014 of £81.7m (2013: £70.1m). The increase in cash was driven largely by the placing of 33.6m new shares at a price of 155 pence per share, generating gross proceeds of £52m. This increase in cash was offset by a £37.8m (€45m) payment to the former shareholders of Activaero in consideration for the business and costs associated with the acquisition and placing of £4.5m.

Cash outflow from operating activities was £0.7m (2012/13: £2.8m outflow).

Foreign exchange rates

The following foreign exchange rates were used during the year:

Paul OliverChief Financial Officer

20 May 2014

Consolidated income statementfor the year ended 31 March 2014

All results are derived from continuing activities.

* Earnings before investment income, finance (costs)/ gains, tax, depreciation, amortisation, share-based compensation, adjusted for non-recurring expenditure.

Consolidated statement of comprehensive income

For the year ended 31 March 2014

Other comprehensive loss:

Items that may be subsequently reclassified through the income statement

Consolidated Balance sheetat 31 March 2014

Consolidated Cash flow statementfor the year ended 31 March 2014

Consolidated Statement of changes in equityfor the year ended 31 March 2014

Notes to the financial statements for the year ended 31 March 2014

1. Basis of preparation

The financial information included in this statement does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information has been extracted without material adjustment from the consolidated financial statements of Vectura Group plc for the year ended 31 March 2014, which have been audited. The auditor has made reports in respect of the statutory consolidated accounts for the years ended 31 March 2014 and 31 March 2013. Their reports were (i) unqualified, (ii) did not include reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under sections 237(2) or 237(3) of the Companies Act 1985 and sections 498(2) or 498(3) of the Companies Act 2006.

Whilst the information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS.

Statutory accounts for the financial year ended 31 March 2013 have been delivered to the Registrar of Companies, whereas those for the year ended 31 March 2014 will be delivered following the Annual General Meeting.

The Group's Annual Report and Accounts will be sent to shareholders in July 2014 and will be available on our website www.vectura.com.

Risks and uncertainties

The key business risks facing Vectura on a stand-alone basis are consistent with those set out in the Annual Report and Accounts for the year ended 31 March 2013 and those to be included in the Annual Report and Accounts for the year ended 31 March 2014. There are a number of potential risks and uncertainties that could have a material impact on the Group's performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results. Particular risks include industry risk, clinical and regulatory risk, counterparty risk, competition and intellectual property risk, economic risk and financial risk (cash flow, credit, liquidity and price risks). The fluctuating US dollar in currency markets has and could continue to impact results as the majority of royalties received are denominated in US dollars. The Board has policies in place to mitigate these risks and uncertainties.

Going concern

The accounts have been prepared on the going concern basis. Although the current economic conditions may place pressures on customers and suppliers which may face liquidity issues, the Group's product diversity and customer and supplier base substantially mitigate these risks. In addition, the Group operates in the relatively defensive pharmaceutical industry which we expect to be less affected compared to other industries.

The Group made a loss of £2.3m for the financial year ended 31 March 2014 (2012/13: £5.9m) but had £81.7m of cash and cash equivalents as at 31 March 2014 (2013: £70.1m). The Board operates an investment policy under which the primary objective is to invest in low-risk cash or cash equivalent investments to safeguard the principal. The Group's forecasts, taking into account likely revenue streams, show that the Group has sufficient funds to operate for the foreseeable future.

After reviewing the Group's forecasts and assessing the uncertain nature of some of the Group's forecast revenues, the Directors believe that the Group is adequately placed to manage its business and financing risks successfully despite the current uncertain economic outlook. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts, from which this announcement has been extracted.

2. Accounting policies

The financial information has been prepared in accordance with accounting policies as set out in the previous financial statements and those signed today for the year ended 31 March 2014. The policies have been consistently applied to all periods presented. Full details of the Group's accounting policies can be found in the 2012/13 Annual Report, which is available on our website www.vectura.com.

3. Revenue

Revenue represents amounts invoiced to third parties, derived from the provision of licences and services that fall within the Group's sole principal activity, the development of pharmaceutical products.

4. Investment income and finance gains

5. Taxation

The major components of the income tax credit for the years ended 31 March 2014 and 31 March 2013 were as follows:

6. Loss per ordinary share

The calculation of loss per share is based on the following losses and number of shares:

The loss per share is based on the weighted average number of shares in issue during the period. IAS 33 - Earnings per Share, requires presentation of diluted earnings per share when a company could be called upon to issue shares that would decrease net profit or increase net loss per share. No adjustment has been made to the basic loss per share, as the exercise of share options would have the effect of reducing the loss per ordinary share, and is therefore not dilutive.

7. Trade and other receivables

 (1) Includes research and development tax credits of £3.3m (2013: £3.8m).

The average credit period taken by customers is 30 days (2013: 30 days). The Directors consider that the carrying value of trade and other receivables approximates to their fair value.

8. Trade and other payables

Trade payables principally comprise amounts outstanding for trade purchases and on-going costs. The average credit period taken by the Group for trade purchases is 31 days (2013: 31 days).

9. Deferred income

Deferred income relates to amounts received under product licensing agreements. Vectura continues to provide services to these licensing partners over a period of time. Milestone payments under these licensing agreements are therefore spread over future periods, and income is deferred as follows:

10. Equity

Share capital

Between 1 April 2013 and 31 March 2014 the Company did not issue any ordinary shares to the Vectura Group plc Employee Benefit Trust (in the year ended 31 March 2013: 1,000,000).

Between 1 April 2013 and 31 March 2014 the Company issued 5,173,784 (in the year ended 31 March 2013: 1,061,980) ordinary shares of 0.025p each on the exercise of employee share options at a weighted average exercise price of 61.19p per share (2013: 48.52p).

Between 1 April 2013 and 31 March 2014 the Company issued 171,736 (in the year ended 31 March 2013: 225,634) ordinary shares of 0.025p each on the exercise of Sharesave options at a weighted average exercise price of 55.5p (2013: 48.18p) per share.

Between 1 April 2013 and 31 March 2014 the Company issued 646,484 (in the year ended 31 March 2013: 482,121) ordinary shares of 0.025p each on the exercise of LTIP nil-cost options.

On 18 March 2014 the company placed 33,565,280 new shares at a price of 155 pence per share.

On 18 March 2014 the company issued 25,641,398 to the shareholders of Activaero GmbH as part of the purchase consideration for 100% of its ordinary share capital. The ordinary shares issued have the same rights as the other shares in issue. The fair value of the shares issued amounted to £41m (160.9 pence per share).

11. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. There has been no material change in the type of related party transactions described in the last Annual Report and Accounts

12. Business combinations

On 18 March 2014, the group acquired 100% of the issued share capital and obtained control of Activaero GmbH (Activaero), a company focused on the development of products for the treatment of respiratory diseases. The acquisition of Activaero fulfils a number of strategic priorities in a single transaction, creating a therapeutic area specialist for airways diseases. The combined entity will benefit from:

· diversified income streams with long term value-creation for Vectura's shareholders

· a balanced pipeline of late-stage and early-stage assets across a spectrum of indications

· access to revenue generating, proprietary, smart nebuliser-based technology that enables targeting of inhaled drugs into pre-selected areas of the lung

· the opportunity to develop a wide range of molecular entities, ranging from small molecules to biologics

· a broader partnership base

The following table summarises the provisional amounts recognised in respect of the identifiable assets acquired and liabilities assumed on the acquisition of Activaero.

Satisfied by:

The above transaction contains certain translations of Euros into amounts in Pounds Sterling based on the exchange rate of £1.00 = €1.1913, being the published exchange rate by the Financial Times at the close of business on 18 March 2014, being the date of acquisition.

The fair value of the 25,641,398 ordinary shares issued as part of the consideration paid for Activaero was calculated using a two-week VWAP (volume weighted average price) share price calculated on 10 March 2014 as 160.9 pence per share.

The goodwill of £7.8m arising from the acquisition is attributable to the future development opportunities arising from the acquisition of proprietary, smart nebuliser-based technology and certain cost synergies.

In the period since 18 March 2014, Vectura GmbH (formerly Activaero GmbH) contributed £0.3m revenue to the Group and this is recognised in the consolidated statement of income. Over the same period, the subsidiary incurred underlying costs of £0.3m.

Had Activaero been consolidated from 1 April 2013, Group revenues would have been £39.9m and the Group loss after tax would have been £2.1m.

The deferred cash consideration is non-contingent. The undiscounted amount that Vectura Group plc is due to pay is €35m. The deferred cash consideration of €35m has been discounted to a present value of €34.7m by applying a discount rate of 0.5%.

Acquisition related costs of £2.5m have been included in other administrative expenses.

Further costs of £2.0m were incurred following the placing of new shares, and these costs have been recognised in share premium.

Due to the proximity of the acquisition to Vectura's year end, in accordance with IFRS 3, the initial accounting outlined above is deemed to be provisional pending finalisation of the fair value exercise. On that basis the assets, liabilities or items of consideration may be restated at any time up to the anniversary of the acquisition date in March 2015.

Directors' responsibility statement

The Directors' responsibility statement below has been prepared in connection with the Company's full Annual Report for the year ended 31 March 2014. Certain parts thereof are not included within this announcement: We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

· the strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties which they face; and,

· the annual report and financial statements, taken as whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.

By order of the Board,

Paul Oliver

Director

20 May 2014