22nd Sep 2005 07:01
Vernalis PLC22 September 2005 News release 22 September 2005 Vernalis Plc: Interim Results for the six months ended 30 June 2005 Vernalis plc (LSE: VER, Nasdaq: VNLS) today announces its interim results forthe six months ended 30 June 2005. The events over the past twelve months have transformed Vernalis. The Companyhas a marketed product, frovatriptan, and a broad pipeline of products indevelopment, with additional clinical data expected during the next six monthsaimed at supporting the expansion of the label of frovatriptan into short termprophylaxis of menstrually related migraine. Vernalis is establishing acommercial presence in the United States which will co-promote frovatriptan fromJanuary 2006, and is in the process of seeking additional products for thissales force to market. Highlights Financial • Revenue increased to £5.9 million (2004: £5.1 million)• Operating loss increased to £19.4 million (2004: £12.9 million) after £6.4 million goodwill impairment as a result of first time application of IFRS• Cash resources at 30 June 2005 of £49.9 million (30 June 2004: £11.0 million)• Fund-raising completed in March 2005 raised £28.4 million net of expenses Corporate Development • Acquisition of rights to oncology target Pin1 from Pintex Pharmaceuticals Inc. in March 2005• Acquisition of Ionix Pharmaceuticals Limited for £12.5 million, completed in July 2005 Frovatriptan • Re-launched in March 2005 by Endo Pharmaceuticals with expanded sales force and new marketing strategy focused on long duration of action o Benefits of new marketing campaign evidenced by increased awareness of the product among targeted neurologists• Exercised option to co-promote frovatriptan alongside Endo Pharmaceuticals• Positive interim Phase III safety data with the number of patients remaining on the trial exceeding expectations• Patient enrolment on Phase III efficacy trial complete and, if the studies are positive, menstrually related migraine (MRM) filing expected in 1H 2006 Product Development Portfolio • V10153 - Commenced a Phase II trial in acute ischaemic stroke. The aim of the trial is to determine whether V10153 can be clinically effective in patients up to 9 hours after the occurrence of a stroke• V1003 (formerly known as IX-1003) - Commenced a Phase II trial in acute post-operative pain• V2006 - Suite of Phase I trials now complete with Vernalis' partner, Biogen Idec, responsible for moving forward into Phase II trials• V24343 - Progressed from research into pre-clinical development. This potent and selective cannabinoid receptor antagonist programme is a potential treatment for obesity and related disorders• MMPI - Phase I started by Serono• V140 - Development discontinued following a portfolio review Simon Sturge, CEO commented, " I am pleased to report further significantachievement against our strategic objectives in this period through the growthof our commercial operation in the US and advancement of our pipeline. We nowretain co-promote options in the US for three products and are firmly focused onseeking additional in-licensing opportunities." ----ends---- Simon Sturge and Tony Weir, CEO and CFO of Vernalis respectively, will todayhost an analyst / investor presentation and conference call at 9:00 am BST todiscuss the interim results. This may be accessed by dialling: +44 1452 561 263, and quoting 'Vernalisconference call.' A replay facility will be available for 7 days by dialling: +44 1452 550 000,with the access code: 9472487#. Enquiries: Vernalis plcSimon Sturge, Chief Executive OfficerTony Weir, Chief Financial OfficerJulia Wilson, Head of Corporate Communications+44 (0)118 977 3133 Brunswick Group (for analyst, financial media enquiries)Jon Coles; Wendel Verbeek; Laure Korenian-Chabert+44 (0)20 7404 5959 About Vernalis Vernalis is a UK-based biotechnology company with a marketed migraine product,frovatriptan, and a development pipeline focused on central nervous systemdisorders and oncology. The company has five products in clinical developmentand collaborations with leading, global pharmaceutical companies includingNovartis, Biogen Idec and Serono. Vernalis is establishing a US commercialoperation to co-promote frovatriptan alongside its North American licensingpartner, Endo Pharmaceuticals, propelling the company towards its goal ofbecoming a sustainable, self-funding, R&D-driven biotechnology company. Forfurther information about Vernalis, please visit www.vernalis.com Safe Harbour statement: this news release may contain forward-looking statementsthat reflect the Company's current expectations regarding future events.Forward-looking statements involve risks and uncertainties. Actual events coulddiffer materially from those projected herein and depend on a number of factorsincluding the success of the Company's research strategies, the applicability ofthe discoveries made therein, the successful and timely completion of clinicalstudies, the uncertainties related to the regulatory process, the successfulintegration of completed mergers and acquisitions and achievement of expectedsynergies from such transactions, and the ability of the Company to identify andconsummate suitable strategic and business combination transactions. 1. Strategy and operational review Vernalis is one of Europe's leading biotechnology companies with a marketedproduct, frovatriptan and a novel portfolio of discovery programmes and productsin clinical development, focused particularly in the areas of CNS disorders andoncology. A twenty-five person strong sales force is expected to be in place byJanuary 2006 to co-promote frovatriptan in the US, and Vernalis is focused onadding additional products to exploit this US commercial organisation. (i) Product Portfolio Frovatriptan • Background Frovatriptan is a selective 5-HT1B/1D receptor agonist approved as an acute oraltreatment for migraine headache and its associated symptoms. It is one of aclass of prescription drugs called triptans, a number of which are alreadyapproved for this acute indication. Frovatriptan is distinguished from othertriptans by its long half life and is also being developed for the intermittent,short-term prevention of menstrually related migraine. Frovatriptan is marketed in the US by Endo Pharmaceuticals, which hasre-launched the product during 2005 with an expanded sales force and a newmarketing strategy focusing on the benefits of frovatriptan's long duration ofaction. These messages are beginning to resonate with the targeted neurologists,evidenced by an increased awareness of frovatriptan. In Europe, frovatriptan is marketed in nine countries by Menarini. The drug wasapproved throughout the then 15 member states via the mutual recognitionprocedure in January 2001, with France acting as the reference member state.Menarini launched frovatriptan in the first European market, Germany, duringNovember 2002. Frovatriptan has also been launched in The Republic of Ireland,the United Kingdom, Austria, The Netherlands, Italy, Spain and Greece. Saleshave been growing steadily and in Germany frovatriptan has achieved anapproximate 11 per cent share of the overall triptan market. Frovatriptan waslaunched In Italy, Menarini's home territory, in September 2004 and has alreadyachieved a 10 per cent market share. A second round of mutual recognition was completed successfully by Menarini inDecember 2004 to include the EU accession countries as well as Icelandand Norway. Frovatriptan has also recently been approved in Switzerland,Bulgaria and Romania and five Central American countries, and is expected to belaunched in some of these during the remainder of 2005. • Seeking a distinct label for frovatriptan for prophylaxis of Menstrually Related Migraine Vernalis is currently conducting further studies to develop frovatriptan forintermittent, short-term prevention of MRM, a form of migraine suffered by over60 per cent of female migraineurs. In the United States this representsapproximately 12 million women. None of the triptan class of drugs is currentlyapproved for this indication and frovatriptan's long half-life (approximately 26hours) suggests that it might be an appropriate treatment for this novelapplication. In October 2002, positive trial data were first presented from a study of morethan 500 menstrual migraine sufferers in the US, suggesting that short-termprophylaxis with frovatriptan was effective in preventing migraine headachestriggered by menstruation. The data demonstrated a highly statisticallysignificant improvement in the numbers of patients who were headache-free duringtheir menstrual cycles for both once and twice daily dose regimens offrovatriptan compared to placebo (p < 0.0001). These data were published in fullby a leading journal, Neurology (2004, 63: 261-269). Two further trials, a safety trial and a confirmatory efficacy trial, arerequired to complete the data package for a supplemental New Drug Approvalapplication in the United States, which, if successful, may permit frovatriptanto be marketed as an intermittent, short-term prophylaxis for MRM. Safety Trial: In this study, which investigated the higher dose regimen from theinitial efficacy study, female patients took frovatriptan for six days eachmonth (2 x 2.5 mg twice daily on day 1, and 2.5 mg twice daily for five days)covering their menstrual cycles. Six-month interim safety data were presented atthe 47th Annual Scientific Meeting of the American Headache Society which tookplace in Philadelphia in June 2005. These data indicated that frovatriptan iswell-tolerated when used as a six-day dosing regimen for up to six menstrualperiods as preventive therapy for MRM. All patients have now completed the studywith more than 300 patients receiving 12 months of treatment, exceeding thestudy objective of treating 100 patients for 12 menstrual cycles. Confirmatory Efficacy Trial: This placebo-controlled, parallel group efficacystudy achieved its recruitment target in August 2005. Over 550 patients who havebeen difficult to treat using acute therapies have been included in the study,which is investigating the same regimens that were found to be efficacious inthe previous trial. Patients are treated for six days each month covering theirmenstrual cycle starting two days before the expected onset of headache and arerandomised to placebo, once daily dosing with frovatriptan and twice dailydosing with frovatriptan for three menstrual cycles. Results from the study are expected in 1H 2006, later than Vernalis' originalguidance of 2H 2005 due to slightly slower than expected recruitment into thetrial. However, provided the positive initial results are confirmed, regulatorysubmissions in the US and Europe remain on track for 1H 2006. Pending ananticipated FDA approval of the menstrually related migraine indication, due 12months after regulatory submission, Endo has committed to a milestone payment ofUS $40 million to Vernalis. V10153 V10153 is a novel thrombolytic protein which is being developed for thetreatment of acute ischaemic stroke. Current therapeutic options for strokesufferers are limited, as only one agent, recombinant tissue plasminogenactivator (rtPA), is approved for use in the acute setting and treatment has tobe administered within the first three hours after a stroke has occurred, whichlimits its use significantly. A multi-centre Phase II clinical trial of V10153commenced in August 2005 and is looking at determining whether this novelthrombolytic can safely benefit patients who have recently experienced an acuteischaemic stroke up to 9 hours after the stroke has occurred. The trial is beingconducted in two parts, with Part A expected to complete in 1H 2006. This firstpart of the study is designed to identify a safe and potentially efficaciousdose of V10153, with the data being reviewed by an independent safety monitoringboard on an ongoing basis. The second part of the study will be a placebocontrolled extension of the study to confirm the initial indications of efficacyfrom Part A, subject to satisfactory regulatory review. V10153 was initially evaluated by a consortium of cardiologists in the US andEurope (the TIMI Study Group) in a Phase IIa ascending dose study to establishproof-of-concept (i.e. that it can dissolve clots and restore coronarybloodflow) in patients who have suffered acute myocardial infarction (AMI).V10153 was found to be well tolerated throughout the dose range of 1-10 mg/kg inpatients with AMI. Restoration of bloodflow was observed in blocked coronaryarteries in up to 40 per cent of patients after 60 minutes following doses of 5mg/kg and greater. This is comparable to the efficacy reported for othermarketed thrombolytic therapies using a similar experimental protocol. V10153was found to be safe in the range of doses tested. Work is continuing with respect to improving the production process of V10153prior to manufacturing material for the Phase III studies. Vernalis recentlysigned an agreement with Diosynth Biotechnology, a division of Organon thatsupplies manufacturing services for the global biotechnology industry, toprovide process development, scale up and manufacturing for V10153. GMPmanufacture at large scale is scheduled to complete at the end of 2006. V1003 Vernalis obtained rights to V1003 (formerly IX-1003) with its acquisition ofIonix in July 2005. V1003 is an intranasal formulation of buprenorphine, anopiate analgesic, for the management of post-operative pain in hospital and homesettings. Buprenorphine is a well-known analgesic and the intranasal formulationhas the potential to provide a convenient alternative to other treatments,allowing patients to manage their post-operative pain both prior to dischargefrom hospital and at home during their recovery period. Two successful Phase Iclinical trials have been conducted and have demonstrated rapid attainment ofanalgesic plasma levels. V1003 started a Phase II study in August 2005. This randomised, double blind,placebo-controlled, single dose study in 360 patients is comparing the efficacyof V1003 to placebo post-operatively in patients experiencing moderate to severepain. Additionally, the study will provide information about the speed of onsetand tolerability of the compound. The trial is expected to complete in 1H 2006. Vernalis is developing V1003 in partnership with Reckitt Benckiser Healthcarewho are responsible for future development costs with Vernalis receiving aseries of further payments upon achievement of development milestones, as wellas royalties on commercial sales. Vernalis has retained the option to co-promotethe product in the US and, should it exercise this option, it will contribute toa proportion of ongoing costs after completion of the Phase IIa trial in returnfor a share of profits. V2006 V2006 is an adenosine A2A receptor antagonist in development as a potentialnovel treatment for Parkinson's disease. A2A receptor antagonists may possessadvantages over conventional dopaminergic strategies, helping to restore motorfunction in patients with Parkinson's disease with fewer of the side effectssuch as nausea and dyskinesia (uncontrolled movements) associated withconventional dopaminergic treatments. A total of five Phase I trials of V2006 have been completed by Vernalis. Theseincluded single and multiple ascending dose studies and studies in healthyelderly volunteers. They also included the effects of V2006 taken with andwithout food, and the potential for V2006 to interact with standard dopaminetherapy. In addition, a human radiolabelled study in six healthy malevolunteers has been completed. In June 2004, Vernalis entered into an agreement with Biogen Idec to develop andcommercialise Vernalis' lead compound, V2006. Biogen Idec are conducting andfunding the development programmes and will pay milestones and royalties on thesuccessful development and commercialisation of collaboration products. Vernalishas an option to co-promote products arising out of this collaboration in theUnited States. Biogen Idec anticipates filing an IND in 2H 2005 prior tocommencing Phase II studies. V24343 Vernalis' research group has successfully progressed a series of potent andselective cannabinoid receptor antagonists as novel treatments for obesity. InAugust 2005, V24343 was selected as the lead clinical candidate, and apre-clinical programme which includes process and formulation development,pre-clinical safety and DMPK (drug metabolism and pharmacokinetics) isunderway. Phase I trials are expected to commence in 2H 2006. According to the World Health Organisation, obesity is a major contributor tothe global burden of chronic disease and disability and has reached epidemicproportions globally, with more than one billion adults overweight, at least 300million of them being clinically obese. CB1 receptors, initially identified inthe brain, are also present in several other peripheral tissues, includingadipocytes (fatty tissues). These receptors are part of the endocannabinoidsystem, a natural physiological system that is thought to play a role in theregulation of both appetite and peripheral energy metabolism, therebyaffecting body weight. V140 Following a portfolio review, Vernalis has taken the decision to focus itsefforts on other programmes with a higher probability of success and isreturning V140 to its originator, Monash University. MMPI A specific inhibitor of MMP-12, with therapeutic potential in inflammatorydisorders including multiple sclerosis, entered into a Phase I trial in January2005. This is the first compound to enter the clinic resulting from the researchcollaboration with Serono focused upon identifying selective metalloenzymeinhibitors (MEI) for the treatment of serious inflammatory diseases. Theprimary objectives of the Phase I study are to elucidate the safety,tolerability and pharmacokinetic properties of the compound. Serono willconduct and fund all development activities associated with the programme withVernalis receiving milestone and royalty payments. 5HT2C receptor agonists Vernalis had a preclinical research collaboration with Roche looking at thepotential use of selective 5-HT2C receptor agonists as one of the key receptorsfor controlling satiety. This four year collaboration has now expired. (ii) Research Using structure based drug design and expertise in GPCR chemistry Vernalis iscontinuing its research into CNS and oncology disease areas. The Company's focusin the CNS area is on pain and in oncology on pleiotropic targets. Vernalisconducts approximately half of its research programmes under collaborationagreements. Hsp90 inhibitors Hsp90 is a novel drug target, inhibition of which is believed to havesignificant potential in the treatment of a broad range of cancers. Thisprogramme is utilising the Company's structure-based design technology toidentify potent and specific inhibitors of Hsp90 for use against cancer. In December 2003 Vernalis formed a research collaboration with the NovartisInstitutes for BioMedical Research, Inc., (Novartis) in Cambridge, MA, USA, toinvestigate inhibitors of Hsp90. After an initial six-month evaluationperiod, Novartis exercised its option to license exclusive worldwide rights toHsp90. The companies are conducting a joint research programme under whichNovartis is providing research funding to Vernalis for an initial three-yearperiod. In addition, Novartis is responsible for funding and conducting thedevelopment of product candidates, and for commercialisation. A2A receptor antagonists A programme is under way to identify and evaluate potent, selective A2A receptorantagonists for the treatment of depression. Biogen Idec has option rights overthis programme under the collaboration agreed in June 2004. A programme ofwork to identify suitable back-up candidates for V2006 is continuing. Pin1 In March 2005 Vernalis acquired the intellectual property rights, know-how andassociated assets relating to an emerging oncology target Pin1 from PintexPharmaceuticals Inc. A programme is under way to discover development candidatesagainst the Pin1 target. Pin1 over expression is observed in a number ofoncology indications and Vernalis is looking to capitalise on its success withHsp90 through utilising its structure based drug discovery suite oftechnologies. 2. Expected Development Progress • V2006: File IND prior to Phase II (Biogen Idec) H2 05• Frovatriptan: MRM efficacy data H1 06• Frovatriptan: MRM regulatory submission H1 06• V10153: Completion of Part A Phase II in stroke H1 06• V1003: Completion of Phase IIa (Reckitt Benckiser) H1 06• V24343: Start of Phase I H2 06 3. Financial Review Implementation of International Financial Reporting Standards The financial results for the six months ended 30 June 2005 are the firstresults prepared in accordance with International Financial Reporting Standards("IFRS"). Prior to these results the Group prepared its audited annual financialstatements under UK Generally Accepted Accounting Practices ("UK GAAP"). In accordance with IFRS 1 the results for the six months ended 30 June 2004 andyear ended 31 December 2004 included in these interim results have been restatedin accordance with IFRS. The impact of the restatement is described in detail innote 2 to the financial statements. The principal adjustments relate to: a) Goodwill. Under IFRS, goodwill is not amortised but subject to impairment tests. Under UK GAAP, goodwill was amortised over its useful economic life. b) Investments. Under IFRS, investments in unrelated entities and available for sale are recorded at fair value. Under UK GAAP such investments were held at cost less impairment. c) Share-based payments. Under IFRS, a charge to the income statement is made to reflect the fair value of the awards at grant date. The charge was not made under UK GAAP. d) Holiday Pay. Under IFRS, a provision for holiday entitlement not taken is required. No such charge was made under UK GAAP. e) Intangible assets. Under IFRS, separately purchased intellectual property is capitalised and subject to impairment tests. Under UK GAAP, full impairment was made immediately in respect of early stage programmes. f) Royalty buy out from GSK. Under IFRS, this item is discounted to fair value resulting in a charge to the income statement over the repayment period. Under UK GAAP, the liability was recorded at the full amount due. The loss for the six months ended 30 June 2004 has decreased from £13.1 millionunder UK GAAP to £11.6 million under IFRS due principally to the reversal ofamortisation on goodwill of £2.3 million offset by a charge for the fair valueof share option grants of £0.3 million and a fair value adjustment to the GSKroyalty of £0.4 million. The loss for the year ended 31 December 2004 wasreduced from £29.2 million under UK GAAP to £25.7 million under IFRS, dueprincipally to the reversal of goodwill amortisation of £4.4 million offset by acharge for the fair value of share option grants of £0.7 million. Net assets at 31 December 2004 have increased from £12.9 million under UK GAAPto £17.9 million under IFRS, due principally to the reversal of goodwillamortisation totalling £4.4 million, the revaluation of available for saleassets of £0.7 million and the reversal of impairment to intangible assets of£0.6 million offset by a fair value adjustment of the GSK royalty of £0.6million. Net assets at 30 June 2004 have increased from £24.0 million under UKGAAP to £26.8 million under IFRS due principally to the reversal of goodwillamortisation of £2.3 million, including the fair value of available for saleinvestments of £0.9 million and the reversal of impairment to intangible assetsof £0.3 million offset by a fair value adjustment to the GSK royalty of £0.4million. All further comparisons refer to the results reported under IFRS. Income Statement Revenue for the six months ended 30 June 2005 was £5.9 million (2004: £5.1million) and comprised £1.6 million in respect of frovatriptan (2004: £3.0million) and £4.3 million in respect of revenue recognised under collaborationagreements (2004: £2.1 million). For the six months ended 30 June 2005 sales offrovatriptan solely comprised European revenues of £1.6 million (2004: £0.5million). The increase in European revenues reflects the additional territoriesin which the product has been launched. The North American revenues of £2.5million in 2004 comprised royalties from Elan for the period to 19 May 2004 andproduct sales from the period from 19 May 2004 to 30 June 2004. Revenue inrespect of collaboration agreements principally comprised £1.6 million from Endoand £0.6 million due from Serono following the start of Phase I trials in thefirst half of the year. Research and development expenditure for the six months ended 30 June 2005increased to £14.2 million (2004: £11.0 million). The increase relatesprincipally to expenditure incurred on the development of frovatriptan for theprophylaxis of MRM. During the period the confirmatory efficacy study was underway and recruitment into the safety study was completed. Selling, general and administrative expenditure for the six months ended 30 June2005 increased to £10.6 million (2004: £6.5 million) due to a goodwillimpairment charge of £6.4 million in the period. The impairment relates to thegoodwill arising on the acquisition of RiboTargets and follows the decision todiscontinue clinical development of V140. Excluding this charge, administrationexpenses were £4.2 million (2004: £6.5 million) and comprised generaladministration expenditure of £4.0 million and sales and marketing costs of £0.2million. The reduction of £2.3 million is due to lower general costs of £0.6million, lower sales and marketing costs of £0.8 million and the inclusion, lastyear, of £0.9 million of restructuring costs. Interest receivable and similar income for the six months ended 30 June 2005increased to £2.3 million (June 2004: £1.1 million) and comprised interestreceivable of £1.0 million (2004: £0.3 million), exchange gains of £0.9 million(2004: £0.8 million), and an implicit interest receipt of £0.4 million (2004:£nil) relating to the fair value accounting for the accrued income of $30million due from Endo. The increase in interest receivable follows the higheraverage cash balances for the period following the fund raising in March 2005.Interest payable and similar charges for the six months ended 30 June 2005increased to £3.0 million (2004: £0.7 million) and comprised interest payable onlong-term loans of £0.7 million (2004: £0.3 million), an exchange loss onlong-term loans and deferred income balances of £2.0 million (2004: nil) and animplicit finance charge of £0.3 million (2004: £0.4 million) on loans repayablein instalments. The interest payable increased in the period due to a charge onthe $50 million loan from Endo which was drawn-down in August 2004. The loss for the six months ended 30 June 2005 was £19.0 million (June 2004:£11.6 million). The increase described above is mainly due to a charge in 2005of £6.4 million relating to the impairment of goodwill. Balance Sheet Non current assets at 30 June 2005 amounted to £43.3 million (2004: £49.7million) with the principal components being intangible assets of £31.8 millionand receivables after more than one year of £8.1 million. The intangible assetsprincipally relate to amounts paid to Elan and GSK in respect of the rights tofrovatriptan. The receivable after one year is the second amount of $15 millionwhich is due from Endo in August 2006. The decrease in non current assets ismainly due to the goodwill impairment charge referred to above and a reductionin intangible assets offset by the inclusion of the amount due from Endo inAugust 2006. Current assets at 30 June 2005 amounted to £70.5 million (2004: £34.6 million)and comprised amounts receivable of £20.6 million and cash resources of £49.9million. The cash resources comprised £34.7 million invested in securities whichmature more than 90 days from the date of purchase, described as held tomaturity financial assets, and £15.2 million invested for periods of less than90 days, described as cash and cash equivalents. The increase in current assetsis due to the higher cash balance which results from the placing and open offercompleted in March 2005 and the receipts in the second half of 2004 arising fromthe collaborations with Endo, Biogen Idec and Novartis. In 2004 the non currentasset held for resale of £3.7 million relates to the Oxford facility which wassold in October 2004. Non current liabilities amounted to £66.7 million (2004: £26.7 million) andprincipally comprised £28.8 million in respect of the $50 million loan fromEndo, repayable in August 2009, and £28.9 million of deferred income from thecollaborations with Endo, Biogen Idec and Novartis where the revenue is beingrecognised over the expected life of the contracts. In 2004, an amount of £12.9million was due to be paid to Elan in December 2005; this was settled early whenthe Company entered into the collaboration with Endo in August 2004. Currentliabilities amounted to £19.7 million (2004: £30.7 million) with the reductiondue to settlement of the amounts due to Elan in respect of the reacquisition offrovatriptan. Cash flow Cash resources, comprising held to maturity financial assets and cash and cashequivalents, increased from £33.3 million at 1 January 2005 to £49.9 million at30 June 2005. The increase of £16.6 million arises as a result of the netproceeds of the placing and open offer completed in March 2005 of £28.4 million.In addition, during the period £14.2 million was utilised in the operations ofthe business, £0.8 million was expended on the purchase of tangible andintangible fixed assets, £2.3 million was received in R&D tax credit reclaimsand £0.7 million of net interest was received. Unaudited consolidated income statementFor the half year ended 30 June 2005 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 Note £000 £000 £000 Revenue 3 5,901 5,093 15,195Cost of Sales (526) (423) (2,909) -------- -------- --------Gross profit 5,375 4,670 12,286Research and developmentexpenditure (14,211) (11,019) (24,087)Selling, general andadministrative expenses 4 (10,556) (6,544) (15,722)------------------------ ------ -------- -------- --------Selling, general andadministrative expenses areas followsGoodwill impairment 4 6,371 - -Other 4 4,185 6,544 15,722 -------- -------- -------- 10,556 6,544 15,722------------------------ ------ -------- -------- -------- Operating Loss (19,392) (12,893) (27,523) -------- -------- --------Interest receivable andsimilar income 5 2,322 1,091 2,933Interest payable andsimilar charges 5 (2,966) (676) (2,821) -------- -------- --------Loss on ordinaryactivities before taxation (20,036) (12,478) (27,411)Tax credit on loss onordinary activities 1,016 875 1,758 -------- -------- --------Loss for the period (19,020) (11,603) (25,653) ======== ======== ======== Loss per share (basic anddiluted) (10.6)p (8.1)p (17.4)p Unaudited consolidated statement of changes in shareholders' equityFor the half year ended 30 June 2005 Share Share Other Retained Total Capital premium Reserve earnings ------- -------- ------- ------- ------- £000 £000 £000 £000 £000 ------- -------- ------- ------- -------Balance at 1January 2004 38,813 298,226 153,092 (456,201) 33,930Revaluationof assetsavailable for sale - - 850 - 850Net incomerecogniseddirectly inequity - - 850 - 850Loss for thesix monthperiod - - - (11,603) (11,603) ------- -------- ------- -------- -------Totalrecognisedincome andexpense forthe period - - 850 (11,603) (10,753)Issue ofequity sharecapital 311 2,984 - - 3,295Equity shareoptions charge - - 341 - 341 ------- -------- ------- -------- -------Balance at 30 June 2004 39,124 301,210 154,283 (467,804) 26,813Revaluationof assetsavailable for sale - - (253) - (253)Net incomerecogniseddirectly inequity - - (253) - (253)Loss for thesix monthperiod - - - (14,050) (14,050) ------- -------- ------- -------- -------Totalrecognisedincome andexpense forthe period - - (253) (14,050) (14,303)Issue ofequity sharecapital 368 4,632 - - 5,000Equity shareoptions charge - - 387 - 387 ------- -------- ------- -------- -------Balance at31 December 2004 39,492 305,842 154,417 (481,854) 17,897Revaluationof assetsavailable for sale - - (95) - (95)Net incomerecogniseddirectly inequity - - (95) - (95)Loss for thesix monthperiod - - - (19,020) (19,020) ------- -------- ------- -------- -------Totalrecognisedincome andexpense forthe period - - (95) (19,020) (19,115)Issue ofequity sharecapital 2,163 28,112 - - 30,275Expenses onissue ofshare capital - (2,177) - - (2,177)Equity shareoptions - - 527 - 527charge ------- -------- ------- -------- -------Balance at30 June 2005 41,655 331,777 154,849 (500,874) 27,407 ------- -------- ------- -------- ------- Unaudited consolidated balance sheetAs at 30 June 2005 30 June 30 June 31 December 2005 2004 2004 Note £000 £000 £000AssetsProperty, plant andequipment 1,120 2,799 1,596Goodwill 6 1,643 8,014 8,014Intangible assets 7 31,811 37,922 33,211Available for salefinancial assets 585 933 680Other receivables 8 8,132 - 7,418 --------- --------- ---------Non current assets 43,291 49,668 50,919 Inventories 62 1,933 49Trade and otherreceivables 8 20,550 17,952 20,355Held to maturity financialassets 34,736 5,141 15,000Cash and cash equivalents 15,175 5,906 18,323 --------- --------- --------- 70,523 30,932 53,727Non current asset held forresale - 3,686 - --------- --------- ---------Current assets 70,523 34,618 53,727 --------- --------- ---------Total assets 113,814 84,286 104,646 --------- --------- --------- LiabilitiesBorrowings 9 (28,758) (1,080) (26,364)Other non-currentliabilities 10 (2,702) (17,987) (2,467)Deferred income (28,876) (4,074) (31,294)Provisions (6,413) (3,583) (6,877) --------- --------- ---------Non current liabilities (66,749) (26,724) (67,002) Borrowings 9 - (270) -Trade and other payables 10 (11,639) (26,511) (11,255)Deferred income (5,182) (1,358) (4,839)Provisions for otherliabilities and charges (2,837) (2,610) (3,653) --------- --------- ---------Current liabilities (19,658) (30,749) (19,747) --------- --------- ---------Total liabilities (86,407) (57,473) (86,749) --------- --------- ---------Net assets 27,407 26,813 17,897 ========= ========= ========= EquityShare capital 41,655 39,124 39,492Share premium 331,777 301,210 305,842Other reserves 154,849 154,283 154,417Retained deficit (500,874) (467,804) (481,854) --------- --------- ---------Total Equity 27,407 26,813 17,897 ========= ========= ========= Unaudited consolidated cash flow statementFor the half year ended 30 June 2005 12 months 6 months to 6 months to ended 31 30 June 2005 30 June 2004 December 2004 Cash flow from operating activities £000 £000 £000Loss before tax (20,036) (12,478) (27,411)Depreciation 568 661 2,327Loss on disposal oftangible fixed assets 1 379 836Amounts written off goodwill 6,371 - -Amortisation of intangiblefixed assets 1,731 877 2,664Amounts written off intangibles 300 - -Amounts written off investments - - (12)Option charge 527 341 728Interest receivable (2,322) (1,091) (2,933)Interest payable 2,966 676 2,821Exchange (gain)/loss (12) 45 (366) --------- --------- ---------- (9,906) (10,590) (21,346)Changes in working capitalIncrease in debtors (587) (6,767) (16,178)(Decrease)/increase in creditors (90) 436 355(Decrease)/increase in provisions (1,528) 2,104 4,260(Decrease)/increase in deferredincome (2,075) 4,754 35,299Decrease in stock (13) (1,884) - --------- --------- ----------Cash (used in)/generatedfrom operations (14,199) (11,947) 2,390Taxation received 2,307 648 1,129Interest paid (5) (106) (216) --------- --------- ----------Net cash (used in)/generatedfrom operating activities (11,897) (11,405) 3,303Cash flows from investing activities Purchase of tangible fixed assets (211) (17) (101)Sale of tangible fixed assets 1 - 3,250Purchase of intangible fixed assets (575) (4,824) (30,841)Sale of investment - - 12Interest received 398 120 19Interest received on financialassets held to maturity 312 173 664 --------- --------- ----------Net cash used in investing activities (75) (4,548) (26,997)Cash flows from financing activitiesFinance charge on US dollar secured loan - - (372)Interest payable on US dollar secured loan - - (388)Receipt of US dollar secured loan - - 27,539Interest on sterling secured loan - (43) -Repayment of sterling secured loan - (135) (1,485)Movement in term deposits (19,737) 2,926 (6,933)Issue of shares 30,275 3,295 8,295Share issue costs (1,880) - -Capital element of finance leasepayments (18) (423) (738) --------- --------- ----------Net cash generated fromfinancing activities 8,640 5,620 25,918 --------- --------- ---------- Movements in cash and cashequivalents in the period (3,332) (10,333) 2,224Foreign exchange on cash and cashequivalents 184 92 (48)Cash and cash equivalents atthe beginning of the period 18,323 16,147 16,147 --------- --------- ----------Cash and cash equivalents atthe end of the period 15,175 5,906 18,323 ========= ========= ========== Notes to the financial statementsFor the half year ended 30 June 2005 1 Accounting policies and basis of preparation Basis of preparation Prior to 2005 the Group prepared its audited annual financial statements underUK Generally Accepted Accounting Practices (UK GAAP). For the year ended 31December 2005, the Group is required to prepare its annual consolidatedfinancial statements in accordance with accounting standards adopted in theEuropean Union (EU). As such those financial statements will take account of therequirements and options in IFRS 1 'First-time Adoption of InternationalFinancial Reporting Standards(IFRS)' as they relate to the 2004 comparativesincluded therein. The financial information for the six months ended 30 June 2005 is unaudited andhas been prepared in accordance with the Group's accounting policies, based onIFRS, that are expected to apply for 2005. The financial information for the sixmonths ended 30 June 2004 is also unaudited and has been restated under IFRS. Certain of the requirements and options in IFRS 1 relating to comparativefinancial information presented on first-time adoption may result in a differentapplication of accounting policies in the 2004 restated financial information tothat which would apply if the 2004 financial statements were the first financialstatements of the Group prepared in accordance with IFRS. An explanation of howthe transition from UK GAAP to IFRS has affected the Groups financial position,income statement and cash flow is set out in Note 2. The reconciliations set outin Note 2 are based on the IFRS expected to be applicable as at 31 December 2005and the interpretations of those standards. The IFRS and IFRIC interpretationsthat will be applicable at 31 December 2005 are not known with certainty. Theseinterim consolidated statements are based on management's understanding ofissued standards and interpretations and current facts and circumstances, whichmay change. For example, amended or additional standards or interpretations maybe issued by the IASB. IFRS is currently being applied in the United Kingdom andin a large number of other countries simultaneously for the first time. The interim financial information has not been audited and does not constitutestatutory accounts within the meaning of Section 240 of the Companies Act 1985but has been reviewed by the auditors in accordance with Bulletin 1999/4 issuedby the Auditing Practices Board. The Company's statutory accounts for the yearended 31 December 2004, prepared under UK GAAP, have been delivered to theRegistrar of Companies; the report of the auditors on these accounts wasunqualified and did not contain a statement under Section 237 (2) or (3) of theCompanies Act 1985. Accounting policies Basis of consolidation The consolidated financial statements include the financial statements ofVernalis Plc and its subsidiaries. Share-based payments The Group makes equity-settled and cash-settled share-based payments to itsemployees and directors. Equity-settled share-based payments are measured atfair value at the date of grant and expensed on a straight-line basis over thevesting period of the award. At each balance sheet date, Vernalis revises itsestimate of the number of options that are expected to become exercisable. Cash-settled share based payments are accrued over the vesting period of theaward based on the current expected fair value at each balance sheet date. When share options are exercised, the proceeds received net of any transactioncosts, are credited to share capital (nominal value) and share premium.Notes to the financial statements (continued)For the half year ended 30 June 2005 1 Accounting policies and basis of preparation (continued) Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the identifiable net assets (including intangibleassets) of the acquired subsidiary at the acquisition date. Goodwill onacquisition of subsidiaries is included in intangible assets. Goodwill is testedat each balance sheet date for impairment and is carried at cost lessaccumulated impairment losses. Gains and losses on disposal of an entity includethe carrying amount of goodwill relating to the entity or investment sold.Goodwill that was previously directly written off to reserves under UK GAAP isnot included in the gain or loss on disposal of an entity. Internally generated intangible assets - Product research and developmentExpenditure on new or substantially improved products is capitalised as anintangible asset and amortised over the expected useful life of the productconcerned. Capitalisation commences from the point at which the technicalfeasibility and commercial viability of the product can be demonstrated and theGroup is satisfied that it is probable that future economic benefit will resultfrom the product once completed. This is usually at the point of regulatoryfiling in a major market. Capitalisation ceases when the product is ready forlaunch. Expenditure on research and development activities which do not meet the abovecriteria is charged to the income statement as incurred. Other Intangibles Other intangibles are recognised when they have been acquired separately forcash or other monetary assets. Impairment of assets Assets that have an indefinite useful life are not subject to amortisation andare tested at each balance sheet date for impairment. Assets that are subject toamortisation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognised for the amount by which the assets carrying amountexceeds its recoverable amount. The recoverable amount is the higher of anasset's fair value less cost to sell and value in use. For the purpose ofassessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash flows (cash generating units). Notes to the financial statements (continued)For the half year ended 30 June 2005 1 Accounting policies and basis of preparation (continued) Investments The Group classifies its investments in the following categories: loans andreceivables, held-to-maturity investments and available-for-sale financialassets. The classification depends on the purpose for which the assets wereacquired. Management determines the classification of its investments at initialrecognition and re-evaluates this designation at every reporting date. At each balance sheet date management assesses whether there is objectiveevidence that a financial asset or group of financial assets is impaired. Ondisposal or impairment of the investment, gains or losses recorded in equity arerecycled through the income statement. Loans and receivables Loans and receivables are non-derivative financial assets or liabilities withfixed or determinable payments that are not quoted in an active market. Assetsin this category are recognised at amortised cost and included in trade andother receivables, and loans in the balance sheet. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed ordeterminable payments and fixed maturities that the Group's management has thepositive intention and ability to hold to maturity. Assets in this category areheld at amortised cost. Held-to-maturity investments include short terminvestments with original maturities of more than 90 days. Available-for-sale financial assets Available for sale financial assets are non-derivative financial assets that aredesignated as available for sale or are not classified as loans and receivables,held to maturity investments or financial assets at fair value through theprofit or loss. Assets in this category are recognised at fair value withunrealised gains and losses arising from changes in fair value recognised inequity. Cash and cash equivalents Cash and cash equivalents include cash in hand, bank deposits repayable ondemand and other short-term highly liquid investments with original maturitiesof 90 days or less. Notes to the financial statements (continued)For the half year ended 30 June 2005 2 Explanation of transition to IFRS Reconciliation of equity and loss. This is the first time that the Group has prepared interim financial informationunder IFRS as defined in Note 1. The following disclosures are required in theperiod of transition. For the purpose of this financial information the lastinterim statements were for the six months ended 30 June 2004, the last annualfinancial statements were for the year to 31 December 2004 and the date oftransition to IFRS was 1 January 2004. IFRS 1 'First-Time Adoption of International Financial Reporting Standards' setsout the transition rules which must be applied when IFRS is adopted for thefirst time. As a result, certain of the requirements and options in IFRS 1 mayresult in a different application of accounting policies in the 2004 restatedfinancial information from that which would apply if the 2004 financialstatements were the first financial statements. The standard sets out certainmandatory exemptions to retrospective application and certain optionalexemptions. The most significant optional exemptions available taken by the Group are asfollows: (a) Business combinations - The Group has elected not to apply IFRS3'Business combinations' retrospectively to business combinations that took placeprior to the transition date. Consequently, goodwill arising on businesscombinations before the transition date remains at its previous UK GAAP carryingvalue at the date of transition from the UK GAAP financial statements. (b) Share-based-payment transactions - The Group has adopted the exemptionsin IFRS 1 which allow a first-time adopter to apply the new standard only toshare options granted after 7 November 2002, that have not vested by 1 January2005. Reconciliation of equity: 31 December 30 June 31 December 2003 2004 2004 £000 £000 £000Net Assets under UK GAAP 33,789 23,954 12,875Reversal of goodwillamortisation a - 2,274 4,398Fair value of available forsale investments b - 933 680Holiday pay accrual d (108) (231) (93)Recognition of intangibleassets e 300 300 600Fair value of royalty buyout from GSK f (51) (417) (563) ----------- ----------- -----------Net Assets under IFRS 33,930 26,813 17,897 =========== =========== =========== Reconciliation of loss: 6 months ended 12 months ended 30 June 2004 31 December 2004 £000 £000Loss under UKGAAP (13,130) (29,209)Reversal ofgoodwillamortisation a 2,274 4,398Investmentwrite off b 83 83Share optioncharge c (341) (728)Holidayaccrual d (123) 15Recognition ofintangibleasset e - 300Fair value ofroyalty buyout from GSK f (366) (512) --------- -----------Loss underIFRS (11,603) (25,653) ========= =========== Notes to the financial statements (continued)For the half year ended 30 June 2005 2 Explanation of transition to IFRSs (continued) Reconciliation of Equity at 31 December 2003 (date of transition to IFRS): UK GAAP IFRS Effect IFRS £000 £000 £000AssetsProperty, plant and equipment 3,441 - 3,441Goodwill 8,014 - 8,014Intangible assets e,f 14,911 (556) 14,355Investment in subsidiaries 83 - 83 ----------- --------- ----------Non Current Assets 26,449 (556) 25,893 Inventories 49 - 49Trade and other receivables 10,991 - 10,991Held to maturity financial assets 8,066 - 8,066Cash and cash equivalents 16,148 - 16,148 ----------- --------- ---------- 35,254 - 35,254Non current asset held for resale 4,067 - 4,067 ----------- --------- ----------Current Assets 39,321 - 39,321 ----------- --------- ----------Total Assets 65,770 (556) 65,214 ----------- --------- ---------- LiabilitiesBorrowings (1,215) - (1,215)Other non-current liabilities f (5,605) 685 (4,920)Deferred income (1,299) - (1,299)Provisions (2,754) - (2,754) ----------- --------- ----------Non current Liabilities (10,873) 685 (10,188) Borrowings (270) - (270)Trade and other payables d,f (14,860) 12 (14,848)Deferred income (4,643) - (4,643)Provisions for other liabilitiesand (1,335) - (1,335)charges ----------- --------- ----------Current Liabilities (21,108) 12 (21,096) ----------- --------- ----------Total Liabilities (31,981) 697 (31,284) ----------- --------- ---------- ----------- --------- ----------Net Assets 33,789 141 33,930 =========== ========= ========== EquityShare capital 38,813 - 38,813Share premium 298,226 - 298,226Other reserves c 152,761 331 153,092Retained deficit c,d,e,f (456,011) (190) (456,201) ----------- --------- ----------Total Equity 33,789 141 33,930 =========== ========= ========== Notes to the financial statements (continued)For the half year ended 30 June 2005 2 Explanation of transition to IFRSs (continued) Reconciliation of Equity at 30 June 2004: UK GAAP IFRS Effect IFRS £000 £000 £000AssetsProperty, plant and equipment 2,799 - 2,799Goodwill a 5,740 2,274 8,014Intangible assets e,f 38,436 (514) 37,922Available for sale financialassets b - 933 933 --------- --------- --------Non Current Assets 46,975 2,693 49,668 Inventories 1,933 - 1,933 Trade and other receivables 17,952 - 17,952Held to maturity financial assets 5,141 - 5,141Cash and cash equivalents 5,906 - 5,906 --------- --------- -------- 30,932 - 30,932Non current asset held for resale 3,686 - 3,686 --------- --------- --------Current Assets 34,618 - 34,618 --------- --------- --------Total assets 81,593 2,693 84,286 --------- --------- -------- LiabilitiesBorrowings (1,080) - (1,080)Other non-current liabilities f (18,401) 414 (17,987)Deferred income (4,074) - (4,074)Provisions (3,583) - (3,583) --------- --------- --------Non current Liabilities (27,138) 414 (26,724) Borrowings (270) - (270)Trade and other payables d,f (26,263) (248) (26,511)Deferred income (1,358) - (1,358)Provisions for other liabilitiesand charges (2,610) - (2,610) --------- --------- --------Current Liabilities (30,501) (248) (30,749) --------- --------- --------Total Liabilities (57,639) 166 (57,473) --------- --------- -------- --------- --------- --------Net Assets 23,954 2,859 26,813 ========= ========= ========EquityShare capital 39,124 - 39,124Share premium 301,210 - 301,210Other reserves b,c 152,761 1,522 154,283Retained deficit a,c,d,e,f (469,141) 1,337 (467,804) --------- --------- --------Total Equity 23,954 2,859 26,813 ========= ========= ======== Notes to the financial statements (continued)For the half year ended 30 June 2005 2 Explanation of transition to IFRSs (continued) Reconciliation of Equity at 31 December 2004: UK GAAP IFRS Effect IFRS £000 £000 £000AssetsProperty, plant and Equipment 1,596 - 1,596Goodwill a 3,616 4,398 8,014Intangible Assets e,f 33,383 (172) 33,211Available for sale financialassets b - 680 680Other receivables 7,418 - 7,418 ---------- --------- --------Non Current Assets 46,013 4,906 50,919 Inventories 49 - 49Trade and other receivables 20,355 - 20,355Held to maturity financial assets 15,000 - 15,000Cash and cash equivalents 18,323 - 18,323 ---------- --------- --------Current Assets 53,727 - 53,727 ---------- --------- --------Total assets 99,740 4,906 104,646 ---------- --------- -------- LiabilitiesBorrowings (26,364) - (26,364)Other non-current liabilities f (2,627) 160 (2,467)Deferred income (31,294) - (31,294)Provisions (6,877) - (6,877) ---------- --------- --------Non current Liabilities (67,162) 160 (67,002) ---------- --------- -------- Trade and other payables d,f (11,211) (44) (11,255)Deferred income (4,839) - (4,839)Provisions for other liabilitiesand charges (3,653) - (3,653) ---------- --------- --------Current Liabilities (19,703) (44) (19,747) ---------- --------- --------Total Liabilities (86,865) 116 (86,749) ---------- --------- -------- ---------- --------- --------Net Assets 12,875 5,022 17,897 ========== ========= ======== EquityShare capital 39,492 - 39,492Share premium 305,842 - 305,842Option reserves b,c 152,761 1,656 154,417Retained deficit a,c,d,e,f (485,220) 3,366 (481,854) ---------- --------- --------Total Equity 12,875 5,022 17,897 ========== ========= ======== Notes to the financial statements (continued)For the half year ended 30 June 2005 2 Explanation of transition to IFRSs (continued) Reconciliation of loss for the 6 months ended 30 June 2004: UK GAAP IFRS Effect IFRS £000 £000 £000Revenue 5,093 - 5,093Cost of Sales (423) - (423) ----------- ---------- ---------Gross profit 4,670 - 4,670Research and development (11,019) - (11,019)expenditureSelling, general andadministrative expenses a,b,c,d,f (8,434) 1,890 (6,544) ----------- ---------- ---------Operating Loss (14,783) 1,890 (12,893)Interest receivable and similar income 1,091 - 1,091Interest payable and similar charges f (313) (363) (676) ----------- ---------- ---------Loss on ordinary activitiesbefore taxation (14,005) 1,527 (12,478)Tax credit on loss on ordinaryactivities 875 - 875 ----------- ---------- ---------Loss for the period (13,130) 1,527 (11,603) =========== ========== ========= Reconciliation of loss for the 12 months ended 31 December 2004: UK GAAP IFRS Effect IFRS £000 £000 £000Revenue 15,195 - 15,195Cost of Sales (2,909) - (2,909) ----------- ---------- ---------Gross profit 12,286 - 12,286Research and developmentexpenditure e (24,387) 300 (24,087)Selling, general andadministrative expenses a,b,c,d,f (19,549) 3,827 (15,722) ----------- ---------- ---------Operating Loss (31,650) 4,127 (27,523)Interest receivable and similarincome 2,933 - 2,933Interest payable and similarcharges f (2,250) (571) (2,821) ----------- ---------- ---------Loss on ordinary activitiesbefore taxation (30,967) 3,556 (27,411)Tax credit on loss on ordinaryactivities 1,758 - 1,758 ----------- ---------- ---------Loss for the period (29,209) 3,556 (25,653) =========== ========== ========= Notes to the financial statements (continued)For the half year ended 30 June 2005 2 Explanation of transition to IFRSs (continued) Notes to the reconciliation of equity and loss (a) Acquisitions -Under IFRS 3 'Business Combinations', goodwillis deemed to have an indefinite useful life and is not amortised. It is subjectto an impairment test at each balance sheet date and to an additional testwhenever there is an indication of impairment. Under UK GAAP, goodwill wasamortised over its useful economic life and subject to an impairment test whenthere was a triggering event. (b) Investments - Investments in an unrelated entity are withinthe scope of IAS 39. All such investments held by the Group are categorised asavailable for sale and are measured at fair value. Changes in fair value of anequity investment that is categorised as 'available-for-sale' are recognised inequity. Under UK GAAP such investments were held at cost less impairment. (c) Share-based payments - Under IFRS 2 'share-based payments' acharge is required for all share based payments including share options. Thecharge in the income statement is based on the fair value of the awards at grantdate. This charge was not required under UK GAAP. (d) Holiday Pay - Under IAS 19 'Employee Benefits' a provisionfor holiday to which staff are entitled but have not yet taken is required. Thischarge was not common practice under UK GAAP. (e) Capitalisation of intangibles - Under IAS 38 'IntangibleAssets' separately purchased intellectual property is capitalised and subject toannual impairment tests. No impairment charge is made unless there is evidenceof a diminution in value. Amortisation begins when the asset is in the conditionnecessary for it to be capable of operating in the manner intended bymanagement. Under UK GAAP full impairment was made immediately in respect ofearly stage programmes. (f) Fair value of royalty buy out from GSK - Under IAS 39'Financial Instruments : Recognition and Measurement' payables are held atamortised cost. This charge was not common practice under UK GAAP. Explanation of principal differences between the cash flow statements presentedunder UK GAAP and the cash flow statement under IFRS The cash flow statement has been prepared in conformity with IAS 7 'Cash FlowStatements.' The principal differences between the 2004 cash flow statementspresented in accordance with UK GAAP and the cash flow statement presented inaccordance with IFRS for the same periods are as follows: 1) Under UK GAAP, net cash flow from operating activities was determinedbefore considering cash outflows from (a) returns on investments and servicingon finance, (b) taxes paid. Under IFRS, net cash flow from operating activitiesis determined after these items.2) Under UK GAAP, capital expenditure, financial investments andacquisitions were classified separately, while under IFRS they are classified asinvesting activities.3) Under UK GAAP, movements in short-term investments were not included incash but classified as management of liquid resources. Under IFRS short-terminvestments with maturity of 90 days or less at the date of acquisition areincluded in cash and cash equivalents. Notes to the financial statements (continued)For the half year ended 30 June 2005 3 Turnover A geographical analysis of turnover according to the country of registration ofthe fee-paying parties is as follows. 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 £000 £000 £000United Kingdom 153 48 161Rest of Europe 1,623 998 3,822North America 4,118 4,047 11,207Rest of theworld 7 - 5 ---------- --------- -------- 5,901 5,093 15,195 ========== ========= ======== 4 Selling, general and administrative costs 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 £000 £000 £000Restructuringcosts - 945 1,493Impairment ofgoodwill 6,371 - -Provision forvacant leases 34 - 4,401Sales andmarketingcosts 175 1,000 1,333Other 3,976 4,599 8,495 ---------- --------- -------- 10,556 6,544 15,722 ========== ========= ======== 5 Finance Charge (net) 6 months 6 months 12 months ended ended 30 ended 30 31 December June 2005 June 2004 2004 Interest receivable and other £'000 £'000 £'000similar incomeInterest oncash, cashequivalentsandheld-to-maturity assets 969 260 664Exchange gainson othercreditor - 831 468Exchange gainson long termloan - - 1,266Exchange gainson otherdebtor 956 - -Unwinding ofdiscount onother debtor 374 - 529Other interest 23 - 6 ---------- --------- -------- 2,322 1,091 2,933Interest payable and similarchargesLoansrepayablewholly orpartly withinfive years 675 106 866Finance Leases 3 72 107Exchange losson otherdebtors - - 686Exchange losson long termloan 1,683 - -Exchange losson othercreditor 324 - -Unwinding ofdiscount ondeferredconsiderationon purchase ofintangibleassets - 135 519Unwinding ofdiscount onroyalty buyout from GSK 121 363 571Unwinding ofdiscount onprovision 112 - -Other interestpayable 48 - 72 ---------- --------- -------- 2,966 676 2,821 ---------- --------- --------Finance chargenet (644) 415 112 ---------- --------- -------- 6 Goodwill Cost At 30 June 2005 At 30 June 2004 At 31 December 2004 £000 £000 £000 ---------- --------- --------Opening and closingcost 17,223 17,223 17,223 ---------- --------- -------- Aggregate ImpairmentOpening balance 9,209 9,209 9,209Impairment for theperiod 6,371 - - ---------- --------- --------Closing balance 15,580 9,209 9,209 ---------- --------- --------Net Book amount atend of period 1,643 8,014 8,014 ========== ========= ========Net book amount atbeginning of period 8,014 8,014 8,014 ========== ========= ======== 7 Intangible Assets At 30 June At 30 June 2004 At 31 December 2005 2004Cost £000 £000 £000 ---------- --------- --------Opening balance 38,008 16,488 16,488Additions 631 24,444 21,520 ---------- --------- --------Closing balance 38,639 40,932 38,008 ---------- --------- --------Aggregate amortisationOpening balance 4,797 2,133 2,133Charge for theperiod 1,731 877 2,664Impairment 300 - - ---------- --------- --------Closing balance 6,828 3,010 4,797 ---------- --------- --------Net book value atend of period 31,811 37,922 33,211 ========== ========= ========Net book value atbeginning of period 33,211 14,355 14,355 ========== ========= ======== Notes to the financial statements (continued)For the half year ended 30 June 2005 8 Trade and other receivables At 30 June 2005 At 30 June 2004 At 31 December 2004 £000 £000 £000Other receivables 8,132 - 7,418 --------- --------- --------Non current tradeand otherreceivables 8,132 - 7,418 Trade debtors 1,211 6,610 860Interest receivable 403 103 122R&D Tax credit 5,142 6,031 6,433Other debtors 9,024 1,334 8,263Prepayments andaccrued income 4,770 3,874 4,677 --------- --------- --------Current trade andother receivables 20,550 17,952 20,355 --------- --------- --------Total trade andother receivables 28,682 17,952 27,773 ========= ========= ======== 9 Borrowings At 30 June At 30 June At 31 December 2004 2005 2004 £000 £000 £000US dollar secured loan 28,758 - 26,364Sterling secured loan - 1,080 - ------------ ----------- --------Non current borrowings 28,758 1,080 26,364 Sterling secured loan - 270 - ------------ ----------- --------Current borrowings - 270 - ------------ ----------- --------Total borrowings 28,758 1,350 26,364 ============ =========== ======== The US dollar secured loan relates to $50 million borrowed from Endo, net of thefinance charges of £0.3 million, and interest payable which the Group haselected to roll up into the loan at December 2004 and June 2005. The sterlingsecured loan relates to the mortgage on the Oxford site which was disposed ofduring 2004. Notes to the financial statements (continued)For the half year ended 30 June 2005 10 Trade and other payables At 30 June At 30 June At 31 December 2005 2004 2004 £000 £000 £000Payments due to Elan - 12,887 -Royalty buy out from GSK 2,702 5,100 2,467 ------------ ----------- --------Non current trade and otherpayables 2,702 17,987 2,467 Trade creditors 2,379 3,765 3,134Obligations under financeleases - 333 18Taxation and socialsecurity payable 736 324 226Other creditors 21 - 72Accruals 5,721 7,273 5,227Payments due to Elan - 10,696 -Royalty buy out from GSK 2,782 4,120 2,578 ------------ ----------- --------Current trade and otherpayables 11,639 26,511 11,255 ------------ ----------- --------Total trade and otherpayables 14,341 44,498 13,722 ============ =========== ======== The payment due to Elan is in respect of the reacquisition of rights tofrovatriptan. This was settled during 2004. The royalty payment toGlaxoSmithKline (GSK) relates to the fair value of payments conditionally dueunder the agreement of December 2000 to buy out royalties due to GSK on sales offrovatriptan. The Group is committed to making one further annual payment of $5million, the first having been made in September 2002. A fifth payment of $5million is due 90 days after cumulative global sales exceed $300 million. Duringthe six months to 30 June 2005, an exchange loss of £0.3 million and an implicitinterest charge of £0.1 million have been recognised in the income statement. 11 Post balance sheet events On 26 July 2005 the purchase of the privately-held UK company IonixPharmaceuticals Limited was completed.In consideration for Vernalis acquiring the entire issued share capital ofIonix, Vernalis issued to Ionix's shareholders 17,847,769 new Vernalis ordinaryshares, bringing the enlarged issued share capital of Vernalis to 216,798,261ordinary shares. A further 1,837,271 new ordinary shares will be issued to Ionixshareholders in July 2006, subject to reduction for any warranty or indemnityclaims. 12 Loss per share Loss per share is based on the loss attributable to shareholders on 179.8million shares being the weighted average number of shares in issue for the halfyear. Basic earnings per share is calculated by dividing the loss for the periodby the weighted average number of shares outstanding during the period (Sixmonths ended 30 June 2004: 142.3 million; year ended 31 December 2004: 147.4million). All potential ordinary shares including options and deferred shares areanti-dilutive and as such there is no difference between the loss per ordinaryshare and the diluted loss per ordinary share. 13 Dividends The directors do not propose a dividend for the period. Independent review report to Vernalis plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2005 which comprises the unaudited consolidatedinterim balance sheet as at 30 June 2005 and the related unaudited consolidatedinterim statements of income, cash flows and changes in shareholders' equity forthe six months then ended and related notes. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in Note 1, the next annual financial statements of the group willbe prepared in accordance with accounting standards adopted for use in theEuropean Union. This interim report has been prepared in accordance with thebasis set out in Note 1. The accounting policies are consistent with those that the directors intend touse in the next annual financial statements. As explained in note 1, there is,however, a possibility that the directors may determine that some changes arenecessary when preparing the full annual financial statements for the first timein accordance with accounting standards adopted for use in the European Union.The IFRS standards and IFRIC interpretations that will be applicable and adoptedfor use in the European Union at 31 December 2005 are not known with certaintyat the time of preparing this interim financial information. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of Group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005. Chartered AccountantsLondon22 September 2005 Notes: (a) The maintenance and integrity of the Vernalis plc web site is theresponsibility of the directors; the work carried out by the auditors does notinvolve consideration of these matters and, accordingly, the auditors accept noresponsibility for any changes that may have occurred to the interim reportsince it was initially presented on the web site. (b) Legislation in the United Kingdom governing the preparation anddissemination of financial information may differ from legislation in otherjurisdictions. 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