Results for the year ended 31 December 2010

12 April 2011

LSE: VER

Announcement of Results for the year ended 31 December 2010

Exceptionally strong financial performance, reflecting reacquisition of Menarini frovatriptan royalty rights

Vernalis plc (LSE: VER) today announces its results for the year ended 31 December 2010.

Highlights from our marketed drugs and research and development pipeline

·; Frovatriptan Menarini royalties:

o Regained entire rights from Paul Capital Healthcare (March 2010)

·; AUY922 (Cancer):

o Initiation of Phase II proof-of-concept study, triggering $3 million milestone from Novartis (March 2010)

·; V158866 (Pain):

o First subjects dosed in Phase I clinical study (March 2011)

·; Tosedostat - CHR2797 (Cancer):

o Licensing deal secured by Chroma Therapeutics for North, Central and South America (March 2011)

o Orphan drug status granted for Acute Myeloid Leukaemia by the US Food and Drug Administration and European Medicines Agency

o Phase III studies targeted to start in Q4 2011

·; V81444 (Parkinson's Disease):

o As separately announced today, rights successfully regained to A2A programme from Biogen Idec following a strategic review of their priority programmes (April 2011)

o Phase I ready, approved by MHRA for first dosing in man

o Phase I trial expected to start during 2011 following transition back to Vernalis

·; HSP990 (Cancer):

o Continuing in Phase I MTD studies

·; V3381 (Neuropathic Pain and Chronic Cough):

o Programme discontinued and rights returned to Chiesi (November 2010)

·; V2006 (Parkinson's Disease):

o Programme redirected by Biogen Idec to V81444 (July 2010) due to V2006 compound-specific safety concerns

·; Research highlights:

o Oncology collaboration with Servier extended (May 2010)

o Milestone of €0.75 million secured from second Servier oncology collaboration (October 2010)

o New collaboration with Lundbeck signed targeting LRRK2, with potential utility in Parkinson's disease (December 2010)

Financial Highlights

·; Dramatically improved trading results in 2010 (vs 2009):

o Revenues up 9% to £14.2 million (2009: £13.0 million)

§ Menarini frovatriptan royalties £7.0 million (2009: £7.5 million)

§ Underlying sales of frovatriptan €31.3 million (2009: €32.4 million) down marginally (3.4%) due to price reductions in Germany (up 2.9% on 2009 excluding Germany)

§ Collaboration income and deferred revenue up 27% to £7.0 million (2009: £5.5 million)

o Underlying operating costs reduced by £1.4 million in 2010 in addition to £3.5 million reduction in 2009

o Loss before exceptional items for 2010 reduced by 75% to £2.8 million from £11.3 million in 2009

o Underlying annual net cash burn reduced by £10.1 million (70%) to £4.4 million

·; Cash resources (including cash, cash equivalents and held-to-maturity financial assets) of £30.9 million at 31 December 2010, debt free and a runway through to the end of 2013

Expected Newsflow

·; V158866 (pain): Complete Phase I trials (H2 2011)

·; Tosedostat (cancer): Initiate Phase III trials (Q4 2011)

·; V81444 (Parkinson's disease): Initiate Phase I trials (2011)

·; V158411 (cancer): Complete pre-clinical studies and file IND/CTA (2011)

·; V85546 (inflammation): Possible partnering and/or start Phase II studies (2011)

·; AUY922 (cancer): Multiple Phase I & II study results (Novartis) (timing undisclosed)

·; HSP990 (cancer): Establish Maximum Tolerated Dose (Novartis) (timing undisclosed)

Ian Garland, Chief Executive Officer, commented, "We have transformed Vernalis financially over the last two years and dramatically reduced our annual net cash burn. Our strong balance sheet and focused strategy positions us well to create value for our shareholders in what is an inherently risky sector. By realising value from our existing programmes and adding later stage products through M&A and in-licensing, over time we aim to transition Vernalis from a cash burning development stage company into a diversified self-sustaining pharmaceutical company."

Presentation & Conference Call

Vernalis management will host a presentation at 09.00am (UK) at Brunswick's offices, 16 Lincoln's Inn Fields, London WC2A 3ED today. It will also be available via webcast at http://www.vernalis.com/investor-centre/presentations-and-webcasts and www.cantos.com and via conference call, which can be joined by dialling + 44 (0)20 3140 0724.

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Enquiries:

Notes to Editors

About Vernalis

Vernalis is a development stage pharmaceutical company with significant expertise in taking promising product candidates along a commercially-focused path to market. The Group has one marketed product, frovatriptan for the acute treatment of migraine, and eight candidates in development, seven of which are designated priority programmes. Four of these priority development programmes are currently unpartnered and three are partnered. Pipeline programmes are derived from both our own research activities where we have significant expertise in fragment and structure based drug discovery, as well as from collaborations. Our technologies, capabilities and products are endorsed by collaborations with Endo, GSK, Lundbeck, Menarini, Novartis and Servier.

For further information about Vernalis, please visit www.vernalis.com

Vernalis Forward-Looking Statement

This news release may contain forward-looking statements that reflect the Company's current expectations regarding future events including the clinical development and regulatory clearance of the Company's products, the Company's ability to find partners for the development and commercialisation of its products, as well as the Company's future capital raising activities. Forward-looking statements involve risks and uncertainties. Actual events could differ materially from those projected herein and depend on a number of factors including the success of the Company's research strategies, the applicability of the discoveries made therein, the successful and timely completion of clinical studies, the uncertainties related to the regulatory process, the ability of the Company to identify and agree beneficial terms with suitable partners for the commercialisation and/or development of its products, as well as the achievement of expected synergies from such transactions, the acceptance of frovatriptan and other products by consumers and medical professionals, the successful integration of completed mergers and acquisitions and achievement of expected synergies from such transactions, and the ability of the Company to identify and consummate suitable strategic and business combination transactions.

Operational Review

During 2010, we embarked on a strategy of transforming Vernalis, over time, from a cash-burning development stage company into a diversified, self-sustaining pharmaceutical company.

An important first step of that strategy was to regain 100 per cent of the Menarini frovatriptan royalties, which was successfully accomplished in March 2010, facilitated by a £28.5 million (net of expenses) equity fundraising. The dramatic impact of that transaction and associated financing can be seen in our 2010 income statement and cash flow where our underlying net cash burn has been cut dramatically from £14.5 million in 2009 to just £4.4 million in 2010. It can also be seen in our balance sheet where we are now debt free and ended 2010 with £30.9 million of cash resources and a cash runway through to the end of 2013.

The Company ended 2010 in a strong position to continue its transformation, with its strong balance sheet and a closer alignment between revenues and investment in research and development. This closer alignment is not solely a result of regaining Menarini frovatriptan royalties but also reflects continued success in securing new or extensions of existing research collaborations, earning milestones under ongoing and historical partnerships and focused investment in in-house development programmes.

Vernalis had eight active collaborations at the end of 2010, four covering candidates in pre-clinical through Phase II development, and four active research collaborations. During 2010, a new research collaboration was secured with Lundbeck and an existing collaboration with Servier was extended following a successful initial three-year term. Under our Hsp90 cancer collaboration with Novartis, the lead candidate, AUY922, progressed into Phase II in March 2010 triggering a $3.0 million milestone. Separately, a €0.75 million milestone was earned in October 2010 following early success under one of our Servier cancer research collaborations. As announced today, we have successfully regained rights to our Phase I ready A2A programme (V81444) from Biogen Idec.

The year has not been without disappointments, reflecting the high risks inherent in developing novel treatments for unmet medical needs. In our clinical pipeline we have seen two candidate failures. Our in-house candidate, indantadol (V3381), failed in the IN-STEP diabetic neuropathic pain Phase II study. In addition, Biogen Idec halted development of a lead candidate, vipadenant, under our A2A Parkinson's collaboration due to compound-specific safety concerns, but following successfully regaining the programme we will progress a follow-up compound, V81444.

Since the year end we have seen two further positive changes to our pipeline. Our partner, Chroma Therapeutics, secured a licensing deal for tosedostat (CHR2797) in North, Central and South America and announced that it has been granted orphan status for Acute Myeloid Leukaemia (AML). Internally our in-house pain product V158866 entered Phase I studies.

The transformation of Vernalis into a diversified, self-sustaining pharmaceutical company will require a combination of successful advancement of existing in-house and partnered programmes, in-licensing and acquisitions. The disappointments in the clinical pipeline in 2010 highlight the risk that existing programmes alone will not be sufficient to provide this transformation and a key focus for 2011 will continue to be in-licensing and acquisitions.

We enter 2011 with optimism that we will be able to deliver the transactions necessary to transform Vernalis, and also continue to create value from our existing programmes and collaborations.

Finally, we would like to thank Board Members and staff for their contributions during the year, and our shareholders for their continued support. George Kennedy, our Senior Independent Director, has decided that, following almost eight years with Vernalis and three years with its predecessor companies, he intends to retire at the Company's Annual General Meeting in June. We would like to thank George for his outstanding contribution during his time with the Company and wish him well for the future.

Financial Review

The Group has performed strongly in 2010, ending the year debt free and with £30.9 million of cash resources. The strong performance was underpinned by the reacquisition of European frovatriptan royalties from Paul Capital in March 2010, a £28.5 million fundraising from shareholders and tight control of expenditure. This royalty stream has structurally changed the Group's cash profile, as it provides a sustainable revenue stream and substantially cuts the annual underlying net cash burn. With sustained development spend at 2009 levels, but without the reliance on future milestones, the Company has cash resources through to the end of 2013. This provides an extended time horizon over which the Company and investors can benefit from the progression of our priority research and development pipeline. Revenue is up by 9 per cent, driven by milestone income, and the Group has continued to further contain costs, reducing internal spend by £1.4 million during 2010.

Income statement

Revenues

Revenue from continuing operations for the year was £14.2 million (2009: £13.0 million), a 9 per cent increase for the year. Revenue included £7.2 million from the supply of frovatriptan (2009: £7.5 million) and £7.0 million (2009: £5.5 million) in respect of collaborations and release of deferred revenue.

Underlying sales of frovatriptan by Menarini were €31.3 million (2009: €32.4 million), down 3.4 per cent compared to 2009. The decrease in underlying frovatriptan sales was due to a price cut in the German market caused by the introduction of a new reference price for all triptans. Underlying growth of frovatriptan, excluding the German market, was 2.9 per cent. Vernalis receives 25.25 per cent of these sales via a royalty agreement linked to the supply of active pharmaceutical ingredient (API). The reported sales of £7.0 million was 5.9 per cent below 2009 sales (£7.5 million) due to a combination of foreign exchange (as the sales are made in euros) as well as the impact of the German price reductions. During the year £0.2 million of sales of frovatriptan were made to SK Chemicals for the South Korean market.

Collaboration and deferred revenue of £7.0 million (2009: £5.5 million) includes research collaboration income and associated milestones as well as milestones from already out-licensed development programmes. The increase of £1.5 million, or 27 per cent, was driven by additional milestone income during the year offset by a slight reduction in collaboration revenue.

In 2010 the Group received a US$3.0 million milestone (£2.0 million) from Novartis on the first dosing of AUY922 in a Phase II study, an increase of £1.1 million on 2009 when we received a US$1.5 million (£0.9 million) milestone as a result of HSP990 moving into Phase I. In addition in 2010 the Group received a first milestone of €0.75 million (£0.6 million) from the Servier 2 research collaboration.

Cost of sales

Cost of sales from continuing operations for the year amounted to £2.9 million (2009: £2.5 million). In both 2009 and 2010, £1.4 million of the costs related to the amortisation of the frovatriptan intangible assets.

R&D expenditure

Research and development expenditure from continuing operations reduced to £11.7 million (2009: £14.2 million) and comprised £10.0 million (2009: £11.0 million) of internally funded research and development costs and £1.7million (2009: £3.2 million) of external costs associated with the development pipeline. The decrease in external costs is due to clinical expenditure on the V3381 Phase IIb study in neuropathic pain which completed in 2010, but the majority of costs were incurred in 2009. In addition the pre-clinical spend on V158866 and V158411 during 2010 has been lower than expected as both of these programmes have taken longer to progress into Phase I than planned. V158866 initiated Phase I in March 2011 and V158411 is anticipated to enter Phase I in 2011. The decrease in internally funded R&D reflects the continued focus on cost containment.

The exceptional charge in 2010 of £9.8 million reflects a write down of the V3381 intangible asset carrying value following the IN-STEP Phase IIb study which failed to achieve its primary endpoint in patients with diabetic peripheral neuropathic pain, and halting of the pilot study into chronic cough due to marginal efficacy.

G&A expenditure

General and administrative expenditure from continuing operations was £3.8 million (2009: £5.6 million), a decrease of £1.8 million. Included in the 2010 costs was a realised foreign exchange gain of £0.7 million whereas in 2009, the costs were increased by a foreign exchange loss of £0.2 million. In addition the 2009 costs include £0.3 million in relation to redundancy and a £0.5 million non-cash share-based payment, due to senior management volunteering to sacrifice their 2009 cash bonus in exchange for LTIP investment awards. In 2010 the senior management team accrued a bonus of £0.3 million, to be paid in cash following the improved cash position of the Company. Excluding these items, the underlying costs decreased by £0.4 million in the year as a result of our continued tight cost control.

Included within the 2010 exceptional item is £0.5 million as an adjustment to the existing vacant lease provision (2009: £1.0 million).

Operating loss

The operating loss for the year from continuing operations before exceptional items was £4.2 million (2009: £9.3 million). The operating loss from continuing operations after exceptional items was £14.5 million (2009: £10.3 million).

Finance income

Finance income decreased to £0.4 million (2009: £2.0 million) and represents interest received on cash deposits. In 2009 there was a £1.5 million exchange gain on the retranslation of the Paul Capital Healthcare loan that was denominated in euros and a further £0.1 million gain on a final royalty payment to GSK on Frova®.

Finance expense

Finance expense for the year before exceptional items decreased to £1.5 million (2009: £6.0 million) and included a finance charge of £1.0 million (2009: £5.5 million) in respect of the Paul Capital Healthcare loan up to 8 March 2010 when the loan was repaid, exchange losses of £0.2 million (2009: £nil), an exchange loss of £0.1 million (2009: £0.3 million) on the retranslation of cash into sterling and a finance charge of £0.2 million (2009: £0.2 million) on the unwinding of the discount on the onerous lease provision. The exceptional charge of £6.6 million relates to the termination of the Paul Capital Healthcare Agreements and comprises the difference between the cash payment of US$32.57 million (£21.6 million) together with the fair value of the warrants issued (£1.1 million) and the carrying value of the Paul Capital Healthcare loan on 8 March 2010 when the loan was repaid.

Taxation

The tax credit of £2.5 million (2009: £2.1 million) represents amounts that are expected to be received under current legislation on research and development tax credits for small and medium sized companies. The tax credit for the year was £1.4 million (2009: £1.5 million) and the balance represents amounts receivable for prior years following new guidance received from HMRC on interpretation of the current legislation.

Loss for the year

The loss for the year from continuing operations and before exceptional items was £2.8 million (2009: £11.3 million). This substantial improvement reflects the settlement of the Paul Capital Healthcare loan, additional income generated during 2010 and our continued efforts to contain costs.

Balance sheet

Non-current assets decreased to £5.7 million (2009: £16.3 million) due to the write down of V3381, following the decision not to invest further in this programme. The movement for the year also includes amortisation of the frovatriptan intangible asset.

Current assets increased to £37.7 million (2009: £32.6 million) primarily due to an increase in cash resources in the year following the March 2010 fundraising.

Total liabilities decreased to £12.2 million (2009: £28.7 million) as a result of the Paul Capital Healthcare loan settlement and the release of deferred income in addition to slightly lower trade payable balances. The Group is now debt free which was an important strategic element of the fundraising.

Cash resources

Cash resources, comprising held-to-maturity financial assets and cash and cash equivalents increased by £4.5 million to £30.9 million (2009: £26.4 million). The fundraising of £28.5 million (net of expenses) in March 2010 was the main inflow in the year, of which £21.6 million was used to settle the Paul Capital Healthcare loan. Other significant inflows were US$3.0 million (£2.0 million) from Novartis following the progression of AUY922 into Phase II studies, and a €0.75 million (£0.6 million) milestone from Servier on the second research collaboration. The underlying net cash burn for the year was £4.4 million (2009: £14.5 million) as a result of regaining 100 per cent of the frovatriptan royalties, £1.7 million of additional milestones and continued success in controlling costs.

Outlook for 2011

The successful fundraising in March 2010 allowed the Company to regain 100 per cent of the Menarini frovatriptan royalties and settle the debt with Paul Capital Healthcare. This royalty stream has structurally changed the Group's cash profile, as it provides a sustainable revenue stream as well as substantially cutting the annual underlying net cash burn. With sustained development spend at 2009 levels, but without the reliance on future milestones, the Company has financial stability and cash through to the end of 2013. This financial strength will be leveraged to expand the existing pipeline through in-licensing or acquisition in the medium term.

Risks and Uncertainties

Like all businesses we face risks and uncertainties and many are inherent within any pharmaceutical development company. Below are those principal risks and uncertainties that we consider could have a material impact on our operational results, financial condition and prospects. These risks are not in any particular order of priority and there may be other risks that are either currently unknown or not considered material which could have a similar impact on our business in the future. Details of our risk management process are outlined in the Corporate Governance report.

Clinical and regulatory risk

There are significant inherent risks in developing drugs for commercialisation due to the long and complex development process. Any drug which we or our partners wish to offer commercially to the public must be put through extensive research, pre-clinical and clinical development all of which takes several years and is extremely costly. We may fail to successfully develop a drug candidate because of:

·; The failure of the drug in pre-clinical studies.

·; The inability of clinical trials to demonstrate the drug is safe and effective in humans.

·; The failure to find a collaborator to take the drug candidate into expensive later stage studies.

·; The failure to manufacture the drug substance in sufficient quantities and at commercially acceptable prices.

In addition, the complexity and multi-jurisdictional nature of the applicable regulatory processes could result in either delays in achieving regulatory approval or non-approval. If a product is approved, the regulators may impose additional requirements, for example, restrictions on the products' indicated uses or the levels of reimbursement receivable, that could impact on the commercial viability of the drug. Once approved, the product and its manufacture will continue to be reviewed by the regulators and may be withdrawn or restricted in the future.

Competition and intellectual property

Our business faces intense competition from major pharmaceutical companies and specialised biotechnology companies developing drugs for the same market opportunities. This intense competition may impact the commercial success of any drug candidate that obtains regulatory approval. Our partnering strategy, where we look to out-license later stage programmes to pharmaceutical companies with significant commercial expertise in the relevant market, should ensure that commercial products receive the level of investment required to maximise their potential.

Intellectual property protection remains fundamental to our strategy of developing novel drug candidates. Our ability to stop others making a drug, using it or selling the invention or proprietary rights by obtaining and maintaining protection is critical to our success. We own a portfolio of patents and patent applications which underpin our research and development programmes. Significant investment is made in maintaining and protecting this intellectual property in order to reduce the risks over the validity and enforceability of our patents. However, the patent position is always uncertain and often involves complex legal issues. Therefore, there is a risk that intellectual property may become invalid and/or expire before or after commercialisation of a drug product occurs, and we may be blocked by other companies' patents and intellectual property.

Manufacturing risk

The supply of frovatriptan active pharmaceutical ingredient to Menarini for the EU and Central American markets is a substantial proportion of our income and so our ability to manufacture and supply this product on schedule is also critical. In addition, our ability to successfully scale-up production processes to viable clinical trial or commercial levels is vital to the commercial viability of any product. Availability of raw materials is extremely important to ensure that manufacturing campaigns are performed on schedule and therefore dual sourcing is used where possible. Product manufacture is subject to continual regulatory control and products must be manufactured in accordance with good manufacturing practice. Any changes to the approved process may require further regulatory approval which may incur substantial cost and delays. These potential issues could adversely impact on the results from operations and our cash liquidity.

Financial risks

Cash flow

We have a history of operating losses which are anticipated to continue for the near to mid-term. As a result we may require further capital to finance development activities. In the last 24 months we have successfully raised £50.6 million through equity fundraisings. Part of this cash raised has been used to regain 100 per cent of the royalty stream from European sales of frovatriptan to potentially finance our cash burn. Existing cash together with cash generated from this royalty stream is now expected to fund the Group through to the end of 2013 at current levels of investment. However, the Group may need to seek further capital through equity or debt financings in the future and if this is not successful, the financial condition of the Group may be adversely affected.

Foreign exchange

We record our transactions and prepare our financial statements in sterling but almost all of our revenue is from licensing and collaborative agreements and frovatriptan royalties which are received in US dollars or euros. A proportion of our expenditure is incurred in US dollars and other currencies, relating principally to clinical trials. Our cash balances are predominantly held in sterling. To the extent that income and expenditure in currencies other than sterling are not matched, fluctuations in exchange rates between sterling and these currencies, principally US dollars and euros, may result in realised or unrealised foreign exchange gains and losses. Simple derivative contracts have been used to mitigate the risk of fluctuations in exchange rates where there has been certainty over the amount and timing of the income. Where the timing and/or the amount to be received is uncertain, risk management is more difficult but the Group has used derivatives where possible and will continue to do so. To the extent that derivative instruments are considered too costly, because of the flexibility required or the time over which protection is sought, any fluctuations in foreign exchange movements may have a material adverse impact on the results from operations and our cash liquidity in the future.

Return on investment

As already mentioned, the drug development process is inherently risky and is conducted over several years and consequently is extremely costly. Many drug candidates fail in development due to the clinical and regulatory risks, and even in those circumstances where drugs are approved, sales levels can be disappointing due to competition, healthcare regulation and/or intellectual property challenges. As a result the returns achieved may be insufficient to cover the costs incurred. The Group looks to mitigate the development and commercial risk by partnering drug candidates at an appropriate stage. This partnering event crystallises part of the programme's value, with the goal of retaining an attractive proportion of the commercial upside through future milestones and an ongoing royalty interest from commercial sales.

Related Parties

Related party disclosures are given in note 10.

Statement of directors' responsibilities

The directors are responsible for preparing the annual report, the remuneration report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the Group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to:

·; select suitable accounting policies and then apply them consistently;

·; make judgements and accounting estimates that are reasonable and prudent;

·; state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and

·; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors, whose names and functions are listed in the management and governance section of this annual report, confirm that, to the best of their knowledge:

·; the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and

·; the directors' report contained on pages 22 to 25 includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Consolidated income statement

for the year ended 31 December 2010

Consolidated statement of comprehensive income

for the year ended 31 December 2010

 Balance sheet

as at 31 December 2010

Statements of changes in shareholders' equity

Cash flow statement

for the year ended 31 December 2010

Notes to the financial statements

1 Accounting policies and basis of preparation

This financial information for the years ended 31 December 2010 and 31 December 2009 does not comprise statutory financial statements but is derived from these financial statements. This financial information and announcement was approved for issue on 11 April 2011 and has been extracted from the 31 December 2010 audited statutory financial statements that were also approved by the Board on the same date and are available on the Company's website www.vernalis.com. These statutory financial statements have not yet been delivered to the Registrar of Companies. Statutory financial statements for the year ended 31 December 2009 were approved by the Board of directors on 9 April 2010 and delivered to the Registrar of Companies. The auditors reports on the financial statements for the years ended 31 December 2010 and 31 December 2009 were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The financial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations and with the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements are prepared in accordance with the historical cost convention as modified by revaluation of available-for-sale financial assets. Whilst the financial information included in this announcement has been prepared in accordance with IFRSs adopted for use in the European Union, this announcement does not itself contain sufficient information to comply with IFRSs.

The accounting policies applied are consistent with those of the audited financial statements for the year ended 31 December 2010 and 31 December 2009, as described in those annual financial statements.

In accordance with Listing Rule 9.6.1 and 9.6.3, a copy of the Annual Report and Accounts are available on the investor's section of the Company's website at www.vernalis.com; and has been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.hemscott.com/nsm.do.

In accordance with Disclosure and Transparency Rule 6.3.5, extracted from the Annual Report and Accounts in full unedited text and detailed in this release is a condensed set of financial statements, a management report which contains: important events and their impact on the financial statements; principal risks; and related party transactions, and directors responsibility statements. Accordingly, page numbers refer to those in the Annual Report and Accounts.

The Group's Annual Report and Accounts will be posted to shareholders on 21 April 2011.

2 Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Executive Committee.

The Group has only one segment, being the research, development and commercialisation of pharmaceutical products for a range of medical disorders. All costs to acquire property, plant, equipment and intangible assets as well as all related depreciation, impairment and amortisation expense borne by the Group relate to this one segment. In addition, all other non-cash expenses incurred by the Group relate to this one segment.

Revenue analysis

The revenue analysis in the table below is based on the country of registration of the fee-paying party:

An analysis of revenue by category is set out in the table below:

3 Exceptional items

Exceptional items represent significant items of income and expense, which, due to their nature or the expected infrequency of the events giving rise to them, are presented separately on the face of the income statement to give a better understanding to shareholders of the elements of financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in financial performance. Exceptional items include, but are not limited to, impairments of goodwill and intangible assets, restructuring costs and the provision for vacant leases.

4 Finance charge

5 Loss per share

Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

For diluted loss per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion for all dilutive potential ordinary shares.

For diluted loss per share, all potential ordinary shares including options and deferred shares are antidilutive as they would increase the loss per share.

6 Intangible assets

Useful life and net book value of intangible Assets

In accordance with IAS 21 "The effects of changes in foreign exchange rates", goodwill and other intangible assets that are created in relation to the acquisition of a foreign subsidiary are maintained in the functional currency of that subsidiary. During the year, the Group had a net exchange gain of £0.5 million (2009: £0.4 million) on assets not yet in use relating to the acquisition of Cita.

Disposal

The disposal in the year relates to the return of V1512 rights to Chiesi.

Impairment

On 24 March 2010, the Group announced that V3381 Phase IIb IN-STEP study in neuropathic pain had missed the primary end point. The Group continued a pilot study in chronic cough with the University Hospitals of South Manchester NHS Foundation but following a review of interim data in November 2010, that showed only marginal efficacy and some issues of tolerability, the Group decided not to invest further in V3381. As a consequence the group has written down the carrying value of V3381 to nil, incurring a £9.8 million exceptional charge in the year.

7 Borrowings

Paul Capital funding liabilities

On 8 March 2010 Vernalis terminated the Paul Capital Healthcare Agreement in exchange for a one time net payment of US $32.57 million in cash. In addition Paul Capital Healthcare subscribed for 2.1 million Vernalis warrants, 1.1 million at a 25 per cent premium to the Placing and Open Offer price of 76p and 1.0 million at a 50 per cent premium. The fair value of these warrants on issue was £1.1 million. The settlement of this debt resulted in an exceptional loss on settlement of £6.6 million (including the fair value of the warrants issued).

8 Provisions

Provisions have been analysed between current and non-current as follows:

Onerous lease provision

Where leasehold properties become vacant the Group provides for all costs, net of anticipated income, to the end of the lease or the anticipated date of the disposal or sublease. This provision relates to properties in Winnersh, Oxford and Cambridge and is expected to be utilised over the life of the related leases to 2012, 2015 and 2019 respectively and has been discounted to fair value at the balance sheet date. Included in the onerous lease provision is a dilapidation provision which principally relates to costs associated with the Group's obligation to reinstate leased buildings to their original state. A net additional exceptional charge of £476,000 (2009: £950,000) has been provided following a reassessment of the assumptions used to calculate the provision.

9 Share capital

Placing and Open Offer and Share Capital Reorganisation - 2010

On 2 March 2010, the Group completed a placing and open offer combined with a share capital reorganisation and removal of the share capital limits.

Removal of share capital limits

An ordinary resolution to remove the limit on the Company's ability to issue shares in the capital of the Company was passed at the General Meeting on 1 March 2010.

Share Capital reorganisation

Under the share capital reorganisation each issued Existing Ordinary Share of 20 pence in nominal value was subdivided into one Ordinary Share of 1 pence in nominal value and one B Deferred Share of 19 pence in nominal value.

The Ordinary Shares of 1 pence each continue to carry the same rights as prior to the reorganisation (save for the reduction in nominal value).

The B Deferred Shares were all repurchased by the Company for one pence in aggregate and, following the repurchase, were cancelled. The repurchase of the B Deferred Shares was financed out of the proceeds of the issue of one new Ordinary Share to an existing Shareholder at a subscription price equal to the nominal value of these shares. This has resulted in the increase in the capital redemption reserve to maintain capital.

Placing and open offer

The Group issued 39,413,722 new Ordinary Shares fully paid at a price of 76 pence per share on 2 March 2010.

10 Related party transactions

Identity of related parties

The Group consists of a parent, Vernalis plc and two wholly owned trading subsidiaries. The main trading company is Vernalis (R&D) Limited.

Group

The Group had no related party transactions during the year (2009: none).

11 Post-balance sheet events

In March 2011, the Group announced Chroma Therapeutics had signed a licensing deal with Cell Therapeutics, Inc. for the rights to CHR2797 (tosedostat) in North, Central and South America. Tosedostat has been granted orphan drug status for Acute Myeloid Leukaemia (AML) by both the Food and Drug Administration and the European Medicines Agency. Phase III trials in AML are expected to start in Q4 2011 and Vernalis is entitled to royalties on commercial sales.

Also in March 2011, the Group announced the initiation of a Phase I trial of V158866, its fatty acid amide hydrolase (FAAH) inhibitor.

In April 2011, the Group announced it had successfully regained rights to the next generation A2A receptor antagonist programme for Parkinson's disease and other possible disorders from Biogen Idec following a strategic review of its priority programmes.