12th Mar 2007 07:03
Vernalis PLC12 March 2007 12 March 2007 Vernalis plc: Announcement of Preliminary Results for the year ended 31 December 2006 - A Year of Progress for Vernalis - WINNERSH, U.K., 12 March, 2007 -- Vernalis plc (LSE: VER, Nasdaq: VNLS) todayannounces its preliminary results for the year ended 31 December 2006. In 2006 Vernalis made significant progress in advancing its drug candidates,establishing its US commercial operations and re-launching Apokyn(R). As aresult of these investments, the company expects significant news flow in 2007from four clinical programmes as well as increased revenues of its two marketedproducts, Apokyn(R) and Frova(R). 2006 Highlights Financial • Revenues increased to £16.3 million (2005: £14.1 million) • Net loss before exceptional charges increased to £30.7 million (2005: £26.4 million). Total net loss increased to £42.4 million (2005: £32.8 million) • Utilisation of cash resources, excluding equity financing, reduced to £31.0 million (2005: £34.0 million) • Cash resources of £37.6 million (2005: £68.3 million) Operational • Establishment of US commercial operations • Re-launch of Apokyn(R) (apomorphine hydrochloride injection) Pipeline • Frova(R) (frovatriptan succinate tablets) Supplemental New Drug Application (sNDA) for short-term prevention of menstrual migraine (MM) accepted for review by the US Food and Drug Administration (FDA) on 20th September 2006 • Started Phase II proof of principle study of V3381(Neuropathic pain) • Started comparator pharmacokinetic study of V1512 (Parkinson's disease) • Started Phase I studies of V24343 in mildly obese volunteers (Obesity) • Completed manufacture of Phase III material for V10153 (Ischaemic stroke) • Successful completion of Phase II study of V1003 (Acute post-operative pain) Research • Strong research capability that has delivered two compounds into development o V24343 (CB1 antagonist for obesity) entered Phase I - see above o Hsp90 (oncology) being developed with Novartis, is expected to enter Phase I in mid-2007 2007 News Flow • PDUFA date Frova(R) MM 19th May 07 • V10153 Phase II data Mid 07 • V3381 Phase II data Mid 07 • V24343 Phase I data Mid 07 • Hsp90 Initiate Phase I Mid 07 • V1512 Initiate Phase III Mid 07 Simon Sturge, CEO of Vernalis, commented: "2006 was a year of significant investment, both in our US sales and marketingoperation, and in progressing our clinical portfolio. In the US we launched anumber of new marketing initiatives for Apokyn(R) which are now gainingtraction. We eagerly await the potential label expansion of Frova(R) formenstrual migraine and expect to see the benefit from our investment inthe development portfolio with a number of programmes finishing clinical trialsin the middle of the year." - ends - Vernalis' CEO Simon Sturge and CFO Tony Weir will discuss the company's 2006results at an analyst/investor presentation and conference call today at 9:30a.m. GMT. The conference call may be accessed by dialling: International dial in +44 (0)1452 542 300, UK Free Phone 0800 953 1444 - Conference ID 2341055. A replayfacility will be available for 7 days following the call by dialling:International dial in +44 (0) 1452 550 000, UK Free Phone 0800 953 1533 - Replayaccess number 2341055#. There will also be a live webcast which can be accessedby visiting the Investor section of the Company's website, www.vernalis.com.Following the webcast, an archived version of the call will be available at thesame address. Enquiries:Vernalis plc +44 (0) 118 977 3133Simon Sturge, Chief Executive OfficerTony Weir, Chief Financial OfficerJulia Wilson, Head of Corporate Communications Brunswick Group +44 (0) 20 7404 5959Jon ColesJustine McIlroy Lazar Partners LtdGregory Gin 212-867-1762 Notes to Editors About Vernalis Vernalis is a speciality bio-pharmaceutical company focused on products marketedto specialist neurologists. The company has two marketed products, Frova(R) andApokyn(R), and a development pipeline focused on central nervous systemdisorders. The company has eight products in registration/clinical developmentand collaborations with leading, global pharmaceutical companies includingNovartis, Biogen Idec and Serono. Vernalis has established a US commercialoperation to promote Apokyn(R) and co-promote Frova(R) alongside its NorthAmerican licensing partner, Endo Pharmaceuticals, progressing the companytowards its goal of becoming a sustainable, self-funding, R&D-driven, specialitybio-pharmaceutical company. For further information about Vernalis, pleasevisit: www.vernalis.com +-------+-----------+-----+-----+-----+------------+------+------------+|Product|Indication |Phase|Phase|Phase| | |Marketing || | | | | | | |Rights || | | I | II | III |Registration|Market| || | | | | | | | || | | | | | | | |+-------+-----------+-----+-----+-----+------------+------+------------+|Apokyn |Parkinson's| | | | | x |North ||(R) |Disease | | | | | |America || | | | | | | | |+-------+-----------+-----+-----+-----+------------+------+------------+|Frova |Migraine | | | | | x |US ||(R) | | | | | | |milestones &|| | | | | | | |royalties - || | | | | | | |Endo || | | | | | | |(EU - || | | | | | | |royalties) |+-------+-----------+-----+-----+-----+------------+------+------------+|Frova |Menstrual | | | | x | |US ||(R) |Migraine | | | | | |milestones &|| |Prevention | | | | | |royalties - || | | | | | | |Endo || | | | | | | |(EU - || | | | | | | |royalties) |+-------+-----------+-----+-----+-----+------------+------+------------+|V1512 |Parkinson's| | x | | | |Worldwide || |Disease | | | | | |(excl. || | | | | | | |Italy) |+-------+-----------+-----+-----+-----+------------+------+------------+|V10153 |Ischaemic | | x | | | |Worldwide || |stroke | | | | | | |+-------+-----------+-----+-----+-----+------------+------+------------+|V1003 |Acute Pain | | x | | | |US Profit || | | | | | | |share Option|| | | | | | | |Reckitt || | | | | | | |Benckiser |+-------+-----------+-----+-----+-----+------------+------+------------+|V3381 |Neuropathic| | x | | | |Worldwide || |Pain | | | | | | |+-------+-----------+-----+-----+-----+------------+------+------------+|V2006 |Parkinson's| x | | | | |US || |Disease | | | | | |Co-promotion|| | | | | | | |Biogen Idec |+-------+-----------+-----+-----+-----+------------+------+------------+|MMPI |Multiple | x | | | | |Royalties - || |Sclerosis | | | | | |Serono |+-------+-----------+-----+-----+-----+------------+------+------------+|V24343 |Obesity | x | | | | |Worldwide |+-------+-----------+-----+-----+-----+------------+------+------------+ Vernalis Forward-Looking Statement This news release may contain forward-looking statements that reflect theCompany's current expectations regarding future events including the clinicaldevelopment and regulatory approval of the Company's products, the Company'sability to find partners for the development and commercialisation of itsproducts, as well as the Company's future capital raising activities.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 ability of theCompany to identify and agree beneficial terms with suitable partners for thecommercialisation and/or development of its products, as well as the achievementof expected synergies from such transactions, the acceptance of Frova(R) andApokyn(R) and other products by consumers and medical professionals, thesuccessful integration of completed mergers and acquisitions and achievement ofexpected synergies from such transactions, and the ability of the Company toidentify and consummate suitable strategic and business combinationtransactions. 1. Strategy and operational review Vernalis' strategic goal is to become a sustainable, self-funding, R&D drivenspeciality bio-pharmaceutical company primarily focused on drugs for thetreatment of Central Nervous System (CNS) disorders. In February of last yearVernalis established a commercial operation in North America focused onspecialist neurologists that markets Apokyn(R) and co-promotes Frova(R)alongside its partner Endo. Vernalis has a strong research capability thatexpects to add one novel pre-clinical candidate every 18 months. Vernalisintends to continue to market products to specialist neurologists in NorthAmerica, and to enter into out-licensing or co-promotion agreements for productsin other territories or marketed to different physician groups. Marketed Products Apokyn(R) - Advanced Parkinson's Disease Apokyn(R) is the only acute, intermittent therapy available in the U.S. for thetreatment of "off" episodes (re-emergence of Parkinson's disease symptoms)associated with advanced Parkinson's disease. It is used as an adjunct to otherParkinson's disease medications and is administered, as needed, by means of aninjector pen to treat periods of poor mobility in people with advanced disease. In April 2004, Apokyn(R) received FDA approval with Orphan Drug designation totreat advanced Parkinson's disease patients in the U.S. who experience thesevere "on/off" motor fluctuations that are unresponsive to other oralParkinson's disease therapies. Approximately 112,000 patients with Parkinson'sdisease experience such "off" episodes despite optimal oral Parkinson's diseasetherapy. Apokyn(R) was launched in the U.S. in July 2004 and Vernalis acquiredthe North American commercial rights from Mylan in November 2005. Mylan stopped promoting Apokyn(R) in July 2005. When Vernalis re-launched thispromotion-sensitive product in February 2006, new prescriptions had diminishedto almost zero. Apokyn(R) is sensitive to promotion due to the need to clarifyappropriate patient candidates and to assist physicians and their staff with theApokyn(R) initiation and titration process. Proper initiation and titration isimportant to ensure that each patient is individually titrated to their optimaldose and to help minimise the risk of first dose side effects. Gross sales for Apokyn(R) for the full year 2006 amount to $5.6 million of which$3.3 million were reported in the second half. The revenues were marginallybelow previously announced guidance of around $6 million predominantly as aconsequence of an under-reporting of patients who had discontinued treatmentduring the period prior to acquisition by Vernalis. This reporting deficit wasidentified in mid-2006 and a true picture of the patient population wasestablished in the second half of 2006. The primary reason for the highdiscontinuation rate was that a number of patients were originally titrated to asub-optimal dose and were therefore not receiving the full clinical benefit fromApokyn(R). The resulting lower drug usage also reduced revenues. Also, theintroduction of a sampling programme for new patient initiations, while key forestablishing patients on an appropriate dose regime, has had the short-termimpact of delaying initiation prescriptions. During H2 2006, Vernalis established several marketing initiatives to makephysicians and patients aware of the benefits of Apokyn(R) at optimal dosinglevels and help reduce the barriers that prevent patients from starting to usethe product. These efforts include a comprehensive support programme (The APOKYN(R) Circle of CareTM) which includes a nurse call centre, home healthcare visitsand a pilot clinical liaison programme where nurses assist both physicians andpatients through the whole treatment cycle. These initiatives are expected tobecome fully effective about 6-months after their introduction and hence improveprescription levels during 2007. Vernalis' U.S. sales efforts and new marketing initiatives have already resultedin a significant turnaround in both new prescriptions and increased dose levels,which reinforces our confidence in the potential of Apokyn(R) and the Companyexpects gross sales in the range of $9 million to $10 million in 2007. Apokyn(R) is indicated for the acute, intermittent treatment of hypomobility or"off" episodes associated with advanced Parkinson's disease. It is used as anadjunct to other Parkinson's disease medications. Apokyn(R) is associated withsevere nausea and vomiting and should be given with a concomitant antiemetic(trimethobenzamide). Frova(R) - Acute Migraine Frova(R) is a selective 5-HT1B/1D receptor agonist approved as an acute oraltreatment for migraine headache and its associated symptoms. Frova(R) belongs tothe triptan class of drugs and is distinguished from other triptans by itsexceptionally long half-life. Frova(R) is also being developed for the shortterm prevention of menstrual migraine (MM) (see below). Vernalis has licensed North American rights for Frova(R) to Endo Pharmaceuticals(Endo) which reported U.S. net sales of the product of $40.6 million for 2006($38.1 million in 2005). Vernalis is co-promoting Frova(R) in the U.S. with Endounder an arrangement that started in February 2006. Vernalis received a fixedpayment of $15 million from Endo in September 2006 and from 1 January 2007Vernalis' return is a variable royalty, at an initial rate of 20 per cent shouldthe label be expanded for the intermittent, short-term prevention of MM. In Europe, frovatriptan is marketed in 13 countries by Menarini. The drug wasapproved throughout the then 15 member states of the European Union via themutual recognition procedure (MRP) in January 2002. In 2006, Menarini launchedfrovatriptan in Slovakia, Finland, Czech Republic, Slovenia, Portugal,Switzerland and all seven Central American countries. Menarini received approvalfor the drug in Turkey, with a launch planned in 1Q 2007, and also applied formarketing authorisation in Russia, with approval expected 1H 2007. Importantly,Menarini received reimbursement and pricing approval for frovatriptan in Franceand plan to launch in 1Q 2007. Vernalis revenues for 2006 from Menarini amountedto £3.6 million (£3.0 million in 2005). Frova(R) is approved for the treatment of migraines in adults. The most commonadverse events include dizziness, fatigue, paresthesia, flushing, and headache. Development Portfolio Pain Franchise Frova(R) - Prevention of Menstrual Migraine (MM) Vernalis has completed a series of studies aimed at obtaining approval for Frova(R) for the intermittent, short-term prevention of MM and Vernalis' partner,Endo, filed a Supplemental New Drug Application (sNDA) in the US with the FDA inJuly 2006. The FDA has accepted this submission and has informed us that it willprovide its response by 19 May 2007 (the PDUFA date) which is ten months afterthe sNDA submission date. If this application is successful a $40 millionmilestone is due to Vernalis from Endo, though Endo reserves the right to pay$20 million in cash and retain the remaining $20 million as partial payment dueon its outstanding loan to Vernalis. The Frova(R) sNDA is supported by data from four clinical studies (twodouble-blind, placebo-controlled efficacy studies, an open-label safety studyand a pharmacokinetic study). The results from three of these studies werereported in prior years, with the positive results from the second efficacystudy, the last of the four studies, being reported in May 2006. In 2H 2007, Vernalis' European partner, Menarini, plans to submit an applicationto extend the current indication to include prevention of menstrualmigraine throughout Europe under the mutual recognition procedure withFrance acting as the reference member state. If successful it would lead to anextension of the existing indication for acute treatment in 25 EU countries. V3381 - Neuropathic Pain V3381 is a novel drug candidate that was licensed from Chiesi Farmaceutici(Chiesi) which is being developed as a treatment for neuropathic pain. It has adual mechanism of action (an NMDA antagonist and an MAO-A inhibitor) which givesit the potential to modulate pain at both central and peripheral sites. In August 2006 Vernalis started a Phase IIa trial of V3381 in patients withneuropathic pain resulting from long-standing diabetes. The randomised,double-blind, placebo-controlled crossover study is designed to assess safety,pharmacokinetics and preliminary efficacy of repeat dosing of V3381, withefficacy being assessed on a numerical point pain rating scale recorded usingdaily diaries. The trial, which is being conducted in the U.S. and Canada, willinclude approximately 30 patients and is planned to complete in mid-2007. V1003 - Post-Operative Pain In March 2006, Vernalis completed a Phase IIa study of V1003 for the managementof post-operative pain. The study achieved its primary end point of pain reliefover the period of eight hours from drug administration. Despite this initialpositive efficacy result, there is uncertainty surrounding the futuredevelopment of V1003 as Vernalis and its partner, Reckitt Benckiser, continue todiscuss the most appropriate path forwards for nasal delivery of buprenorphine. Vernalis has two other pre-clinical programmes based on the proprietaryintranasal formulation for the delivery of buprenorphine in partnership withReckitt Benckiser; V1004 for the treatment of chronic pain and V1005 for thetreatment of opiate addiction. Neurology Franchise V10153 - Ischaemic Stroke V10153 is a novel thrombolytic protein which is being developed for thetreatment of acute ischaemic stroke. Ischaemic stroke is the most common type ofstroke, accounting for over 80 per cent of all strokes and occurs when a bloodclot forms and blocks blood flow in an artery supplying blood to a part of thebrain (as distinct from a haemorrhagic stroke which is caused by bleeding).Current therapeutic options for stroke sufferers are severely limited since theonly current approved therapy, recombinant tissue plasminogen activator (rtPA),must be administered within the first three hours after a stroke has occurred. In late 2005 Vernalis started a multi-centre Phase II clinical study of V10153to determine whether this novel thrombolytic can safely benefit patients whohave recently experienced an acute ischaemic stroke if administered up to ninehours after the stroke has occurred. The study is designed to identify a safeand potentially efficacious dose of V10153 and is targeted to complete patientenrolment in 1H 2007 with data being reported in mid-2007. Vernalis has contracted the process development, scale-up and cGMP manufacturingof V10153 to Diosynth Biotechnology. Diosynth has now completed drug substancemanufacturing of V10153 for use in the Phase III stroke trials. V1512 - Parkinson's Disease V1512 combines Levodopa (L-dopa) methylester, an enhanced soluble form ofL-dopa, with Carbidopa that was licensed from Chiesi. V1512 is fully soluble inwater and is presented in a patented, effervescent formulation as a potentialnovel treatment for Parkinson's disease. L-dopa has been the cornerstone ofParkinson's disease treatment for four decades; however, after many years oftreatment it may become less effective, and other problems such as motorcomplications and unwanted movements, known as dyskinesias, can emerge. There isevidence that some of these problems, such as a delay in the onset of effect ofsome L-dopa doses during the day, may be due to erratic absorption of the druginto the bloodstream caused by impaired functioning of the stomach and smallintestine. Normal gut motility, called peristalsis, is essential for passage offood and solid dose form drugs (tablets and capsules) through the stomach to theparts of the intestine where absorption into the bloodstream takes place. V1512,being fully soluble in water, is administered in liquid form and therefore wouldbe less susceptible to impaired gut motility as it could quickly pass through tothe small intestine assisted only by gravity. In November 2006, Vernalis started a bridging study to evaluate thepharmacokinetics and efficacy of V1512 in patients with Parkinson's diseasecomparing the plasma profiles of the drug following repeated doses, with thoseof Sinemet(R), the most widely-prescribed form of L-dopa and Carbidopacombination in the US. Regulatory submissions will be targeted for North Americaand Europe. It is intended to submit to the FDA for a Special ProtocolAssessment (SPA) prior to starting the Phase III programme in mid-2007. UnderSection 119(a) of the US FDA Modernization Act the SPA process allows a protocolto be adequately assessed by the FDA in terms of study size and design inorder to determine whether the study design is adequate to form the basis of anefficacy claim in the proposed indication. A written agreement on the protocol,which occurs before the study commences, becomes part of the administrativerecord. V2006 - Parkinson's Disease V2006 is an adenosine A2A receptor antagonist in development as a noveltreatment for Parkinson's disease. A2A receptor antagonists act indirectly ondopaminergic systems and may possess advantages over conventional dopaminergictherapies. Vernalis has completed a suite of Phase I trials and its partner, Biogen Idec,will start patient dosing in a Phase II trial of V2006 imminently. Vernalisreceived a milestone payment of $3 million at the end of 2006 in recognition ofthe start of the Phase II programme. Vernalis has an option to co-promoteproducts arising out of this collaboration in the U.S. Apomorphine - Parkinson's Disease In November 2005, Vernalis entered into a collaboration with BritanniaPharmaceuticals Limited (Britannia) to explore the development of newformulations of apomorphine for the U.S. market. Vernalis has rights toBritannia's technology to develop a continuous sub-cutaneous infusion ofapomorphine and rights to negotiate terms for a nasal powder formulation ofapomorphine, which is currently in clinical development in Europe. Other Programmes V24343 - Obesity In December 2006 Vernalis started a Phase I trial of V24343, a cannabinoid type1 receptor (CB1) antagonist, as a potential treatment for obesity, type IIdiabetes and related disorders. CB1 receptors are widely expressed both inperipheral tissues involved in lipid and glucose metabolism and in the brainregions controlling appetite. Blockade of these receptors by selective CB1receptor antagonists is thought to cause weight loss and help attenuate riskfactors for obesity related disorders such as cardiovascular disease and type IIdiabetes. The efficacy of CB1 receptor antagonists in the treatment of obesity,type II diabetes and associated disorders has been clinically demonstrated inrecent trials of the Sanofi Aventis product, Rimonabant. The Phase I double-blind, randomised, placebo-controlled study in overweight andmildly obese volunteers is being conducted in two parts; a single ascending dosefollowed by a multiple ascending doses and is expected to complete in mid-2007.The primary objectives of the Phase I programme are to evaluate the safety,tolerability and pharmacokinetics of single and multiple doses of V24343.Overweight and mildly obese subjects are being recruited into the trial toensure that the evaluation of V24343 is carried out in a clinically relevantpopulation. Hsp90 inhibitors - Oncology Inhibition of Hsp90 is believed to have significant potential in the treatmentof a broad range of cancers. Vernalis has a research collaboration with Novartisutilising Vernalis' structure-based design technology to identify potent andspecific inhibitors of this novel drug target for use against various cancers.The two companies are conducting a joint research programme under which Novartisprovides research funding to Vernalis for an initial three-year period fromAugust 2004. In addition, Novartis is responsible for funding and conducting thedevelopment of product candidates as well as for commercialisation. In December 2006, Vernalis announced that Novartis had selected a secondclinical development candidate; an oral follow on to an intra-venous (IV)compound, triggering a milestone payment of $1.5 million to Vernalis. Novartisexpects to start a Phase I clinical trial with the IV compound in mid-2007. Research Vernalis has a strong research capability focused on the discovery of drugdevelopment candidates to treat CNS diseases and cancer. The current therapeuticfocus in CNS is pain and Parkinson's disease, where, for the latter, bothsymptomatic and disease modifying strategies are being pursued. Emphasis isplaced on drug targets for which there is both strong evidence of therapeuticrelevance and which are amenable to the Company's drug candidate discoverytechnology. Where appropriate, Vernalis seeks collaborations in this area, anexample of which is its adenosine A2A receptor antagonist programme partneredwith Biogen Idec. In cancer the emphasis is on targets that are capable ofhaving pleiotropic effects on cancer cells i.e. single targets that can modulatethe action of multiple growth promoting pathways used by cancer cells. With thisapproach it is hoped to produce effective treatments by preventing a tumourbeing able to survive by using a different complementary growth pathway. Thispleiotropic approach to targets is illustrated by the Company's Hsp90 programmepartnered with Novartis. Vernalis uses and develops structure-based drug discovery methods for itsprogrammes in order to increase the quality and discovery rate of drug candidatecompounds. The Company's approach is to generate as much 3-dimensionalprotein-molecule structural information as possible in the hit identificationphase using virtual screening, a distinctive fragment (small parts of molecules)based discovery process, and molecular modelling. In turn, this structuralinformation is used to design novel hit compounds, often combining keyinteraction features from a number of fragments and compounds together. Thesehits are then optimised using structure-guided medicinal chemistry. Drugcandidate compounds emerging from this discovery process in both therapeuticareas are regularly reviewed and considered for partnering or internaldevelopment. 2. Financial Review Income Statement Revenue was £16.3 million (2005: £14.1 million) and comprised £2.6 million(2005: £0.5 million) in respect of Apokyn(R), £3.9 million (2005: £3.0 million)in respect of Frova(R), £9.8 million (2005: £10.0 million) in respect ofrevenues recognised under collaboration and similar agreements and other revenueof £0.1 million (2005: £0.2 million). The rights to Apokyn(R) were acquired from Mylan in November 2005. Revenues for2006 amounted to gross sales of $5.6 million less provisions of $0.8 million forpotential returns, rebates and allowances. The Frova(R) revenues comprised £3.6 million (2005: £3.0 million) from Europewhere the product is promoted by Menarini, and the release of a provision of£0.3 million (2005: £nil) relating to North American returns and rebates inrespect of the period prior to the licensing agreement with Endo. During 2006,an anniversary payment of $15 million was received from Endo, part of which isaccounted for within collaboration income. The variable royalty on NorthAmerican sales of Frova(R) commenced on 1 January 2007. Revenues from collaborations and similar agreements included £3.2 million (2005:£3.2 million) in respect of Frova(R), including recognition of a proportion ofthe $15 million anniversary payment from Endo that was received in September2006. In addition, £1.5 million (2005: £Nil) was recognised following initiationof the BIIB014 (formerly V2006) Phase II programme by Biogen Idec and consequentpayment of $3 million to Vernalis. Other collaboration income amounted to £5.1million (2005: £7.2 million) and related to the release of deferred income ofpreviously received initial payments from Biogen Idec and Novartis and thefunding from Endo in respect of the US co-promotion of Frova(R). Cost of sales increased to £6.8 million (2005: £5.0 million). This comprised£0.5 million (2005: £0.1 million) in respect of Apokyn(R), reflecting productcosts and royalties payable to Britannia, £1.2 million (2005: £1.2 million) inrespect of European sales of Frova(R) and £5.1 million (2005: £3.7 million) ofother charges, principally amortisation of the acquisition costs of Frova(R) andApokyn(R) incurred in prior years. Other income of £0.6 million (2005: £nil) results from compensation received fordamaged inventory of Frova(R). Research and development expenditure increased to £38.9 million (2005: £26.5million). The 2006 expenditure includes an impairment charge of £9.8 million inrespect of V1003. The valuation of V1003 has been reduced to zero due to theuncertainty surrounding its future development. Excluding this amount, researchand development expenditure increased to £29.1 million (2005: £26.5 million) andcomprised £17.5 million (2005: £17.3 million) on internally-funded R&D and £11.6million (2005: £9.2 million) on external costs associated with development ofthe product portfolio. The increase in external costs is due to investmentacross the broader portfolio, particularly V1512 and V3381, and manufacture ofPhase III material for V10153; this was offset by reduced costs, compared with2005, on the clinical development of Frova(R) for the short-term prevention ofMM. Sales and marketing expenditure increased to £9.0 million (2005: £1.6 million)reflecting the launch of Apokyn(R) in February 2006 and the full operation ofthe US commercial business. General and administrative expenditure was £12.2 million (2005: £14.4 million)and comprised goodwill impairment of £0.7 million (2005: £6.4 million), vacantlease provisions of £1.2 million (2005: £Nil) and other expenditure of £10.3million (2005: £8.0 million). The increase in other expenditure was due to theoverhead costs of operating in the USA and Canada (£2.1 million), and increasesin professional fees (£0.6 million). The operating loss before exceptional items was £38.3 million (2005: £26.9million). The total operating loss for the year was £50.0 million (2005: £33.3million). Interest receivable and similar income increased to £8.1 million (2005: £4.4million). Bank interest was £2.3 million (2005: £2.0 million) with the increasedue to both slightly higher average cash balances during the year and slightlyhigher interest rates. Exchange gains increased to £5.7 million (2005: £1.8million) and relates principally to the retranslation of the dollar-dominatedloan from Endo (£3.9 million) and retranslation of the dollar-dominatedcontingent deferred consideration that may become due pursuant to theacquisition of Cita (£1.4 million). These amounts arise due to the strengtheningof sterling from $1.72 at the beginning of the year to $1.96 at the end of theyear. The exchange gains and losses are not matched under hedge accountingbecause, in the case of the loan from Endo, it is expected to be repaid out offuture dollar receipts from Endo and, in the case of the contingent deferredconsideration, it is not certain when or what amount will be due. In 2005 animplicit interest receipt of £0.5 million was recorded relating to the fairvalue accounting for the $15 million anniversary payment from Endo in September2006. Interest payable and similar charges reduced to £3.6 million (2005: £5.5million). The reduction was due to lower exchange losses of £1.3 million (2005:£3.7 million). The principal exchange loss recorded in 2005 related to the loanfrom Endo and occurred due to the weakening of sterling against the dollar in2005. Loan interest was unchanged at £1.5 million. Charges relating to the fairvalue accounting for deferred obligations increased to £0.8 million (2005: £0.3million). The tax credit of £3.1 million (2005: £1.6 million) represents amounts that areexpected to be received in the UK and Canada under current legislation onresearch and development tax credits for small and medium sized companies. The loss for the year ended 31 December 2006 before exceptional items was £30.7million (2005: £26.4 million). The increase is due to higher sales and marketingcosts resulting from the acquisition of Apokyn(R) and establishment of the UScommercial organisation. The total loss for the year was £42.4 million (2005:£32.8 million). Balance Sheet Non current assets decreased to £71.6 million (2005: £91.7 million). Theprincipal factor was the reduction of intangible assets to £66.4 million (2005:£84.3 million). This reduction resulted from the regular amortisation charge of£4.7 million, the impairment in respect of V1003 of £9.8 million and an exchangeadjustment on Canadian intangibles of £3.4 million. In addition, goodwillreduced to £3.4 million (2005: £4.9 million) as a result of adjustment to theprice paid to acquire Cita relating to the tax credits receivable and the likelytiming of the satisfaction of the contingent deferred consideration. Current assets reduced to £50.8 million (2005: £93.1 million). Trade and otherreceivables decreased to £12.3 million (2005: £24.0 million). Trade receivablesincreased to £3.1 million (2005: £2.3 million) due principally to the amountsdue in respect of sales of Apokyn(R). Research and development tax creditsreceivable increased to £5.0 million (2005: £4.0 million) due to the higherclaim in the year, principally in respect of the Canadian operations. Otherreceivables decreased to £0.6 million (2005: £13.0 million). The 2005 balanceincluded the second anniversary payment of £8.7 million from Endo, received inSeptember 2006, and the unwinding of £3.6 million in respect of tax-assistedfinance arrangements entered into by Cita prior to its acquisition by Vernalis.In addition prepayments and accrued income decreased to £3.0 million (2005: £4.2million). Cash resources, comprising held to maturity financial assets of £16.1million (2005: £28.1 million) and cash and cash equivalents of £21.5 million(2005: £40.2 million), decreased to £37.6 million (2005: £68.3 million). Thereasons for the decreases are explained in the cash flow section below. Non-current liabilities reduced to £47.8 million (2005: £69.6 million). Thereduction is principally due to the classification of £14.9 million in respectof the Endo loan within current liabilities. For the purpose of classificationof creditors, it is assumed that Frova(R) will be approved by the FDA for theshort-term prevention of MM during 2007. This event would trigger a payment of$40 million from Endo to Vernalis. Endo has the right to withhold 50 per cent ofthis payment, together with 50 per cent of any royalty payments, and use them toreduce the balance outstanding on the loan. In addition, following recognitionof another year's deferred revenue in the income statement, £4.5 million ofdeferred income has been transferred from non-current to current liabilities. Current liabilities increased to £36.8 million (2005: £32.3 million) with theincrease due to the reclassification of £14.9 million in respect of the Endoloan within current liabilities. This was offset by a reduction of £2.6 millionin trade creditors and accruals, due principally to unpaid transaction costs in2005, a reduction of £3.6 million in respect of the Cita tax-assisted financingreferred to above and a reduction of £1.2 million to the deferred considerationthat could become payable pursuant to the acquisition of Cita. In additionprovisions reduced by £2.8 million due to the occupancy of part of the premisesat Granta Park by Pfizer and the resolution of rebates and returns in respect ofFrova(R). Cash Flow Cash resources, comprising held to maturity financial assets and cash and cashequivalents decreased to £37.6 million (2005: £68.3 million). The decrease incash resources was £30.7 million (2005: £34.0 million) which comprises £31.9million (2005: £15.8 million) utilised in the operations of the business offsetby £1.6 million generated from investing activities (2005: utilisation of £18.7million) and £0.6 million of exchange losses (2005: £0.5 million gains). Theincrease in the amount utilised in the operations of this business is consistentwith the expenditure analysis above and principally relates to the additionalcosts of the US and Canadian operations, sales and marketing support for Apokyn(R) and investment in the broader portfolio of development candidates. Theamount generated from investments is principally interest received on financialassets and cash deposits. In 2005 the amount used in investing activities arosedue to the acquisition of Apokyn(R) from Mylan for $23 million, a payment of£2.8 million to GSK in respect of the royalty buy-out for Frova(R) and £3.1million of costs associated with business combinations during 2005. Outlook for 2007 The potential approval of Frova(R) for the short-term prevention of MM is themost significant factor affecting the financial position of the Company. The FDAhas indicated it will provide its response to the Company's sNDA submission by19 May 2007 (PDUFA date). If this application is successful a $40 millionmilestone is due to Vernalis from Endo, though Endo reserves the right to pay$20 million in cash and retain the remaining $20 million as partial payment dueon its outstanding loan to Vernalis. Vernalis' variable royalty on Frova(R) sales in North America commenced on 1January 2007. 2007 Apokyn(R) revenues are expected to increase to between $9million to $10 million. There is also the potential to generate income from newcollaborative arrangements for V10153, V3381 and V24343 if the ongoing trialswith these products, all of which are expected to complete in the summer, arepositive. External development costs are expected to be similar to 2006 with the largestelement of expenditure being the Phase III programmes with V1512. This Phase IIIprogramme is expected to start in the second half of the year, after the FDA hasresponded on the Frova(R) sNDA. Internal R&D costs and general costs areexpected to be at similar levels to 2006 and it is anticipated there will be asmall increase to sales and marketing costs reflecting a full year's charge inrespect of infrastructure established in 2006. Unaudited Consolidated Income StatementFor the year ended 31 December 2006 Note Year ended 31 December 2006 Year ended 31 December 2005 Pre-Exceptional Exceptional TOTAL Pre-Exceptional Exceptional TOTAL Items Items Items Items (Note 3) (Note 3) £000 £000 £000 £000 £000 £000_____________________________________________________________________________________________________Revenue 2 16,327 - 16,327 14,131 - 14,131Cost of sales (6,799) - (6,799) (4,991) - (4,991)Other income 621 - 621 - - -Research and development expenditure (29,105) (9,781) (38,886) (26,491) - (26,491)Selling and marketing (9,036) (9,036) (1,601) - (1,601)General and administrative expenses (10,275) (1,943) (12,218) (7,993) (6,400) (14,393)_____________________________________________________________________________________________________Operating loss (38,267) (11,724) (49,991) (26,945) (6,400) (33,345)Interest receivable and similar income 4 8,132 - 8,132 4,403 - 4,403Interest payable and similar charges 4 (3,642) - (3,642) (5,490) - (5,490)_____________________________________________________________________________________________________Loss on ordinary activities beforetaxation (33,777) (11,724) (45,501) (28,032) (6,400) (34,432)_____________________________________________________________________________________________________Tax credit on loss on ordinary activities 3,070 - 3,070 1,584 - 1,584_____________________________________________________________________________________________________Loss for the year (30,707) (11,724) (42,431) (26,448) (6,400) (32,848)_____________________________________________________________________________________________________Loss per share (basic and 5 diluted) (9.8)p (3.8)p (13.6)p (13.1)p (3.2)p (16.3)p_____________________________________________________________________________________________________ Unaudited Balance SheetAs at 31 December 2006 Note 2006 2005 £000 £000_________________________________________________________________________AssetsProperty, plant and equipment 1,689 1,910Intangible assets 6 69,795 89,196Available-for-sale financial assets 135 601_________________________________________________________________________Non-current assets 71,619 91,707Inventories 927 752Trade and other receivables 7 12,322 24,013Held-to-maturity financial assets 16,087 28,052Cash and cash equivalents 21,469 40,243_________________________________________________________________________Current assets 50,805 93,060_________________________________________________________________________Total assets 122,424 184,767_________________________________________________________________________ LiabilitiesBorrowings 8 (13,806) (30,938)Other non-current liabilities 9 (6,564) (7,412)Deferred income (21,937) (26,457)Provisions (5,540) (4,780)_________________________________________________________________________Non-current liabilities (47,847) (69,587) Borrowings 8 (15,074) (33)Trade and other liabilities 9 (15,305) (22,971)Deferred income (5,012) (5,147)Provisions (1,373) (4,169)_________________________________________________________________________Current liabilities (36,764) (32,320)_________________________________________________________________________Total liabilities (84,611) (101,907)_________________________________________________________________________Net assets 37,813 82,860_________________________________________________________________________Shareholders' equityShare capital 47,372 47,280Share premium 369,633 369,324*Other reserves 177,941 180,958*Retained deficit (557,133) (514,702)_________________________________________________________________________Total shareholders' equity 37,813 82,860_________________________________________________________________________ * Restated - see Note 1. Unaudited Statements of changes in shareholders' equity Share Share Other Retained Total capital premium reserves deficitGroup £000 £000 £000 £000 £000______________________________________________________________________________Balance at 1 January 2005 39,492 305,842 154,417 (481,854) 17,897Revaluation of assets available for sale - - (79) - (79)Exchange loss on translation of overseas subsidiaries - - (31) - (31)______________________________________________________________________________Net income recognised directly in equity - - (110) - (110)Loss for the year - - - (32,848) (32,848)______________________________________________________________________________Total recognised income and expense for the period - - (110) (32,848) (32,958)Issue of equity share capital 7,788 91,903 - - 99,691Reclassification of share premium to other reserve - (24,400) 24,400 -Expenses on issue of share capital - (4,021) - - (4,021)Shares to be issued - - 1,034 - 1,034Equity share options charge - - 1,217 - 1,217______________________________________________________________________________Balance at 31 December 2005 47,280 369,324 180,958 (514,702) 82,860Revaluation of assets available for sale - - (382) - (382)Exchange loss on translation of overseas subsidiaries - - (3,789) - (3,789)______________________________________________________________________________Net income recognised directly in equity - - (4,171) - (4,171)Loss for the year - - (42,431) (42,431)______________________________________________________________________________Total recognised income and expense for the period - - (4,171) (42,431) (46,602)Issue of equity share capital 92 - (92) - -Refunded expenses on issue of share capital - 309 - - 309Equity share options charge - - 1,246 - 1,246______________________________________________________________________________Balance at 31 December 2006 47,372 369,633 177,941 (557,133) 37,813______________________________________________________________________________ Unaudited cash flow statementsFor the year ended 31 December 2006 2006 2005 £000 £000Cash flows from operating activitiesLoss for the period (42,431) (32,848)Taxation (3,070) (1,584)Depreciation 1,318 921Loss on disposal of tangible fixed assets 3 12Adjustments to/amounts written off goodwill 747 6,371Amortisation, impairment and disposal of intangible fixed assets 14,543 3,983Charged to Provision 1,293 -Loss on sale of available for sale asset 22 -Option charge 1,246 1,217Interest receivable (8,132) (4,403)Interest payable 3,642 5,490Exchange loss/(gain) 41 -_________________________________________________________________________ (30,778) (20,841)Changes in working capitalIncrease in inventories (175) (703)Decrease in receivables 11,969 7,914Decrease in liabilities (6,590) (133)Decrease in provisions (3,678) (1,807)Decrease in deferred income (4,655) (4,529)_________________________________________________________________________Cash used in operations (33,907) (20,099)Taxation received 2,073 4,284Taxation paid (28) -Interest paid (50) (8)_________________________________________________________________________Net cash used in operating activities (31,912) (15,823)Cash flows from investing activitiesPurchase of Property, plant and equipment (351) (589)Acquisition of subsidiary undertakings net of cash acquired - (3,104)Purchase of intangible fixed assets - (16,570)Purchase of investment in subsidiary undertakings (395) -Sale of available for sale asset 62 -Interest received 1,002 710Interest received on financial assets held-to-maturity 1,276 898_________________________________________________________________________Net cash generated from/(used in) investing activities 1,594 (18,655)Cash flows from financing activitiesMovement in held-to-maturity financial assets 11,965 (13,052)Issue of shares - 72,958Share issue refunds (costs) 309 (3,996)Capital element of finance lease payments (140) (23)_________________________________________________________________________Net cash generated from financing activities 12,134 55,887 Foreign exchange on cash and cash equivalents (loss)/gain (590) 511_________________________________________________________________________Movements in cash and cash equivalents in the period (18,774) 21,920Cash and cash equivalents at the beginning of the period 40,243 18,323_________________________________________________________________________Cash and cash equivalents at the end of the period 21,469 40,243_________________________________________________________________________ Notes to the unaudited financial statementsFor the year ended 31 December 2006 1. Basis of preparation The financial information has been prepared in accordance with InternationalFinancial Reporting Standards as adopted for use in the European Union. Inpreparing this financial information management has used the principalaccounting policies as set out in the Group's annual financial statements forthe year ended 31 December 2005 to which no material changes are required. The financial information for the year ended 31 December 2006 has not beenaudited and does not constitute statutory accounts within the meaning of Section240 of the Companies Act 1985. The financial information for the year ended 31December 2005 has been extracted from the Company's accounts for the year ended31 December 2005, which have been delivered to the Registrar of Companies; thereport of the auditors on these accounts was unqualified and did not contain astatement under Section 237 (2) or (3) of the Companies Act 1985. Certaincomparative figures as at 31 December 2005 have been reclassified to beconsistent with the presentation of financial information for the year ended 31December 2006. In 2005 the Group acquired Cita NeuroPharmaceuticals Inc. and IonixPharmaceuticals Limited. Both acquisitions included consideration satisfied bythe issue of equity shares in the Group, in exchange for 100 per cent of theequity share capital of the acquired companies. These shares qualified formerger relief (s131) under the Companies Act, and any premium is required to becredited to a merger reserve. This was credited to the share premium reserve inthe 2005 financial statements. Accordingly, the comparative figures as at 31December 2005 for share premium and other reserves have been restated. The potential approval of Frova(R) for the short-term prevention of MM is themost significant factor affecting the financial position of the Company. The FDAhas indicated a PDUFA date of 19 May 2007 for the application and approval willtrigger a milestone from Endo of $40 million which Endo has reserved the rightto pay half in cash and half as partial repayment of its outstanding loan toVernalis. If Frova(R) is not approved for the short-term prevention of MM, or ifany issues cannot be readily resolved, Vernalis will be required to review itsoperations and cost base including potentially delaying the start of clinicalprogrammes. The extent of these actions will depend upon the success of anymitigating factors including, in particular, whether revenue can be generatedfrom new collaborations. These financial statements have been prepared on agoing concern basis as the Directors believe that, even if the Frova(R) approvalis not achieved; there are a range of actions that could be taken to ensure thatthe business continues to operate for the foreseeable future. 2. Revenue The revenue analysis in the table below is based on the country of registrationof the fee-paying party. 2006 2005 £000 £000________________________________________________________________________United Kingdom 63 2,178Rest of Europe 3,598 3,622North America 12,624 8,317Rest of the world 42 14________________________________________________________________________ 16,327 14,131________________________________________________________________________ An analysis of revenue by category is set out in the table below: 2006 2005 £000 £000________________________________________________________________________Product Sales 7,739 3,602Royalties 91 110Collaborative 8,497 10,419________________________________________________________________________ 16,327 14,131________________________________________________________________________ 3. Exceptional Items Exceptional items represent significant items of income and expense which due totheir nature or the expected infrequency of the events giving rise to them, arepresented separately on the face of the income statement to give a betterunderstanding to shareholders of the elements of financial performance in theyear, so as to facilitate comparison with prior periods and to better assesstrends in financial performance. Exceptional items include, but are not limitedto, impairments of goodwill and intangible assets, and provisions for vacantleases. 2006 2005 £000 £000________________________________________________________________________ Intangibles impairment 9,781 -Goodwill adjustment/impairment 747 6,371Provision for vacant leases 1,196 29________________________________________________________________________ 11,724 6,400 4. Finance credit/(charge) (net) 2006 2005 £000 £000________________________________________________________________________ Interest receivable and similar incomeInterest on cash, cash equivalents and held-to-maturity assets 2,327 1,997Exchange gains on cash (previously disclosed under administrative expenses) - 511Exchange gains on other payable 347 -Exchange gains on long-term loan 3,911 -Exchange gains on other receivable - 1,320Exchange gains on contingent deferred consideration 1,446 -Unwinding of discount on other receivable 74 531Other interest 27 44________________________________________________________________________ 8,132 4,403________________________________________________________________________ Interest payable and similar chargesLoans repayable wholly or partly within five years 1,546 1,489Finance leases 50 4Exchange loss on cash 590 -Exchange loss on other receivable 701 -Exchange loss on long-term loan - 2,987Exchange loss on other payable - 429Exchange loss on deferred consideration - 257Unwinding of discount on contingent deferred consideration on purchase of intangible assets 514 -Unwinding of discount on royalty buy-out from GSK 67 94Unwinding of discount on provision 174 226Other interest payable - 4________________________________________________________________________ 3,642 5,490________________________________________________________________________ Net finance credit/(charge) 4,490 (1,087)________________________________________________________________________ Exchange gains on cash have been re-classified from administrative expenses tointerest receivable in order to provide a fairer presentation 5. Loss per share Basic loss per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year. For diluted loss per share, the weighted average number of ordinary shares inissue is adjusted to assume conversion of all dilutive potential ordinaryshares. Since the Group is loss-making there is no such dilutive impact. 2006 2005__________________________________________________________________________ Attributable loss before exceptional items (£'000) (30,707) (26,448)__________________________________________________________________________ Exceptional Items (£'000) (11,724) (6,400)__________________________________________________________________________ Attributable loss (£000) (42,431) (32,848)__________________________________________________________________________ Weighted average number of shares in issue (000) 312,229 202,174__________________________________________________________________________ Loss per ordinary share before exceptional items (9.8)p (13.1)p__________________________________________________________________________ Exceptional Items (3.8)p (3.2)p__________________________________________________________________________ Loss per ordinary share (basic and diluted) (13.6)p (16.3)p__________________________________________________________________________ All potential ordinary shares including options and deferred shares areanti-dilutive. 6. Intangible assets Goodwill Intangible Intangible Total assets in use assets not yet in use £000 £000 £000 £000__________________________________________________________________________________ CostAt 1 January 2006 20,431 50,400 42,425 113,256Disposals (8,269) - - (8,269)Adjustments (1,211) - - (1,211)Exchange (248) - (3,399) (3,647)__________________________________________________________________________________ At 31 December 2006 10,703 50,400 39,026 100,129__________________________________________________________________________________ Aggregate amortisationAt 1 January 2006 15,580 8,480 - 24,060Impairment - - 9,781 9,781Amortisation charge in the period - 4,762 - 4,762Disposals (8,269) - - (8,269)__________________________________________________________________________________ At 31 December 2006 7,311 13,242 9,781 30,334__________________________________________________________________________________ Net book value at 31 December 2006 3,392 37,158 29,245 69,795__________________________________________________________________________________ Goodwill Intangible Intangible Total Assets in use Assets not yet in use £000 £000 £000 £000__________________________________________________________________________________ CostAt 1 January 2005 17,223 37,408 600 55,231Additions through business combinations 3,208 - 41,327 44,535Additions separately acquired - 12,992 798 13,790Disposals - - (300) (300)__________________________________________________________________________________ At 31 December 2005 20,431 50,400 42,425 113,256__________________________________________________________________________________ Aggregate amortisationAt 1 January 2005 9,209 4,797 - 14,006Impairment 6,371 - - 6,371Amortisation charge in the period - 3,683 - 3,683__________________________________________________________________________________ At 31 December 2005 15,580 8,480 - 24,060__________________________________________________________________________________ Net book value at 31 December 2005 4,851 41,920 42,425 89,196__________________________________________________________________________________ Opening value of intangibles Intangible assets in use at 1 January 2006 represent the capitalisation ofpayments conditionally due to GlaxoSmithKline (GSK) agreed in December 2000 tobuy out royalties due to GSK on sales of Frova(R), and the consideration paid toElan in respect of the re-acquisition of the North American rights to Frova(R)in May 2004 and the capitalisation of payments for Apokyn(R) in 2005. Goodwill at 1 January 2006 arose from the acquisitions of RiboTargets Holdingsplc of £nil in 2003 (fully impaired during 2005), Cerebrus Pharmaceuticals Ltd.of £1,643,000 in 1999, Ionix Pharmaceuticals Limited of £926,000 and CitaNeuroPharmaceuticals Inc of £2,282,000 Impairment of Intangibles V1003 Post Operative pain - In March 2006, Vernalis completed a Phase IIa studyof V1003, a novel proprietary intranasal formulation of buprenorphine for themanagement of post-operative pain. The study achieved its primary end point ofpain relief over the period of eight hours from drug administration. ReckittBenckiser has not yet identified the most appropriate indication for the futuredevelopment of the nasal delivery of buprenorphine. Due to the uncertainty, and likelihood of this product being further developedby Reckitt Benckiser, the Group has fully impaired the carrying value of thisasset. This results in a charge to the income statement of £9,781,000. Adjustments to Cita goodwill During 2005, the Group recognised deferred tax assets on Research andDevelopment tax credits that had previously not been recognised on theacquisition of Cita. In accordance with IAS 12, Income taxes, when deferred taxassets have not been recognised on acquisition and are subsequently recognised,both goodwill and deferred tax assets are adjusted with corresponding entries tooperating expenses and taxation in the income statement. Therefore a deferredtax credit has been included within taxation in the income statement, and acharge of £747,000 has been recorded in operating expenses. Following a review of the deferred contingent consideration payable to theoriginal Cita shareholders, an adjustment of £464,000 has been made to the valueof goodwill. The adjustments relates to the timing of future contingentpayments, which are discounted at 12%. In accordance with IAS21, goodwill and other fair value that is created inrelation to the acquisition of a foreign subsidiary is maintain in thefunctional currency of that subsidiary. During the year, the Group had anexchange loss of £248,000 on goodwill relating to the acquisition of Cita. Disposal - Following the impairment of the Goodwill relating to RibotargetsHoldings plc in 2005 the group has disposed of the rights to the V140 programme. Net Book value of Intangible Assets Assets in Use £000 Useful Life_________________________________________________________________________ Frova(R) 25,682 to 2014Apokyn(R) 11,476 to 2015_________________________________________________________________________ Total assets in use 37,158_________________________________________________________________________ Assets not in Use £000 Useful Life_________________________________________________________________________ V3381 14,351 Not in UseV1512 13,796 Not in UseOther 1,098 Not in Use_________________________________________________________________________ Total Assets Not in use 29,245_________________________________________________________________________ Closing Value of Goodwill The value of Goodwill at 31 December 2006 is attributed to the remaining valueof the business and is tested for impairment accordingly. Long-lived assets, including identifiable intangibles are regularly reviewed forimpairment, whenever events or changes in circumstance indicate that the balancesheet carrying amount of the asset may not be recoverable. In order to assess ifthere is any impairment, estimates are made of the future cash flows expected toresult from the use of the asset and its eventual disposal. Goodwill andin-process research and development and acquired development projects that arenot yet ready for use are subject to impairment review at least annually. Otherlong-lived assets are reviewed when there is an indication that an impairmentmay have occurred. If the balance sheet carrying amount of the asset exceeds thehigher of its value in use to Vernalis or its anticipated fair value less costof sale, an impairment loss for the difference is recognised. The impairmentanalysis is principally based upon estimated discounted future cash flows.Actual outcomes could vary significantly from such estimates of discountedfuture cash flows. Especially, the development of discounted future cash flowsfor intangible assets under development involves highly sensitive assumptionsspecific to the nature of the Group's activities such as: • Outcome of research & development activities (compound efficacy, results of clinical trials, etc.) • Probability of obtaining regulatory approval • Long-term sales forecast period of up to 20 years • Selling price erosion rates after the end of patent protection due to generic competition • Behaviour of competitors (launch of competing products, marketing initiatives etc.) • The availability of sufficient funding to develop the programme in-house Value in use calculations are generally utilised to calculate recoverableamount. Value in use is calculated as the net present value of the projectedrisk-adjusted, post-tax cash flows of the cash generating unit (being therelated products) relating to the intangible asset, and applying a discount rateof the Group post-tax weighted average cost of capital of approximately 12%.This approximates to applying a pre-tax discount rate to pre-tax cash flows. Thecash flows projected are over the expected useful lives of the products whichextend over the period of the licences or patents. The determination of these underlying assumptions relating to the recoverabilityof intangible assets is subjective and requires the exercise of considerablejudgement. Any changes in key assumptions about our business and prospects, orchanges in market conditions, could result in an impairment change. 7. Trade and other receivables 2006 2005 £000 £000______________________________________________________________________ Trade receivables 3,049 2,292Interest receivable 600 524Research and development tax credits 5,046 3,996Other receivables 643 12,969Prepayments and accrued income 2,984 4,232______________________________________________________________________ Current trade and other receivables 12,322 24,013______________________________________________________________________ Other receivables at 31 December 2005 includes £8,662,000 in relation to thefair value of the $15 million receivable from Endo. This amount was received inAugust 2006. During the year an exchange loss of £701,000 and an implicitinterest receipt of £74,000 linked to the unwinding of the discount have beenrecognised in the income statement in relation to this asset. 8. Borrowings 2006 2005 £000 £000_________________________________________________________________________ US dollar secured loan 13,544 30,839Obligations under finance leases 262 99_________________________________________________________________________ Non-current borrowings 13,806 30,938 US dollar secured loan 14,927 -Obligations under finance leases 147 33_________________________________________________________________________ Current borrowings 15,074 33_________________________________________________________________________ Total borrowings 28,880 30,971_________________________________________________________________________ Borrowings included above are repayable asfollows:Under one year 15,074 33Over one and under two years 6,847 -Over two and under five years 6,959 30,938_________________________________________________________________________ 28,880 30,971_________________________________________________________________________ The US dollar secured loan relates to $50 million borrowed from Endo, net of thefinance charges of £0.2 million, and interest payable of $6.1 million (£3.1million) which the Group has elected to roll up into the loan at December 2005and December 2006. It is secured against all royalty and milestone incomereceivable by Vernalis in respect of the licence deal with Endo. Endo have theright to offset half the royalty payments and milestones payable to Vernalisagainst the loan from 2007. The weighted average interest rate is 5 per centfixed for the term of the loan. The minimum lease payments under finance leases fall due as follows: 2006 2005 £000 £000_________________________________________________________________________ Not later than one year 21 28_________________________________________________________________________ Future finance charges on finance leases 21 28Present value of finance lease liabilities 409 132 The minimum lease payments of £21,000 relate to the fleet of vehicles that aremaintained for the US sales force with an initial contract term of 12 monthsfrom acquisition. The company has capitalised the rental cost for the entirecontract length, being 60 months, because if the rental is terminated beforethat date, any loss or gain on disposal is attributable to Vernalis. 9. Trade and other liabilities 2006 2005 £000 £000_________________________________________________________________________ Royalty buy out from GSK (a) 2,508 2,788 Deferred consideration 4,056 4,624_________________________________________________________________________ Non-current trade and other liabilities 6,564 7,412_________________________________________________________________________ Trade payables 2,894 3,975Taxation and social security payable 345 301Other payables (b) 9 3,626Accruals 6,055 7,825Deferred consideration for acquisitions 6,002 7,244_________________________________________________________________________ Current trade and other liabilities 15,305 22,971_________________________________________________________________________ Total trade and other liabilities 21,869 30,383_________________________________________________________________________ a) The royalty payment to GlaxoSmithKline (GSK) relates to the fair value ofpayments conditionally due under the agreement of December 2000 to buy outroyalties due to GSK on sales of Frova(R). The Group is committed to making onefurther annual payment of $5 million, the first having been made in September2002. A fifth payment of $5 million is due 90days after cumulative global salesexceed $300 million. During 2006, an exchange gain of £0.3million and animplicit interest charge of £0.1 million have been recognised in the incomestatement. The weighted average period cannot be calculated due to the paymentbeing conditional on future events. The directors estimate that this will beduring 2008. b) Included within other payables (and other receivables) in the year ended 2005is £3,592,000 (CAD$7,204,000) relating to tax-assisted finance that wascompleted by Cita NeuroPharmaceuticals Inc. on 23 December 2004. Thisarrangement unwound on 6 January 2006. Also included within other payables is£7,000 (2005: £34,000) in relation to money-purchase pension contributionspayable. 10. Post-balance Sheet Events There have been no material post-balance sheet events. 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Vernalis PLC