Half-yearly Report

Verona Pharma plc ("Verona Pharma" or the "Company") Interim results for the six months ended 30 June 2014 Well financed to support further development 11 September 2014, Cardiff - Verona Pharma plc (AIM: VRP), the drug developmentcompany focused on first-in-class medicines to treat respiratory diseases,today announces its interim results for the six months ended 30 June 2014. OPERATIONAL HIGHLIGHTS * Development of a novel, commercially scalable, nebulized formulation of RPL554, our lead pipeline candidate. RPL554 is a novel PDE3/PDE4 inhibitor for the treatment of respiratory diseases, including COPD and asthma. * Studies have demonstrated very attractive properties compared to previous formulation. * Commenced preparations for further clinical studies of RPL554 to demonstrate the safety and efficacy of the new formulation in the treatment of COPD patients. * Data presented on the synergistic bronchodilator effects of RPL554 when used in combination with anti-muscarinic agents and beta2-agonists. FINANCIAL HIGHLIGHTS * Completed a £14.02m (gross) share placing, subscription and open offer in March 2014. All existing institutional shareholders participated together with a number of new healthcare-focused investors. * Loss after tax for the period of £1.40 million (2013: £1.02 million) or 0.19 pence (2013: 0.31 pence) per ordinary share. * Net cash outflows from operating activities during the six month period of £1.47m (2013: £1.29m), with cash and cash equivalents as at 30 June 2014 of £12.10 million (2013: £0.93 million). Dr. Jan-Anders Karlsson, CEO of Verona Pharma commented: "We are pleased withthe progress made during the period in our lead drug development programme,RPL554, and the opportunities for its further development andcommercialisation. The financing raised in March 2014 enables us to advance thenew commercially-scalable proprietary formulation for the product, throughclinical studies up to the start of Phase 2b, which is expected in 2016. Ourinitial focus remains to develop the drug for hospital use in the treatment ofacute exacerbations of COPD, where reducing re-admission rates is an emergingpharmacoeconomic impetus. "The Board believes that products combining RPL554 with other classes ofbronchodilators are potentially highly attractive for the respiratory market.We also plan to expand the use of RPL554 beyond COPD. As we have previouslystated, the Company recognises that the right development partner could bringsignificant value to the development of RPL554 for chronic maintenancetreatment in COPD and perhaps asthma and therefore continues to be involved inbusiness development discussions around the RPL554 programme. However, theCompany intends to partner its drug candidates only when it can extract acommercially attractive return for the Company and its Shareholders." For further information please contact: Verona Pharma plc Tel: +44 (0) 20 7863 3300 Jan-Anders Karlsson, CEO N+1 Singer Tel: +44 (0)20 7496 3000 Aubrey Powell / Jen Boorer FTI Consulting Tel: +44 (0)20 3727 1000 Julia Phillips / Simon Conway Notes to Editors About Verona Pharma plc Verona Pharma is developing first-in-class drugs to treat respiratory disease,such as COPD and asthma. The Company currently has two drug programmes, one ofwhich is in Phase II trials for two diseases. The lead programme, RPL554, is aninnovative dual phosphodiesterase (PDE) 3 and 4 inhibitor with bothbronchodilator and anti-inflammatory properties. In its second programme,Verona Pharma is investigating novel anti-inflammatory molecules, called NAIPs,for a wide range of respiratory and inflammatory diseases. CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S JOINT STATEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2014 INTRODUCTION Verona Pharma is a biotech company focused on the development of high value,"first-in-class" drugs for the treatment of respiratory diseases. The Company'slead medicine, RPL554, is an innovative inhaled dual phosphodiesterase PDE3/PDE4 inhibitor with both bronchodilator and anti-inflammatory properties forthe treatment of patients with COPD and asthma. We are initially developingRPL554 as a hospital treatment for COPD patients with acute exacerbations.Despite the many recently introduced novel maintenance treatments, patientsfrequently experience breakthrough symptoms and have to be hospitalized.Perhaps somewhat surprisingly, old short-acting nebulized bronchodilators arestill used on the wards and there is clearly a need for novel, effectivetreatments in this acute hospital setting. We believe RPL554 can become anattractive additional therapy to provide extra clinical benefit in patientswith acute exacerbations of COPD and asthma. There is little competition in theform of novel classes of bronchodilator drugs for these acutely ill patientsand the Board therefore believes that these are very attractive commercialmarkets for Verona Pharma. We believe there is also an opportunity to develop RPL554 as maintenancetherapy for mild to moderate COPD and asthma patients, obviously a much largeraddressable market. We have previously demonstrated the ability to formulateRPL554 as a dry-powder or as a solution suitable for administration in a DPI orpMDI device (a pre-requisite for orally inhaled drugs for this patient segment)and together with a suitable partner we can undertake further clinicaldevelopment for this market. With the new funding of £14m (gross) raised in March 2014, the Company is nowwell positioned to continue to implement the strategy to accelerate shareholdervalue creation that was announced at the end of last year. A new nebulizedformulation of RPL554 that is suitable for commercial use has now beendeveloped. This will be used in the initial development of RPL554 as anebulised treatment for hospitalized COPD patients and we anticipate that thecombined bronchodilator and anti-inflammatory properties of RPL554 should bebeneficial to these acutely ill patients. Interestingly, an increasing awareness of the problem of COPD patientsreturning for hospital treatment within 30 days of discharge has triggered astrong interest from industry and regulators in optimizing treatment of COPDpatients at discharge from hospitals and beyond. This provides a uniqueopportunity for RPL554 that we will explore in further Phase 2 clinicalstudies. We are also investigating RPL554 in combination products with ananti-muscarinic drug, such as glycopyrrolate, a class of drugs that is widelyused in treating COPD patients. We have been strongly encouraged by our datashowing a synergistic effect of RPL554 in combination with anti-muscarinicdrugs in isolated human airway smooth muscle. Such a combination product couldhave significant advantages over the many dual LABA/ LAMA bronchodilatorinhalers available to COPD patients and could be used both in acute hospitalcare and in long-term maintenance treatment. The Board believes that evolving the development strategy for RPL554 to includecombination products and new indications, together with strengthening the IPcoverage around the programme adds significant value to the Company. It shouldaccelerate access to multi-billion dollar commercial markets and increase theflexibility in the timing for achieving attractive commercial partnerships andprolong patent protection for the emerging franchise. RPL554 RPL554 is a novel inhaled dual PDE3 / PDE4 inhibitor. RPL554 is currently beingdeveloped as a potential "first-in-class" treatment for patients with chronicrespiratory diseases such as COPD and asthma based on its unique and favourablebronchodilator and anti-inflammatory effects. RPL554 has successfully passed a number of early clinical Phase 1 and 2studies. These single and multiple dose studies demonstrate that RPL554, wheninhaled across a range of doses, is an effective bronchodilator in patientswith COPD or asthma. RPL554 has a rapid onset of action and the magnitude ofthe bronchodilator effect seems to be at least as profound as that of othercommonly used bronchodilator drugs. RPL554 has also been demonstrated to have potent anti-inflammatory effect in aclinical trial in human subjects. This property is unique to RPL554 and notshown by other bronchodilator drugs of the beta2 agonists or anti-muscarinicclasses. RPL554 showed a broad inhibitory effect on inflammatory cells in theairways, including a significant reduction in the number of neutrophils, a celltype thought to be involved in COPD. This effect sets RPL554 apart fromsteroids as this class of drugs seem to have little effect on neutrophils andincreasingly the use of inhaled steroids in COPD patients is being questionedas they seem to have limited beneficial effects. Therefore, RPL554 as acombined bronchodilator and anti-inflammatory agent offers unique benefits toCOPD patients, both as a novel type of bronchodilator, and as ananti-inflammatory compound offering additional benefits over and above those ofsteroids. A novel nebulized formulation of RPL554 has been developed, suitable forcommercial use. A substantive pre-clinical work package is being conducted toswitch to this new formulation in future clinical trials. This next series ofclinical trials will set out to confirm the safety and efficacy of the newformulation of RPL554 and study its effect when given to COPD patients togetherwith other bronchodilators, in preparation for the start of Phase 2b. RPL554 is initially being developed for hospital use, as a treatment for COPDpatients who have been hospitalized for an acute exacerbation. The objective isto add RPL554 to treatment with standard bronchodilators and to achieve animproved lung function and symptom relief and therefore reduce hospital stay.Interestingly, such an effect would be highly beneficial also to reduce thehigh re-admission rate of COPD patients 30 days after discharge from a hospitaltreatment. The increasing awareness of the high cost of these "treatmentfailures" has triggered multiple treatment improvement plans, but so far withlittle success. This could become a major commercial opportunity for RPL554. The synergistic interaction with anti-muscarinic drugs has been repeatedlydemonstrated in a series of pre-clinical studies in human airways. RPL554 wouldtherefore be a particularly promising component of a combination therapy withan anti-muscarinic drug like glycopyrrolate. Verona Pharma has started work onco-formulating these compounds for inhaled use both in acute hospital settingsand for chronic maintenance therapy. Finally, it is also planned to examine RPL554 in further respiratory diseasessuch as acute asthma in the A&E unit and in other pulmonary disorders such ascystic fibrosis and bronchiectasis. VRP700 Cough is the most common symptom of a number of lung diseases. Chronic cough ofmore than eight weeks duration can be a debilitating symptom when associatedwith severe lung diseases such as interstitial lung disease, includingidiopathic pulmonary fibrosis (IPF), lung cancer, cystic fibrosis, asthma andCOPD. Unfortunately, currently available cough remedies are recognised as beingrelatively ineffective, often with significant side effects. To the best of ourknowledge, there is no novel and effective inhaled therapy for treating thesevere, intractable cough associated with these lung diseases in clinicaldevelopment. A clinical trial of VRP700 at the University of Florence, Italy, showed a veryeffective reduction of chronic cough in a small group of patients with variousforms of severe lung disease. A second, randomized, double-blind,placebo-controlled clinical study with single-dose administration of VRP700 wascompleted in patients with IPF at the University of Manchester, UK. This is thefirst study objectively measuring spontaneous cough in IPF patients. Coughswere not significantly reduced in this study. It is possible that VRP700 couldbe effective in chronic cough caused by a different lung condition, or possiblyby more frequent dosing of the compound over a longer treatment period. Whilstwe will not undertake any further in-house development of VRP700, we areexploring opportunities to realise value from this asset. NAIPS The Company continued to support the recent patent filings in the NAIPSprogramme as a basis for securing ownership and creating value from thisearlier stage research program in the longer term. FINANCIALS The loss from operations after tax for the six month period ended 30 June 2014(the "Period") was £1.40 million (2013: £1.02 million) or 0.19 pence (2013:0.31 pence) per ordinary share. The loss includes a non-cash share-basedpayment charge of £0.06 million (2013: £0.03 million) and a researchdevelopment tax credit of £Nil (2013: £0.29 million). Research and development expenditure, which was expensed as incurred, amountedto £0.87 million (2013: £0.80 million). Programme expenditures incurred duringthe Period were as follows: RPL554 programme amounted to £0.57 million (2013: £0.50 million), VRP700 programme amounted to £0.30 million (2013: £0.30million). Expenditures in RPL554 increased by £0.07 million, with costs of preparing thenew formulation and for clinical studies of RPL554 in the current period beingslightly higher than the cost in the prior period. Administrative expenses for the six months period were £0.53 million (2013: £0.51 million). The increase of £0.02 million over the prior period wasprimarily due to an increase in share-based payments. On 24 March 2014, the Company announced that it had raised £14.02 million(gross) from a placing, subscription and open offer. These funds will be usedprimarily to support the development of RPL554 in severe COPD as well as forcorporate and general administrative expenditures. As at 30 June 2014, the Company had approximately £12.10 million (2013: £0.93million) in cash and cash equivalents. OUTLOOK The new financing raised in March 2014 enables us to advance the new commercialformulation of RPL554 through clinical studies up to the start of Phase 2bwhich is expected in 2016. Additional pre-clinical and manufacturing work willbe performed to satisfy certain regulatory guidelines. In parallel, we willcontinue to strengthen the IP coverage to provide comprehensive patentprotection for RPL554 in its various forms with the intent to expand the use ofRPL554 in new indications and in combination products. Our initial focus to develop the nebulized formulation of RPL554 for hospitaluse is motivated in part by the increasing concern and intent to tackle thehigh rates of 30-day hospital re-admissions for COPD. This has recently gainedimpetus as from October 2014 the US Government will implement a new policy of penalizing hospitals with high 30-day re-admission rates for select conditions,including COPD. In our clinical studies in hospitalized patients, we willexplore the possibility that treatment with RPL554 will reduce suchre-admission rates and so demonstrate a clear health-economic benefit oftreatment with the drug. The Board believes that products combining RPL554 with other classes ofbronchodilators are potentially highly attractive products for the respiratorymarket and expand the RPL554 product franchise. Indeed, while there has beensignificant interest in the novel dual bronchodilator products containing aLABA and a LAMA recently introduced as chronic treatments for COPD, acombination between RPL554 and, for example, the LAMA glycopyrrolate, wouldcontain two different bronchodilator components, with the added benefit thatRPL554 would also provide an anti-inflammatory component to create in essence atriple-combination product. We further plan to expand the use of RPL554 beyond COPD, and explore thepossible use of nebulized RPL554 to treat acute asthma attacks in the A&E unit.When used as an addition to standard treatment, it is expected that RPL554would rapidly improve lung function, reduce symptoms and reduce the number ofhospital admissions from the A&E unit. Again, a clear health-economics benefitfrom this treatment. The Company recognises that an experienced and resourceful commercial partnercould bring significant value to the development of RPL554 for chronicmaintenance treatment in COPD and perhaps asthma and therefore continues to beinvolved in business development discussions around the RPL554 programme.However, the Company intends to partner its drug candidates only when it canextract a commercially attractive return for the Company and its Shareholders. In summary, the Company continues to operate with a strong focus and financialdiscipline. We remain very positive about progress to date in our lead drugdevelopment programme and the opportunities for its further development andcommercialisation. Professor Clive P. Page Dr. Jan-Anders Karlsson Chairman Chief Executive Officer GROUP STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 30 JUNE 2014 6 months ended 6 months ended Year ended 30 June 2014 30 June 2013 31 December 2013 Notes (unaudited) (unaudited) (audited) £ £ £ Revenue - - - Cost of sales - - - Gross profit/(loss) - - - Research and development (865,646) (800,036) (1,656,490) Administration expenses (525,620) (508,866) (1,160,294) Operating loss (1,391,266) (1,308,902) (2,816,784) Finance revenue 3,220 1,875 2,632 Loss before taxation (1,388,046) (1,307,027) (2,814,152) Taxation - credit 2 - 289,400 289,400 Total comprehensive loss (1,388,046) (1,017,627) (2,524,752)for the period Loss per ordinary share - 3 (0.19)p (0.31)p (0.74)pbasic and diluted GROUP STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2014 As at As at As at 30 June 2014 30 June 2013 31 December 2013 (unaudited) (unaudited) (audited) £ £ £ ASSETS Non current assets Plant and equipment 23,505 33,519 27,647 Intangible assets - patents 347,463 160,321 207,144 Goodwill 1,469,112 1,469,112 1,469,112 1,840,080 1,662,952 1,703,903 Current assets Trade and other receivables 324,093 208,070 249,639 Cash and cash equivalents 12,099,601 930,753 603,791 12,423,694 1,138,823 853,430 Total assets 14,263,774 2,801,775 2,557,333 EQUITY AND LIABILITIES Capital and reservesattributable to equityholders Share capital 1,009,923 336,175 372,598 Share premium 26,669,298 13,434,648 14,184,412 Share-based payments 653,931 494,520 640,579reserve Retained losses (14,474,741) (11,638,056) (13,129,576) Total equity 13,858,411 2,627,287 2,068,013 Current liabilities Trade and other payables 405,363 174,488 489,320 Total liabilities 405,363 174,488 489,320 Total equity and 14,263,774 2,801,775 2,557,333liabilities GROUP STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 30 JUNE 2014 6 months 6 months Year ended ended ended 30 June 2014 30 June 2013 31 December 2013 (unaudited) (unaudited) (audited) £ £ £ Net cash outflow from operating (1,469,753) (1,291,199) (2,343,944)activities Cash inflow from taxation - 289,400 289,400 Cash flow from investing activities Interest received 3,220 1,827 2,642 Purchase of plant and equipment (1,507) (1,197) (2,033) Payment for patents (158,361) (45,204) (105,587) Net cash outflow from investing (156,648) (44,574) (104,978)activities Cash flow from financing activities Financing costs - - - Net proceeds from issue of shares 13,122,211 1,016,256 1,802,443 Net cash inflow from financing 13,122,211 1,016,256 1,802,443activities Net increase/(decrease) in cash and 11,495,810 (30,117) (357,079)cash equivalents Cash and cash equivalents at the 603,791 960,870 960,870beginning of the period Cash and cash equivalents at the end 12,099,601 930,753 603,791of the period Reconciliation of operating loss tonet cash outflow from operatingactivities Operating loss (1,391,266) (1,308,902) (2,816,784) Share-based payments charge 56,233 25,186 186,850 (Increase)/decrease in trade and (74,454) 29 (41,598)other receivables (Decrease)/increase in trade and (83,957) (24,837) 289,995other payables Depreciation of plant & equipment 5,649 7,162 13,870 Amortisation of intangible assets 18,042 10,163 23,723 Net cash outflow from operating (1,469,753) (1,291,199) (2,434,944)activities GROUP STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 30 JUNE 2014 Share Share Option Retained capital premium reserve losses Total £ £ £ £ £ Balance at 1 January 372,598 14,184,412 640,579 (13,129,576) 2,068,0132014 Total comprehensive loss - - - (1,388,046) (1,388,046)for the period Issue of shares 372,598 14,184,412 640,579 (14,517,622) 679,967 Share issue costs 637,325 13,383,821 - - 14,021,146 - (898,935) - - (898,935) Share-based payments - - 56,233 - 56,233 Transfer of previously - - (42,881) 42,881 - expensed share-basedpayment charge upon lapse ofoptions Balance at 30 June 2014 1,009,923 26,669,298 653,931 (14,474,741) 13,858,411(unaudited) Balance at 1 January 307,203 12,447,364 470,577 (10,621,672) 2,603,4722013 Total comprehensive loss - - - (1,017,627) (1,017,627)for the period Issue of shares 307,203 12,447,364 470,577 (11,639,299) 1,585,845 Share issue costs 28,972 1,129,889 - - 1,158,861 - (142,605) - - (142,605) Share-based payments - - 25,186 - 25,186 Transfer of previously - - (1,243) 1,243 - expensed share-basedpayment charge upon lapse ofoptions Balance at 30 June 2013 336,175 13,434,648 494,520 (11,638,056) 2,627,287(unaudited) Balance at 1 January 307,203 12,447,364 470,577 (10,621,672) 2,603,4722013 Total comprehensive loss - - - (2,524,752) (2,524,752)for the year Issue of shares 307,203 12,447,364 470,577 (13,146,424) 78,720 Share issue costs 65,395 1,894,767 - - 1,960,162 - (157,719) - - (157,719) Share-based payments - - 186,850 - 186,850 Transfer of previously - - (16,848) 16,848 - expensed share-basedpayment charge upon lapse ofoptions Balance at 31 December 372,598 14,184,412 640,579 (13,129,576) 2,068,0132013 (audited) NOTES TO THE FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED 30 JUNE 2014 1. Publication of non-statutory accounts i) This interim financial information for the six months ended 30 June 2014 isunaudited and does not constitute statutory accounts within the meaning ofSection 434 of the Companies Act 2006. It was approved by the board ofdirectors on 10 September 2014. The figures for the year ended 31 December 2013have been extracted from the statutory accounts which have been reported on bythe Company's auditor. The financial statements for the year ended 31 December2013 have been delivered to the Registrar of Companies and the auditor's reporton those financial statements was unqualified and did not contain a statementmade under section 498 (2) or section 498 (3) of the Companies Act 2006. ii) Accounting policies The interim financial statements for the six months ended 30 June 2014 includesthe results of Verona Pharma plc and its wholly-owned subsidiary RhinopharmaLimited. The unaudited results for the period have been prepared on the basisof accounting policies adopted in the audited accounts for the year ended 31December 2013 and expected to be adopted in the financial year ending 31December 2014. In the opinion of the Directors, the interim financial information for theperiod present fairly the financial position and the results from operationsand cash flows for the period. No new IFRS standards, amendments or interpretations became effective in thesix months to the 30 June 2014 which had a material effect on this interimfinancial information. iii) The directors do not recommend the payment of a dividend (period to 30June 2013 - £Nil; year ended 31 December 2013 - £Nil). iv) A copy of the interim report is available on the Company's websitewww.veronapharma.com. 2. Taxation The £289,400 research and development tax credit recognised in 2013 wasreceived during the six months period ended 30 June 2013. The tax credit is acash refundable tax credit of 11% on the enhanced qualifying research anddevelopment expenditures made by the Company in fiscal year 2012. 3. Loss per share i) The basic loss per share of 0.19p (30 June 2013: loss of 0.31p; 31 December2013: loss of 0.74p) for the Group is calculated by dividing the loss for theperiod by the weighted average number of ordinary shares in issue of721,190,685 (30 June 2013: 329,133,121; 31 December 2013: 341,564,623). ii) The diluted loss per share has not been presented since the Company's stockoptions are anti-dilutive. 4. Comparatives The comparatives include audited figures for the year ended 31 December 2013and unaudited figures for the six months ended 30 June 2013.