Half Yearly Report

Vectura Group plc - Interim Results

Strong increase in revenues, gross profit and a material improvement to cash

- Deals and product progress driving strong financial performance -

Chippenham, UK - 16 November 2010: Vectura Group plc (LSE: VEC) ("Vectura"), today announces its interim results for the six months ended 30 September 2010.

Financial Highlights

·; Revenues increased by 15% to £26.3m (2009/10 H1: £22.8m)

·; Gross profit up by 17% to £24.9m (2009/10 H1: £21.2m)

·; EBITDA increased by 174% to £6.3m (2009/10 H1: £2.3m)

·; Loss after tax reduced by 94% to £0.2m (2009/10 H1: £3.3m)

·; Cash and cash equivalents increased by £13.8m to £77.9m (£64.1m at 31 March 2010)

Pipeline & Company Update

·; GSK (asthma/COPD)

o GSK signed a worldwide non-exclusive agreement to license certain of Vectura's patents in relation to two late-stage development compounds

o £10m up-front payment received and further £10m expected over the period to launch

o Additional royalties from sales of up to £13m p.a.

·; NVA237 (COPD)

o Phase III trial results to be announced in Q2 2011

o Novartis expects launch in 2012

·; QVA149 (COPD)

o $7.5m (£5.1m) milestone triggered by start of Phase III studies

o Novartis expects launch in 2013

·; VR315 (asthma/COPD)

o Next milestones expected on approval in EU

o $9.5m (£6.2m) payment received from Sandoz in respect of US agreement

o Ongoing dialogue with US regulators on development pathways

o Licensing discussions ongoing for US and ROW

·; VR632 (asthma/COPD) 

o Good development progress, €0.6m (£0.5m) milestone received from Sandoz in October 2010

·; VR506 (asthma)

o Preparations for clinical development ongoing

·; VR040 (Parkinson's disease)

o Phase II study results demonstrated clinically relevant and statistically significant benefit

o Licensing discussions ongoing

·; VR496 (cystic fibrosis)

o Phase II proof-of-concept study results on track to read out in early 2011

·; R&D restructuring and cost-saving

o Closure of the Nottingham facility and consolidation of all formulation development activities at our Chippenham facility

o Anticipated annual cost-savings of approximately £6m from the next financial year

Dr Chris Blackwell, Chief Executive of Vectura:

"Vectura has delivered a robust set of results with a strong increase in revenues and gross profits and a material improvement in our cash position. Whilst we have taken some tough decisions during the period to restructure the business and sharpen our focus, we have made important progress on several fronts. In particular, the recent deal with GSK further validates our technology and strengthens our balance sheet, while NVA237 and QVA149 are getting nearer to the market, with launches expected in 2012 and 2013 respectively. With a reduced risk profile, cash of £78m and substantial revenues expected in the short-term, Vectura is moving closer to becoming a sustainably cash generative and profitable company."

- Ends -

Chris Blackwell, Chief Executive and Anne Hyland, Chief Financial Officer, will host an analyst/investor briefing today at 09.30 a.m. GMT at the offices of Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London, WC2A 1PB.  For further details please contact Juliet Edwards on +44(0)20 7269 7125.

Enquiries

Notes for editors

About Vectura

Vectura Group plc develops inhaled therapies principally for the treatment of respiratory diseases. Vectura's main products target diseases such as asthma and chronic obstructive pulmonary disease (COPD), a growing market that is currently estimated to be worth in excess of $25 billion. Vectura also develops products for other lung pathologies and non-respiratory diseases.

Vectura has six products marketed by its partners and a portfolio of drugs in clinical and pre-clinical development, some of which have been licensed to major pharmaceutical companies. 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.

Vectura has development collaborations and licence agreements with several pharmaceutical companies, including Novartis, Sandoz (the generics arm of Novartis), Baxter, GlaxoSmithKline (GSK) and Otsuka. For further information, please visit Vectura's website at www.vectura.com.

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.

INTERIM MANAGEMENT REPORT

CHAIRMAN AND CHIEF EXECUTIVE'S REVIEW

OVERVIEW

Vectura specialises in developing inhaled therapies, principally for the treatment of respiratory diseases; bringing together all elements of inhaled product development including the technologies, clinical and regulatory operations and manufacturing for clinical trials. The collaborations and licence agreements we have with major players in the $25 billion asthma/COPD market is testament to the importance of our respiratory expertise.

Our licensed proprietary product, NVA237 is in Phase III development for COPD with Novartis, both alone and combined with Novartis's indacaterol (Onbrez® Breezhaler®) as QVA149. They are expected to launch in 2012 and 2013 respectively.

VR315, our inhaled combination therapy for asthma and COPD, is progressing well in Europe with our licensee, Sandoz, and we await our next milestone payments on regulatory approval. In October, we received our penultimate development milestone payment for VR632, the second generic combination product we licensed to Sandoz.

Our respiratory technologies received significant endorsement in August when GSK, one of the leading developers of innovative respiratory medicines, signed a licensing agreement with us. This worldwide, non-exclusive licence for certain of Vectura's dry powder drug formulation patents relates to two of GSK's late-stage respiratory development products.

In August, we announced the restructuring of our R&D activities, allowing us to invest in a more focused pipeline of respiratory products, reduce our infrastructure costs by some £6m per annum, and expedite our time to sustainable cash generation and profitability. In a more cautious environment, within both the healthcare sector and the economy, we believe it prudent to reduce the risk profile of Vectura whilst preserving the upside. As a result of our restructuring, Vectura is now:

·; Focused on partnered programmes and respiratory product opportunities that are key value drivers

·; Exploiting the value of our technologies, technical expertise and development capabilities through licensing partnerships

·; Continuing to explore new product development partnerships targeting respiratory medicines

·; Progressing specialty products no further than Phase II proof-of-concept

·; Closing its Nottingham facility and consolidating all formulation development activities at the Chippenham facility.

Outlook

Vectura is committed to building to profitability; minimising both financial and development risk through careful financial management and appropriate partnering. We look forward to the NVA237 Phase III data, expected in the second quarter of 2011, with filing also in 2011 and launch expected in 2012. The QVA149 Phase III programme is ongoing and Novartis expects to file for approval in 2012, with launch in 2013. We anticipate we will have additional visibility on VR315 in Europe as we have now received our first orders for the commercial supply of our GyroHaler® device, and we expect clinical trial results for VR496 over the coming months. Our licensing activities continue in all areas; products, technologies and intellectual property. Overall, we believe that Vectura has the financial resources, the product portfolio, and the technological know-how to become a leading speciality pharmaceutical company that will deliver significant value to our shareholders.

Partnered patented products and technologies

In the asthma/COPD market, Vectura seeks to work with major pharmaceutical companies by providing licensing opportunities for products (e.g. NVA237) and technologies (e.g. GSK) that can enable a more effective delivery of asthma/COPD products.

NVA237 and QVA149 for chronic obstructive pulmonary disease (COPD)

NVA237 is a dry powder formulation for inhalation of glycopyrronium bromide, a long-acting muscarinic antagonist (LAMA) with a rapid onset of activity.

NVA237 was licensed to Novartis in April 2005 by Vectura and its co-development partner, Sosei Group Corporation (Sosei). Novartis intends to launch NVA237 as a once-daily monotherapy for COPD in 2012 and as a combination (QVA149) with its once-daily, long-acting beta-agonist (LABA), indacaterol (Onbrez® Breezhaler®) in 2013.

COPD is a chronic obstruction of the airways that affects 210 million people worldwide and is projected to be the third leading cause of death by 2030. It is a progressive lung disease with symptoms including chronic bronchitis and/or emphysema, which slowly progresses and eventually leads to an irreversible loss of lung function. Although there is no cure, bronchodilators make breathing easier by enlarging the patient's airways and are recognised in international guidelines as an integral part of the treatment for COPD.

Vectura believes that QVA149 could be the first once-daily LABA/LAMA combination therapy to come to market for COPD. The dual activity of a beta-adrenergic agonist and a muscarinic antagonist could potentially result in a potent bronchodilator with convenient once-daily dosing, and has the potential to address a large and unmet need for COPD sufferers.

NVA237 and QVA149 entered Phase III trials in June 2009 and May 2010 respectively; with both events triggering milestone payments of $7.5m to Vectura. Publication of NVA237 Phase III data in COPD is expected in Q2, 2011. To date, Vectura has received $30m from Novartis and, under the terms of the licence, could receive up to an additional $157.5m, of which $72.5m would be payable by the time both products are launched in Europe and the US. In addition, Vectura will receive royalties on future product sales.

Novartis received European regulatory approval for indacaterol (Onbrez® Breezhaler®) in November 2009, with the initial launch of the product in Germany in December 2009. Since then, the product has been approved in more than 40 countries and is available in 12 countries. US approval is subject to the FDA's review of additional clinical data that Novartis filed at the end of September 2010.

GSK Licence

In August 2010, Vectura signed a worldwide, non-exclusive licensing agreement with GSK for certain of Vectura's dry powder drug formulation patents in relation to two late-stage development compounds in GSK's respiratory product pipeline.

Under the terms of the agreement, Vectura received an up-front payment of £10m and expects a further £10m to be received up to the time the compounds are launched. In addition, Vectura will earn royalties on sales of these products. Vectura will earn up to £13m per annum under this licence agreement.

The non-exclusive nature of this agreement allows Vectura to continue to identify additional licensing partners for the Company's inhaled therapy technologies in the future.

Generic/505(b)(2) products

Branded, combination dry powder inhaler (DPI) therapy is currently the biggest sector of the respiratory market, with annual sales in excess of $10bn. With increasing pressure to provide medicines that are effective and affordable to more patients, these products have the potential to provide a large value opportunity as generics or branded generics. Developing DPI products requires the integrated development of both formulation and device, an area of Vectura's expertise.

VR315 for asthma/COPD

VR315 is an inhaled combination therapy for asthma and COPD, delivered with Vectura's GyroHaler® DPI device, and is licensed to Sandoz AG for development in Europe. The deal is worth up to €22.5m in milestones and development funding, plus royalties on all products sold. Vectura has achieved all the development milestones due for VR315 and is awaiting final approval milestones.

In December 2006, a cost/profit-sharing agreement was signed with Sandoz for the development of VR315 in the US. In March 2010, Vectura received full development and commercialisation rights back from Sandoz for VR315 in the US. Under the revised agreement, Vectura received $9.5m from Sandoz in May 2010. This follows a $6m milestone received in August 2009 and $2m received in 2006. Vectura continues US development whilst further assessing FDA requirements and is in active discussions with a number of potential licensing partners.

Vectura also retains the rights to the product in territories outside the US and Europe. These territories account for 18% of the branded product's sales and therefore provide an important licensing opportunity. Vectura is currently discussing licensing opportunities in these territories with a number of potential partners.

VR632 for asthma/COPD

VR632 is Vectura's second inhaled combination therapy for asthma and COPD, also delivered using Vectura's GyroHaler® technology, and is again licensed to Sandoz in Europe. Vectura licensed the European rights for VR632 to Sandoz in December 2007 in a deal worth up to €15.5m in milestones and development funding, plus royalties on all products sold. Vectura retains rights for the US and other territories. In October 2010, Vectura received a milestone payment (€0.6m) from Sandoz in relation to progress made with the product. The final VR632 development milestone is expected in 2011, with approval milestones following thereafter.

Sandoz has made a significant investment in manufacturing facilities for both VR315 and VR632.

VR506 for asthma

VR506, an inhaled corticosteroid (ICS) in development for the treatment of asthma, is expected to enter the clinic in the first half of 2011. Steroids are the mainstay of prophylactic therapy for asthma, the recommended "preventer" drugs for adults and children, and are often prescribed alongside beta-agonist bronchodilators. This valuable product could form part of a licensing package with one of our other out-licensing respiratory opportunities, or it could be developed as a stand-alone product.

Duohaler® combination products for asthma/COPD  

The Duohaler® device provides advantages over a number of multi-dose DPIs. It has two separate drug reservoirs that feed two individual drug formulations to two separate metering chambers from which the drugs are delivered to the user in the same inhalation, avoiding potential co-formulation issues. Vectura is currently in discussions with potential licensing partners for the Duohaler® and the lead product in this technology.

Specialty products

In addition to the major blockbuster asthma/COPD market, Vectura has a portfolio of specialty products addressing smaller indications. Vectura's strategy is to progress these products no further than Phase II clinical development and to seek licensing partners.

VR496 for cystic fibrosis (CF)

VR496 is in development as an inhaled, locally acting treatment for CF. The active component of VR496 is heparin, a drug that has been approved worldwide as an injected or infused treatment for other indications. Vectura is conducting a Phase II clinical study with VR496 in CF patients, with results expected in early 2011.

A significant literature database describes the multi-modal and complementary pharmacological properties of inhaled heparin that are also relevant to the treatment of asthma and COPD, with mucolytic, anti-inflammatory, bronchodilator and anti-infective activities being particularly relevant. Vectura will seek a partner for the CF and the larger asthma and COPD indications following positive outcomes of the CF proof-of-concept study.

The European Medicines Agency (EMA) and US Food and Drug Administration (FDA) have given VR496 orphan drug designation.

VR040 for Parkinson's disease (PD)

VR040 is an inhaled, systemically acting, rapid-onset treatment for "off" episodes associated with PD. The active ingredient in VR040, apomorphine hydrochloride, is marketed as a solution for injection in Europe and the US. VR040 is Vectura's formulation of apomorphine, delivered by inhalation using Vectura's proprietary DPI technology.

VR040 has orphan drug designation from the European Medicines Agency (EMA). Vectura is using the EMA scientific advice procedure to progress the development of the product. Results from a recent Phase II study are the subject of a separate press release. Vectura intends to license VR040 before the start of Phase III and is in dialogue with interested third parties.

VR461 for fungal-related lung disease  

VR461 is an inhaled anti-fungal that is in a pre-clinical stage of development for the treatment of lung diseases in patients with fungal sensitisation.

VR909 for the prevention of chronic rejection following lung transplant

VR909 is an inhaled, adjunctive, chronic immunosuppression therapy in pre-clinical development as a treatment to delay the onset of chronic rejection and increase survival.

MARKETED PRODUCTS

Vectura has six products marketed by its partners from which it receives revenues; ADVATE® being the main revenue driver.

ADVATE® for haemophilia A

In 2000, Vectura granted worldwide rights to Baxter to use its stabilisation patents in its serum-free recombinant Factor VIII, ADVATE®. ADVATE® is indicated for the treatment of haemophilia A and is marketed worldwide by Baxter, with Vectura receiving royalties on sales.

There is continued strong demand for ADVATE® and Baxter has confirmed that the outlook for its recombinant franchise remains strong and is guiding to mid-single digit growth for the next two years. Growth of ADVATE® sales has continued to exceed our expectations as patients switch from plasma-based and other competing products in Europe and the US. The product has recently been launched in China and we expect to see further growth from increased compliance, establishing prophylaxis as the standard of care and the global penetration of the therapy, as well as new launches in Brazil and Russia.

Extraneal® for peritoneal dialysis

Extraneal® is a peritoneal dialysis solution containing icodextrin, licensed to Baxter in 1996 and marketed by Baxter worldwide. The product has been launched in over 45 countries including, in 2003, the US and Japanese markets. Vectura receives royalties on the sales of Extraneal® in the US, Japan and the rest of the world.

Adept® for prevention of surgical adhesions

Adept® is a 4% icodextrin solution used during surgery to reduce post-surgical adhesions, a frequent and major complication following gynaecological and other abdominal surgery. It has been used for this purpose in Europe since 2000 and in the US since October 2006. Vectura signed a licence deal with Baxter in December 2005 for the manufacture and distribution of Adept®.

Asmasal® and Asmabec® for asthma

Asmasal® and Asmabec® are Clickhaler®-based products. Asmasal® contains salbutamol, a short-acting beta-2 agonist for the quick relief of asthma symptoms. Asmabec® contains beclometasone, an inhaled steroid used as standard preventative therapy for asthma. Asmasal® and Asmabec® are marketed by Recipharm in the UK, France and Ireland. Clickhaler® is Vectura's proprietary reservoir DPI device.

Meptin Clickhaler® for asthma

Otsuka Pharmaceutical, in Japan, has licensed the Clickhaler® technology from Vectura. The device is used to deliver its short-acting beta-2 agonist Meptin® (procaterol) for the quick relief of mild, intermittent asthma symptoms.

Other Clickhaler® opportunities

Vectura continues to explore licensing opportunities for Clickhaler® products in other countries. The products available include budesonide and formoterol. Regulatory approvals for Clickhaler® budesonide have been received in Germany, The Netherlands and New Zealand; and regulatory approvals for Clickhaler® formoterol were received in Denmark, The Netherlands, South Africa and New Zealand. These products are currently not marketed. Vectura is actively exploring new territories for marketing these and other Clickhaler® products. Territories under consideration include China, where it is estimated that over 5% of the population suffers from asthma/COPD.

ENABLING TECHNOLOGY PLATFORMS

Vectura has several important, patent-protected, drug delivery technology platforms. In addition to using these technologies to support its own product development programmes, Vectura licenses them to other pharmaceutical companies where the resulting licence will generate value. Such agreements have already generated significant revenues. Vectura also has a state-of-the-art Good Manufacturing Practice (GMP) facility that has been specifically designed to manufacture inhaled products to support clinical trials.

The development of drugs for inhalation is more complex than for oral delivery and different approaches are required depending on the characteristics of the drug being delivered. Vectura's expertise and technology is in demand for a range of inhalation programmes with various companies, and Vectura expects that some of these, and future collaborations, will lead to future licensing deals.

GyroHaler® and OmniHaler® - multi-unit dose DPI devices

GyroHaler® and OmniHaler® are cost-effective, multi-unit dose DPI devices designed to deliver locally acting drugs to the lung. They are compact and easy to use, with a small number of moulded parts facilitating low manufacturing costs. The devices may contain up to 60 doses and are disposable after use. They have aerosolisation characteristics that are competitive with existing devices and provide excellent drug protection from moisture and light using sealed foil blisters. The GyroHaler® device is used to deliver Vectura's generic products including VR315 and VR632 and is scaled up for commercial launch. OmniHaler® is in late-stage development and will be used to deliver both Vectura's own and third parties' products.

Formulation technologies - including PowderHale®

Vectura's formulation technologies include PowderHale®, micronisation, blending and spray drying. PowderHale® is a patented DPI formulation technology, designed to allow aerosolised drug particles to achieve high lung deposition with low-dose variability. This is achieved by the incorporation of an additional pharmacologically inactive excipient, known as a Force Control Agent (FCA), to the drug formulation. Vectura's formulation technologies and expertise are used to enable our own and third-party products.

FINANCIAL REVIEW

Summary of results

In the six months ended 30 September 2010, revenue grew 15% to £26.3m (2009/10 H1 - £22.8m) with gross profit increasing 17% to £24.9m (2009/10 H1 - £21.2m). The operating loss for the period was reduced by 89%, to £0.5m (2009/10 H1 - £4.6m). Loss before tax narrowed to £0.6m (2009/10 H1 - £3.7m) and loss after tax was £0.2m (2009/10 H1 - £3.3m).

Total revenue

In the six months to 30 September 2010, revenue increased by 15% to £26.3m compared to the six months to 30 September 2009 (£22.8m). Revenue includes income from royalties, product licensing, technology licensing, development fees and device sales.

Royalties

Royalty income increased 9% to £7.4m (2009/10 H1 - £6.8m). ADVATE® contributed 70% of the royalties generated in the period, £5.2m (2009/10 H1 - £4.9m) with Extraneal® contributing 24% and Adept® contributing 6%.

ADVATE® sales increased to over US$1.7bn in 2009, compared to US$1.5bn in 2008 and have continued to increase in the period to 30 September 2010. The annual increase in ADVATE® royalties in the period to 30 September 2010 is 6%, with the underlying product sales increasing by 8% and foreign exchange rates accounting for a 2% reduction. Vectura receives an average royalty of less than 1% at these high levels of sales. Extraneal® royalties were in line with the period ended 30 September 2009.

Product licensing

Product licensing revenues in the period were £4.5m (2009/10 H1 - £7.1m). These include the $7.5m (£4.5m) milestone received from Novartis in 2009, recognised over a 21-month period, this being the duration of the NVA237 clinical trial. Product licensing revenues also include the $9.5m (£6.2m) milestone received from Sandoz for VR315US, which is being recognised over a 14-month period, and the $7.5m (£5.1m) milestone received from Novartis for QVA149, which is recognised over a 21-month period. A €0.6m (£0.5m) VR632 milestone was received in October 2010 from Sandoz and this will be recognised in the second half of the year.

Technology licensing

Technology licensing revenues of £11m (2009/10 H1 - £5.1m) include a £10m upfront payment from GSK under a non-exclusive agreement to license certain of Vectura's dry powder formulation patents.

Pharmaceutical Development Services

Pharmaceutical Development Services (PDS) revenues were above expectations at £3.2m (2009/10 - £3.6m) through higher demand for these services from both our current licensing partners and potential new partners for whom we are undertaking feasibility work. We expect these revenues to decline in the second half of the year as we complete our work on some partnered programmes. Future PDS revenues will depend on the extent and nature of feasibility studies and new licensing deals as the development of inhalation products is a very specialist area, with partners frequently requiring Vectura's involvement in the continuing development of a product.

Device sales

Device sales revenue of £0.2m (2009/10 H1 - £0.2m; 2009/10 FY - £0.7m) was in line with the previous period. We expect sales in the second half of this financial year to be ahead of H2 2009/10 following the receipt of our first commercial orders for the GyroHaler® device.

Gross profit

The gross profit in the six months to 30 September 2010 was £24.9m, a 17% increase on the same period in the prior year (£21.2m). Gross profit in the period to 30 September 2010 represents 95% of revenue (2009/10 H1 - 93%).

Research and development expenses and restructuring costs

Total investment in research and development was £17.5m, a 5% decrease on the same period in the year prior (2009/10 H1 - £18.5m). The expenditure includes £2.5m that relates to the estimated costs of restructuring our development operations, which includes closure of the Nottingham facility and a reduction in the number of R&D employees. It is estimated that the restructuring will result in a £6m annual reduction in our infrastructure costs.

Other administrative expenses

Other administrative expenses for the period were £1.7m (2009/10 H1 - £1.4m); they are expected to remain consistent in the second half of this financial year.

Loss after taxation and loss per share

The loss for the period after taxation was £0.2m (2009/10 H1 - £3.3m), giving a loss per ordinary share of 0.1p (2009/10 H1 - 1.0p).

Non-current assets

Non-current assets were £89.7m, compared with £95.0m at 31 March 2010, and include goodwill (£49.6m), intangible assets (£36.3m), and property, plant and equipment (£3.3m). The reduction in non-current assets of £5.3m is due to the amortisation of intangible assets during the period.

Deferred income

Deferred income relates to milestones received in cash but not yet recognised as revenue. The £9.5m (31 March 2010 - £2.7m) to be recognised as revenue in later periods comprises £4.3m for VR315, £1.3m for NVA237 and £3.9m for QVA149.

Cash flow

Cash and cash equivalents increased by £13.8m in the period. This increase is due to the £21.3m of milestones received (Sandoz, £6.2m; Novartis, £5.1m; GSK, £10m), together with a net £4m tax receipt. At 30 September 2010, Vectura had cash and cash equivalents of £77.9m (31 March 2010 - £64.1m), which is equivalent to 24p per share in issue.

Foreign exchange rates

The following foreign exchange rates were used during the period:

Condensed consolidated statement of comprehensive income

for the six months ended 30 September 2010

Condensed consolidated balance sheet

at 30 September 2010

Condensed consolidated cash flow statement

for the six months ended 30 September 2010

Condensed consolidated statement of changes in equity

for the six months ended 30 September 2010 (unaudited)

Notes to the condensed set of financial statements

1. Basis of preparation of the condensed half yearly financial statements

These condensed half yearly financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and International Accounting Standard 34 - Interim Financial Reporting, and do not include all the statements required for full annual financial statements. The same accounting policies, presentation and methods of computation, have been followed in the interim financial statements as applied in the latest audited financial statements of Vectura Group plc for the year ended 31 March 2010, with the exception of International Financial Reporting Standard 3 - Business Combinations (revised 2008) and International Accounting Standard 27 - Consolidated and Separate Financial Statements (revised 2008) which have been adopted in the current financial year. The adoption of these standards has not had any material impact on the Group's financial statements.

These condensed half yearly financial statements are unaudited and do not constitute statutory accounts of the Group as defined in section 434 of the Companies Act 2006. The auditors, Deloitte LLP, have carried out a review of the financial information in accordance with the guidance contained in International Standard on Review Engagements (UK and Ireland) 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, and their review report is set out at the end of this report.

The financial information for the year ended 31 March 2010 has been extracted from the Group's published financial statements for that year, which contain an unqualified audit report; does not draw attention to any matters of emphasis, and did not contain statements under section 498(2) and 498(3) of the Companies Act 2006 and which have been filed with the Registrar of Companies.

Risks and uncertainties

The key business risks facing Vectura on a standalone basis remain unchanged from those set out on page 23 in the Annual Report and Accounts for the year ended 31 March 2010. There are a number of potential risks and uncertainties that could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. Particular risks include industry risk, clinical and regulatory risk, competition and intellectual property risk, economic risk and financial risk (cash flow, credit, liquidity and price).

Going concern

Although the current economic conditions may place pressures on customers and suppliers that may be facing 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 than other industries.

The Group has £77.9m of cash and cash equivalents as at 30 September 2010. 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 making enquiries, 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 interim report and accounts.

2. Revenue

For management purposes the Group is currently organised into one business segment, which is the development and commercialisation of pharmaceutical products. Since this is the only primary reporting segment, no further information has been shown.

All revenue and losses before taxation originate in the United Kingdom.

Interest income is disclosed separately in the income statement and has been excluded from this note.

3. Restructuring charge

The £2.5m restructuring charge relates to the estimated costs of restructuring our research and development operations, which includes closure of the Nottingham facility and a reduction in the number of R&D employees.

4. Investment income and finance (losses)/gains

5. Taxation

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

8. Trade and other payables

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. Income from milestone receipts under these licensing agreements is therefore deferred as follows:

10. Share capital

11. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. There have been no material changes in the type of related party transactions described in the last annual report.

DIRECTORS' RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

a) the condensed set of financial statements has been prepared in accordance with IAS 34 - Interim Financial Reporting;

b) the condensed set of financial statements, which has been prepared in accordance with the applicable set of accounting standards, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer, or the undertakings included in the consolidation as a whole as required by the Disclosure and Transparency Rules (DTR) 4.2.4R;

c) the interim management report includes a fair review of the information required by the DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

d) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

By order of the Board,

Anne Hyland

Director

15 November 2010

INDEPENDENT REVIEW REPORT TO VECTURA GROUP PLC

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2010, which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated cash flow statement, the condensed consolidated statement of changes in equity, and related notes 1 to 11. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting, as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditors

Cambridge, United Kingdom

15 November 2010