Unaudited Interim Results for 6 months to 31/12/17

28 March 2018

Vernalis plc

Unaudited Interim Results for the six months ended 31 December 2017

Research business continues to perform well

US Commercial closure impacts overall financial performance

Formal sale process for Company initiated

Vernalis plc (LSE: VER) today announces its unaudited condensed consolidated results for the six month period ended 31 December 2017.

US Commercial business update:

• Tuzistra® XR prescriptions increased to 20,668 for the six month period (2016: 11,586) but were below the original expectations.

• The Board updated market guidance on 28 February 2018, with Tuzistra® XR prescriptions for the year expected to be below the guided range of 105,000-115,000.

• Subsequently on 15 March 2018, the Board announced that it was not financially viable to sustain an independent US commercial sales and marketing operation given the performance of Tuzistra® XR and slower than hoped for progress with the cough cold pipeline. Consequently, the US commercial business will be closed by the end of September 2018.

• The Company is exploring options for the continued commercialisation of Tuzistra® XR and Moxatag® including co-promotion, out-licensing the commercial rights or a sale of the NDA's.

Other Operational Highlights:

• Frovatriptan (marketed): Underlying Menarini sales for the six months to 31 December 2017 down 16 per cent at €7.3 million (2016: €8.7 million).

• NCE Development Pipeline: Verona announced positive top line data from a Phase IIb study for maintenance treatment of COPD (March 2018) as well as positive top line data from two Phase IIa trials with RPL554 in Cystic Fibrosis patients (March 2018) and in COPD when dosed in addition to tiotropium (September 2017).

• Research Collaborations: Seven active collaborations generated £3.6 million in FTE income in the period and £0.9 million in milestone income. New collaboration with Daiichi Sankyo also announced (December 2017).

Financial Highlights for the six months ended 31 December 2017:

• Revenue was £7.0 million (2016: £5.6 million)

• US Commercial net revenues (including Tuzistra® XR and Moxatag®) were £1.0 million (2016: £0.9 million) and represented deliveries made to wholesalers.

• Research collaboration income was £4.5 million (2016: £3.2 million) due to higher FTE income in the period from seven active collaborations and includes a €1.0 million milestone (£0.9 million) from Servier.

• Frovatriptan royalty income was flat at £1.5 million (2016: £1.5 million); one batch of API was delivered to Menarini in each period.

• Operating costs before exceptional items were £21.3 million (2016: £21.7 million) with the decrease due to lower research and development expenditure.

• Loss for the period before exceptional items was £16.3 million (2016: £11.0 million), with the increase in loss between periods principally driven by unrealised foreign exchange movements on cash resources.

• An exceptional charge of £21.2 million has been incurred in relation to the performance of the US commercial business and the subsequent announcement to close the US operations, resulting in the write down of the cough cold (Tuzistra® XR, CCP-07 and CCP-08) and Moxatag® assets.

• Loss for the period after exceptional items was £37.6 million (2016: £11.0 million).

• Cash resources at 31 December 2017 were £46.0 million (2016: £61.3 million) and the Group has no debt.

• Cash resources including cash and cash equivalents and held to maturity assets reduced by £15.3 million in the six months to 31 December 2017 and included:

• Cash used in operations of £15.3 million (2016: £12.8 million)

• £1.6 million unrealised foreign exchange loss in cash and cash equivalents (2016: £4.4 million gain).

Ian Garland, Chief Executive Officer, commented, 

"The Board deeply regret having to implement the wide-reaching restructuring recently announced but given the Tuzistra® XR performance and slower than hoped for progress with the cough cold pipeline, it is no longer viable to sustain our US commercial operations or continue to pursue our current strategy."

"The decision to close the US commercial business will significantly reduce the ongoing cash burn of the Group, after the closure costs have been incurred. Whilst there is a need to exit or renegotiate contracts on reasonable terms, the directors have a reasonable expectation that the Group will have adequate financial resources to continue in operation for the foreseeable future. The unaudited cash resources at 28 February 2018 was £45.5 million."

"Alongside the closure of the US commercial operations, our focus in the next few months will be on exploring alternative ways in which to realise value for shareholders, including potentially the sale of the Company as a whole. The Board has set a target date for concluding this activity of 30 September 2018 and we will provide updates to the market where possible."

Formal Sale Process

On 15 March 2018, the Board announced that it had decided to seek offers for the Company and that the UK Panel on Takeovers and Mergers (the "Panel") had agreed that any discussions with third parties could be conducted within the context of a "formal sale process" (as referred to in the City Code on Takeovers and Mergers). Please refer to the Vernalis announcement dated 15 March 2018 for further details. Further announcements regarding timings for the formal sale process will be made when appropriate and as agreed with the Panel.

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Enquiries:

Notes to Editors

Vernalis is a revenue generating, pharmaceutical company with significant expertise in drug development. The Group has three approved products: Tuzistra® XR targeting the US prescription cough cold market; Moxatag®, a once-daily formulation of the antibiotic, amoxicillin, indicated for the treatment of tonsillitis and/or pharyngitis secondary to Streptococcus pyogenes in adults and pediatric patients 12 years and older; and frovatriptan for the acute treatment of migraine. Vernalis has also nine programmes in its NCE development pipeline in addition to significant expertise in fragment and structure based drug discovery which it leverages to enter into collaborations with larger pharmaceutical companies. The Company's technologies, capabilities and products have been endorsed over the last five years by collaborations with leading pharmaceutical companies, including Asahi Kasei Pharma, Biogen Idec, Daiichi Sankyo, Endo, GSK, Genentech, Lundbeck, Menarini, Novartis, Servier and Tris.

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 NCE pipeline, and the Company's ability to find partners for the commercialisation of Tuzistra® XR and Moxatag®. 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 Tuzistra® XR, Moxatag®, 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, the ability of the Company to exit or renegotiate contracts on reasonable terms and achievement of expected synergies from such transactions and the ability of the Company to identify and consummate suitable strategic and business combination transactions.

Strategic and Operational Review 

Closure of the US Commercial Business

Over the last several months and particularly during the peak of the cough cold season, the business has been fully focused on accelerating Tuzistra® XR prescription growth in order to validate the potential value of the cough cold franchise. Against the backdrop of a larger than normal prescription cough cold market in the US this year, prescriptions of Tuzistra® XR grew steadily over the prior year (+78% YoY for the 6 month period) and it was hoped that a number of commercial initiatives would provide the catalyst for a further acceleration in growth.

During this time, the Board was closely monitoring week-on-week prescription and other market data and whilst some initial acceleration in growth was seen, an announcement was made on 28 February 2018 that the total number of Tuzistra® XR prescriptions for the current financial year was expected to be below the guided range of 105,000-115,000. In addition to announcing the update to Tuzistra® XR prescription performance, the Board also announced that there were no significant updates from Tris on either addressing the CCP-07 or CCP-08 complete response letters, or achieving proof-of-concept for CCP-06.

Due to the lower growth in Tuzistra® XR prescriptions and slower than hoped for progress with the cough cold pipeline, the Board performed a detailed evaluation of alternative forms of restructuring the US commercial business. On 15 March 2018, the Board announced that it had concluded it was not financially viable to sustain any independent US commercial sales and marketing operation and that the Company would wind down its US commercial business. As a result, Vernalis would cease direct promotion of Tuzistra® XR to physicians at the end of the current cough cold season and close its US Commercial business by the end of September 2018.

Strategic review

Alongside closing the US commercial business, the Board announced that it would explore alternative ways in which to realise value for shareholders, including potentially the sale of the Company as a whole. The Board has set a target date for concluding this activity of 30 September 2018.

In the period through to the end of September 2018, the Company will also explore options for the continued commercialisation of Tuzistra® XR and Moxatag®, including co-promotion, out-licensing or sale of the NDA. Discussions with Tris regarding the termination of our interest in the cough cold development programmes CCP-05, -06, -07 and -08 have already started and we will provide a market update on those discussions in due course.

Ian Garland will continue in his role until completion of the US restructuring and will lead the efforts to realise value for shareholders from the remaining business over this same time horizon. He will step down from his position as CEO and a Director of the Company at the end of that time. David Mackney will also remain in his role until both activities are complete when he will step down from his position as CFO and a Director of the Company. There are no other immediate changes to the Board; a decision on the future composition of the Board will be made following conclusion of the strategic review.

NCE pipeline

The NCE pipeline of nine clinical stage assets has potentially significant value to the Group. Some of these assets are already partnered and the aim continues to be to partner all of these assets and realise value for shareholders through milestones and royalties, with no further investment by the Group.

One of the NCE pipeline assets, RPL554, partnered with Verona produced positive data from a Phase IIb study as well as from two Phase IIa studies during the period. Vernalis will receive a share of sub-licensing income, a milestone payment on approval of RPL554 and royalties on commercialisation.

The Phase IIb study was for maintenance treatment of COPD, with the data showing a clinically and statistically significant improvement in peak forced expiratory volume in one second (FEV1) at four weeks in patients with moderate-to-severe COPD compared to placebo, with the peak FEV1 significantly improved at all time points over the four weeks of dosing.

One of the Phase IIa studies was in Cystic Fibrosis patients with statistically significant increases in average forced expiratory volume in one second. The other Phase IIa study was in COPD where RPL554 was dosed in addition to tiotropium (Spiriva®) with positive top-line data reported, compared to placebo. Statistical significance was demonstrated across all primary and secondary efficacy outcome measures as well as a clear dose response with a meaningful additional improvement in peak lung function.

Research Collaborations

During the six month period, Vernalis successfully continued its collaborative strategy with seven active drug discovery collaborations including a new oncology focused collaboration with Daiichi Sankyo added in December 2017. Each research collaboration is tailored to the needs of the individual research programme and has different financial terms. These usually include funding for scientists, success milestone payments and potentially royalties on sales. The team continues to seek new opportunities for further collaborations.

Financial Review

Total revenue of £7.0 million

Revenue for the six months ended 31 December 2017 was £7.0 million (2016: £5.6 million), an increase of 26 per cent compared to 2016. £1.0 million was recorded for US Commercial revenues (2016: £0.9 million), £1.5 million related to the supply of frovatriptan (2016: £1.5 million) and £4.5 million (2016: £3.2 million) to the research collaborations, and other collaboration income.

US Commercial Revenues

Net revenue reflects the gross turnover of product shipped to the wholesaler, reduced for estimates of: rebates, discounts, allowances and provision for product returns, given or expected to be given which vary by product arrangements and buying groups. These estimates have been made based on actual in-market data received pre- and post- the end of the six month accounting period and have been applied to the wholesaler and pharmacy pipeline. We will continue to refine these estimates and methodologies including estimates for the closure of the US business.

Tuzistra® XR

Revenues from Tuzistra® XR were £1.0 million for the six months (2016: £0.8 million). Prescriptions grew to 20,688 (2016: 11,586 scripts) for the six month period, a 79 per cent increase on the prior period. Patient prescriptions accounted for ~75 per cent of sales volume for the period (2016: ~64 per cent) with the remaining 25 per cent primarily due to expanded pharmacy stocking.

Moxatag®

Revenues from Moxatag® were minimal in the period with the initial launch quantities sold into the wholesale channel last year being sufficient to satisfy demand.

Frovatriptan sales

Sales of frovatriptan by Menarini in Europe and Central America were down 16 per cent in euro terms at €7.3 million for the six months to 31 December 2017, compared to 2016 (€8.7 million). Volume of tablets sold for the six months to 31 December 2017 was down 13 per cent at 3.619 million compared to 2016 (4.162 million). The decrease in sales value was principally due to price reductions and loss of market share following generic entrants in December 2015. Vernalis receives 25.25 per cent of Menarini sales via a royalty linked to the supply of API, so the reported royalties do not necessarily track the underlying performance of frovatriptan in the market.

The reported frovatriptan royalties for the six months to 31 December 2017 of £1.5 million were flat (2016: £1.5 million) with one 12.5 Kg batch of API shipment in both periods.

The composition of matter patent on frovatriptan expired in December 2015 but Vernalis will continue to receive a royalty through to April 2019, but on lower underlying forecast frovatriptan sales.

Research Collaboration revenue

Research collaboration income was £4.5 million for the six month period to 31 December 2017 (2016: £3.2 million). The increase in revenue was driven by higher FTE income and a £0.9 million pre-clinical milestone earned during the period from the 3rd oncology collaboration with Servier (2016: £nil). A new oncology collaboration with Daiichi Sankyo was also secured and announced in December 2017.

Research and Development costs

Research and development expenditure before exceptional items decreased to £4.9 million for the six month period to 31 December 2017 (2016: £5.5 million) due to effective cost control. The research and development costs for the six month period, annualised, are a reasonable guide for the remainder of the year with no changes anticipated in this part of the business. An £8.2 million exceptional impairment charge was incurred in the six month period to 31 December 2017, due to the write down of the CCP-07 and CCP-08 intangible assets not yet in use following the impairment review performed as at 31 December 2017 and the decision to close the US commercial business.

Sales and Marketing costs

Sales and marketing costs before exceptional items were flat at £13.5 million for the six month period to 31 December 2017 (2016: £13.3 million) with the same number of sales representatives in the field for both periods. A £12.0 million exceptional impairment charge was incurred in the six month period to 31 December 2017, due to the write down of Tuzistra® XR and Moxatag® intangible assets following the impairment review performed as at 31 December 2017 and the later decision to close the US commercial business.

General and Administrative cost control

General and administrative expenditure costs were also flat at £2.9 million for the six months to 31 December 2017 (2016: £2.9 million).

Operating loss before exceptional items decreased due to the increase in research collaboration incomeThe operating loss before exceptional items decreased to £15.0 million for the six months to 31 December 2017 (2016: £16.9 million), reflecting the increase in research collaboration income with operating costs largely flat. The operating loss for the six months to 31 December 2017 after exceptional items was £36.0 million (2016: £16.9 million) principally due to the intangible asset impairment charges.

Weakening of US dollar impacts finance income and expense

Interest earned on cash resources for the six months to 31 December 2017 was £0.3 million (2016: £0.3 million) consistent with the prior period, with lower average cash balances held offset by an increase in the yield received.Finance expense was significantly affected by the weakening of the US dollar against sterling with a £1.6 million unrealised foreign exchange loss recorded on the conversion of foreign currency denominated cash deposits into sterling at 31 December 2017 for financial reporting purposes (2016: £4.4 million unrealised gain). At 31 December 2017, the sterling:US dollar rate was 1.353, compared to a 30 June 2017 rate of 1.299.

Income tax credit decreased

The income tax credit before exceptional items for the six months to 31 December 2017 was £0.1 million (2016: £1.1 million credit) reflecting a higher US tax charge for the period. The six month period to 31 December 2016 also benefited from tax credits associated with the CCP-07 and CCP-08 filing milestones paid to Tris. The income tax charge after exceptional items was £0.2 million (2016: £1.1 million credit) due to the £0.3 million release of a deferred tax asset related to the US commercial business.

Wider loss reported

The pre-exceptional loss for the six months to 31 December 2017 was £16.3 million (2016: £11.0 million). The widening of the loss is principally due to an unrealised foreign exchange loss on the retranslation of our foreign currency balances into sterling for reporting purposes in the period, compared to an unrealised foreign exchange gain reported in the prior period. The loss after exceptional items for the six months to 31 December 2017 was £37.4 million (2016: £11.0 million).

Balance sheet impacted by US closure

Non-current assets decreased to £1.6 million (30 June 2017: £24.0 million) due to the write down of intangible assets and the release of the deferred tax asset, following the performance of the US commercial business and subsequent decision to close the US operations.

Current assets decreased to £53.9 million (30 June 2017: £70.1 million) primarily due to the £15.3 million reduction in cash resources over the period.

Total liabilities decreased to £9.5 million (30 June 2017: £11.4 million). This was primarily due to a decrease in trade and other liabilities, the release of the deferred consideration relating to Moxatag®, offset by an increase to provisions associated with US commercial revenues.

Cash Resources

Cash resources comprising held-to-maturity financial assets and cash and cash equivalents at 31 December 2017, totalled £46.0 million (30 June 2017: £61.3 million). A significant proportion of these cash resources are denominated in non-sterling currencies with most of the cash denominated in US dollars.

We continue to manage cash tightly. The £15.3 million cash burn in the six months to 31 December 2017 included the £1.6 million unrealised foreign exchange loss arising from the conversion of our US dollars and euros into sterling for reporting purposes.

Cash used in operations increased to £15.3 million (2016: £12.8 million) due to a decrease in both receivables and trade liabilities at the end of the period, more than offsetting a lower pre-exceptional operating loss.

Going concern

At 31 December 2017, the Group had cash resources (being cash and cash equivalents and held-to-maturity financial assets) of £46.0 million.

On 15 March 2018, the Group announced the intended closure of the US commercial business as it is not financially viable to maintain an independent US commercial sales and marketing operation. This decision will significantly reduce the ongoing cash burn of the Group after the closure costs have been incurred, albeit there will be a need to exit or renegotiate contracts on reasonable terms; the cash projections have been prepared on that basis. After making enquiries and taking into account management's estimates of future revenues and expenditure, the directors have a reasonable expectation that the Group will have adequate financial resources to continue in operation for the foreseeable future, and accordingly the condensed financial statements have been prepared on a going concern basis.

Principal Risks and Uncertainties

Vernalis considers strategic, operational and financial risks and identifies actions to mitigate these risks. The principal risks and uncertainties for the remaining six months of the financial period ending 30 June 2018 can be found in the Annual Report for the year ended 30 June 2017, available on the website www.vernalis.com. Following the Board's decision to close the US business, one additional risk and uncertainty relates to the ability of the Group to exit or renegotiate contracts on reasonable terms.

Vernalis is a revenue generating, pharmaceutical company with significant expertise in drug development. The Group has three approved products: Tuzistra® XR targeting the US prescription cough cold market; Moxatag®, a once-daily formulation of the antibiotic, amoxicillin, indicated for the treatment of tonsillitis and/or pharyngitis secondary to Streptococcus pyogenes in adults and pediatric patients 12 years and older; and frovatriptan for the acute treatment of migraine. Vernalis has also nine programmes in its NCE development pipeline in addition to significant expertise in fragment and structure based drug discovery which it leverages to enter into collaborations with larger pharmaceutical companies. The Company's technologies, capabilities and products have been endorsed over the last five years by collaborations with leading pharmaceutical companies, including Asahi Kasei Pharma, Biogen Idec, Daiichi Sankyo, Endo, GSK, Genentech, Lundbeck, Menarini, Novartis, Servier and Tris.

Independent review report to Vernalis plc

Report on the unaudited condensed consolidated results

We have reviewed Vernalis plc's unaudited condensed consolidated results (the "interim financial statements") in the unaudited interim results of Vernalis plc for the 6 month period ended 31 December 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the AIM Rules for Companies.

The interim financial statements comprise:

· the Unaudited condensed consolidated balance sheet as at 31 December 2017;

· the Unaudited condensed consolidated income statement and Unaudited condensed consolidated statement of comprehensive income for the period then ended;

· the Unaudited condensed consolidated statement of cash flows for the period then ended;

· the Unaudited condensed consolidated statement of changes in equity for the period then ended; and

· the explanatory notes to the interim financial statements.

The interim financial statements included in the unaudited interim results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the AIM Rules for Companies.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The unaudited interim results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the unaudited interim results in accordance with the AIM Rules for Companies which require that the financial information must be presented and prepared in a form consistent with that which will be adopted in the company's annual financial statements.

Our responsibility is to express a conclusion on the interim financial statements in the unaudited interim results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the AIM Rules for Companies and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the unaudited interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

London

27 March 2018

Unaudited condensed consolidated income statement

for the six months ended 31 December 2017

The notes form part of the condensed financial information.

Unaudited condensed consolidated statement of comprehensive income

for the six months ended 31 December 2017

The notes form part of the condensed financial information.

Unaudited condensed consolidated balance sheet

as at 31 December 2017

The notes form part of the condensed financial information.

Unaudited condensed consolidated statement of changes in equity

for the six months ended 31 December 2017

Unaudited condensed consolidated statement of cash flows

for the six months ended 31 December 2017

\* The Group movement in held-to-maturity financial assets includes a foreign exchange loss of £1.4 million for the six months ended 31 December 2017 (£4.0 million gain for the six month period ended 31 December 2016).

Notes to the interim condensed financial statements

1 Accounting policies and basis of preparation

Vernalis plc ('the Company') and its subsidiaries (together 'the Group') is a revenue generating pharmaceutical company with significant expertise in drug development. 

The Company is a public limited company incorporated and domiciled in the UK. The address of its registered office is 100 Berkshire Place, Wharfedale Road, Winnersh, Berkshire, RG41 5RD and its primary listing is on AIM.

This condensed consolidated financial information has been reviewed but not audited and was approved for issue on 27 March 2018.

This condensed consolidated interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 June 2017 were approved by the Board of directors on 11 September 2017 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. This condensed consolidated financial information for the six months ended 31 December 2017 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union as if the company were listed on a market regulated under EU law. The condensed consolidated financial information should be read in conjunction with the annual financial statements for the year ended 30 June 2017, which have been prepared in accordance with IFRSs as adopted by the European Union.

Exceptional items are disclosed and described separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group. They are material items of income or expense that have been shown separately due to the significance of their nature or amount.

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. Accruals made in respect of incentive schemes are accrued throughout the incentive scheme period using management's best estimate of the expected outcome as at the date of the interim report.

In preparing these condensed interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were as stated within the consolidated financial statements for the year ended 30 June 2017. The key areas of judgement relate to revenue recognition associated with the US commercial business, valuation of intangible assets, fair value measurements in relation to business combinations related to estimation of deferred contingent consideration due, and the share option charge.

US commercial revenue is recognised when title and risk of loss passes to the customer, estimates are made for the relevant deductions and obligations due to reflect the complete economic transaction. The US commercial revenue recognised in the condensed consolidated income statement is disclosed net of these various sales related deductions. Net revenue reflects the gross turnover reduced for estimates of: rebates, discounts, allowances and provision for product returns, given or expected to be given which vary by product arrangements and buying groups based on actual in market data received pre- and post- the end of the accounting period applied to inventory held by wholesalers and pharmacies. Amounts are reviewed frequently but as estimates they may not fully reflect the final outcome.

Research and development revenues including non-refundable access fees, options fees and milestone payments receivable for participation by a third party in commercialisation of a compound are recognised when they become contractually binding provided there are no related commitments of the Group. Where these receipts are upfront payments to enter into contracts, they are recognised over the expected life of the contract. Where there are related commitments, revenue is recognised on a percentage-of-completion basis in line with the actual levels of expenditure incurred in fulfilling these commitments. All other licence income and collaborative research fees are recognised over the accounting period to which the relevant services relate.

Royalty income is recognised in relation to sales to which the royalty relates. Royalties are recognised as they are earned.

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

The accounting policies applied are consistent with those of the annual financial statements for the twelve month period ended 30 June 2017, as described in those annual financial statements.

There are no new IFRSs or IFRICs that are effective for the first time for this interim period that would be expected to have a material impact on the Group. Although not effective for the interim period to 31 December 2017, IFRS 15, "Revenue from contracts with customers"; IFRS 16, "Leases" and IFRS 9, "Financial instruments" are currently being assessed by the Group.

Going concern

At 31 December 2017, the Group had cash resources (being cash and cash equivalents and held-to-maturity financial assets) of £46.0 million.

On 15 March 2018, the Group announced the intended closure of the US commercial business as it is not financially viable to maintain an independent US commercial sales and marketing operation. This decision will significantly reduce the ongoing cash burn of the Group after the closure costs have been incurred albeit there will be a need to exit or renegotiate contracts on reasonable terms; the cash projections have been prepared on that basis. After making enquiries and taking into account management's estimates of future revenues and expenditure, the directors have a reasonable expectation that the Group will have adequate financial resources to continue in operation for the foreseeable future, and accordingly the condensed financial statements have been prepared on a going concern basis.

2 Segmental information

For the six months ended 31 December 2017, and for the six months ended 31 December 2016, the Group has two segments Commercial and Research and Development. These were in line with the reporting to the Executive Committee, which comprises the executive directors and other senior management.

Performance of these segments is reviewed at a sales and operating profit level which does not include the full allocation of general administrative costs which are reported separately. The Commercial segment covers all areas relating to the commercial sale of pharmaceutical products, the manufacture, distribution and operating expenses directly related to that activity. The Research and Development business includes all activities related to the research and development of pharmaceutical products for a range of medical disorders and includes the income generated by collaboration, milestones or royalties as well as the costs directly associated with those activities. There is no segmentation of the balance sheet. Charges such as depreciation, impairment, amortisation and other non-cash expenses are expensed to the relevant segment.

3 Exceptional items

Exceptional items represent significant items of income and expense, which, due to their size, 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 period, so as to facilitate comparison with prior periods and to better assess trends in financial performance. Exceptional items include, but are not limited to, restructuring costs and provisions for vacant leases. The exceptional items for the six months to 31 December 2017 all relate to the conclusion that it was not financially viable to sustain the US commercial sales and marketing operations and the decision to close the US commercial business as a result.

4 Finance income/expense

5 Income tax

6 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 period.

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 decrease the loss per share.

7 Property, plant and equipment

Additions of £0.2 million were made during the six months ended 31 December 2017 (£0.3 million in the six months ended 31 December 2016).

Assets with a cost of £0.6 million and a net book value of £nil were disposed of in the six months to 31 December 2017 (six months ended 31 December 2016: cost £0.1 million; net book value £nil).

Manufacturing assets relating to Moxatag® with a net book value of £0.3 million were fully impaired during the six months ended 31 December 2017 (six months ended 31 December 2016: £nil).

There were capital commitments at 31 December 2017 of £0.2 million (31 December 2016: £nil).

8 Intangible assets

Additions

No additions were made during the six month period to 31 December 2017.

£4.7 million of additions were made during the six months ended 31 December 2016. These related to two milestone payments under the Tris agreement of $3.0 million each for the accepted filing with the FDA of the NDA application for CCP-07 and CCP-08. These are held in "assets not yet in use" until commercialisation occurs.

Impairments

At 31 December 2017, prescriptions of Tuzistra® XR had grown steadily over the prior year (+78% YoY for the 6 month period). Whilst encouraging, this growth was below the market guidance rate of growth provided for the whole season and so triggered the need for an impairment review. A number of commercial initiatives to accelerate prescription growth were introduced after the 31 December 2017, with an enhanced coupon programme rolled out at the beginning of February 2018 and whilst some initial acceleration in growth was seen, the Board concluded on the 28 February 2018 that it was unlikely that the prescriptions for the year would accelerate sufficiently to meet guidance. In light of the Tuzistra® XR performance described above and slower than hoped for progress with the cough cold pipeline, the Board was considering alternative strategies for the US business and strategic options for the Group. On the 15th March 2018 the Board announced that it was not financially able to sustain an independent US commercial sales and marketing operations, and that the direct promotion of Tuzistra® XR would cease at the end of the current cough cold season. The impairment review carried out incorporates the impact of this decision to cease ongoing direct promotion of Tuzistra® XR.

The impairment reviews, resulted in the full write down of the US commercial related intangible assets to the income statement in the six month period to 31 December 2017. In the case of all of the US intangible assets it was not possible to establish a reliable fair value less costs to sell, and therefore the Board considers their value to be nil, and thus the value-in-use models indicated the respective assets should be fully written down. Details of the impairment by asset, including which segment the impairment charge has been charged to in the income statement are included in note 2.

During the six months to 31 December 2016 there were no impairments.

9 Inventories

The cost of inventories recognised as an expense and included in cost of sales for the six months to 31 December 2017 amounted to £946,000 (six months to 31 December 2016: £204,000).

Included in the cost of inventories for the six months to 31 December 2017 cost of sales expense is an obsolescence provision charge of £689,000 (six months to 31 December 2016: £nil), where it is estimated that inventory will not be sold prior to becoming short dated. The remaining provision movement relates to the destruction of obsolete inventories.

10 Held-to-maturity financial assets

Group held-to-maturity financial assets of £39,228,000 (30 June 2017: £54,056,000) represent fixed-rate, short-term deposits placed with a range of banks at fixed-terms of three months or greater, a floating-rate long-term bank deposit placed as collateral against the Group's foreign currency exchange contracts, a floating-rate 100-day notice deposit account and collateral given by Vernalis Therapeutics, Inc in support of local credit facilities.

11 Provisions for other liabilities and charges

Property

At 31 December 2017, this provision related to dilapidation provisions which related to costs associated with the Group's obligation to reinstate leased buildings to their original state and had been discounted to fair value at the balance sheet date.

Revenue

When calculating US commercial revenues, provisions are made for rebates, discounts, allowances and product returns estimated, given or expected to be given which vary by product arrangements and buying groups. These provisions are calculated based on contractual obligations, available current/future market information and historic experience. Amounts are reviewed throughout the reporting period and reflect the best estimate at each reporting date.

12 Derivative financial instruments

Further details of derivative financial instruments are provided in note 17. The fair values of all foreign currency forward contracts are based on period-end prices in an active market.

13 Share capital

Issue of shares six months to 31 December 2017

374,394 shares were issued following the exercise of options under the Bonus Long Term Incentive Plan, and the Executive Incentive Plan schemes.

Issue of shares six months to 31 December 2016

156,317 shares were issued following the exercise of options under the Long Term Incentive Plan scheme.

14 Other reserves

The warrant reserve arose from the fair value of the warrant issued to Paul Capital Healthcare on termination of the Paul Healthcare agreement in 2010. During the six months to 31 December 2017 these warrants were cancelled in full for nil consideration.

15 Related party transactions

Key management compensation amounted to £1,279,000 for the six months ended 31 December 2017 (six months ended 31 December 2016: £1,274,000). Key management includes executive directors, non-executive directors and certain members of the Executive Committee.

At 31 December 2017 an amount of £2,933 (31 December 2016: £4,484) was due from Dr Fellner and companies where Dr Fellner is a board member, in respect of certain travel costs. The amount due at 31 December 2017 had been repaid in full at 6 March 2018. The amount due at 31 December 2016 was repaid in full by 30 May 2017.

16 Financial risk management

The main risks arising from the Group's financial instruments are foreign currency risk, cash flow and liquidity risk, interest rate risk, credit risk and fair value estimation.

The condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements but the risks are consistent with those disclosed in the Group's annual financial statements as at 30 June 2017. There have been no changes to risk management policies since the end of the financial reporting period.

17 Financial instruments by category

The Group holds the following financial instruments:

* Excluding amounts that relate to non-financial instruments of tax and prepayments.

** Excluding amounts that relate to non-financial instruments of taxation and social security.

The above assets and liabilities have all been stated at undiscounted values with the exception of deferred consideration. The undiscounted value of the deferred contingent consideration is £nil as at 31 December 2017 (£2,513,000 undiscounted deferred consideration versus a discounted value of £1,156,000, as at 30 June 2017).

The assets and liabilities, which are measured at fair value through profit and loss, are as follows:

Level 2:

Derivative financial instruments measured at fair value are classified as level 2, where their value has been determined by reference to observable market data. Foreign currency forward contracts have been determined to be level 2 as their valuation has been derived from forward exchange rates observable at the balance sheet date together with the contractual forward rates and have been measured using the market approach.

Level 3:

Financial instruments are classified as level 3 when one or more of the key assumptions being modelled are not based on observable market data. The deferred contingent consideration relates to royalties and milestone payments due on future Moxatag® net revenues. Following the cessation of US field force activities, as described in note 18, the fair value of the deferred consideration arrangement was considered to be £nil at 31 December 2017 (30 June 2017: £1,156,000). The fair value estimates are internally calculated at each reporting date based on the discount rate of 10 per cent and current best estimates of net revenues and cost of goods which are used to calculate future royalties and milestones. The key assessments and judgements included in the calculation of deferred consideration include:

· Market size and product

· Gross and net selling price

· Costs of manufacturing and product distribution

· Discount rates including a risk adjustment for ongoing supply

There have been no transfers between levels in the period and there were no changes to valuation techniques.

Fair value measurements using significant unobservable inputs (level 3)

18 Seasonality

The Group's financial results have an accounting reference date of 30 June to reflect the impact of the US commercial sales following the launch of Tuzistra® XR, the Groups initial cough cold product, which is subject to the seasonality of the US cough cold market, with higher product demand during the Winter months.

19 Post balance sheet event

On 15 March 2018, the Board announced that it was not financially able to sustain any independent US commercial sales and marketing operations. The direct promotion of Tuzistra® XR and Moxatag® will cease at the end of the current cough cold season with the business closed by the end of September 2018.

In the period through to the end of September 2018 the Company will also explore options for the continued commercialisation of Tuzistra® XR including co-promotion, out-licencing and the sale of NDA's.

Alongside restructuring the US commercial business the Board also announced that it would explore alternate ways in which to realise value for shareholders, including potentially the sale of the Company as a whole.

Statement of directors' responsibilities

The directors' confirm that these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

· An indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· Material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report

The directors confirm that these condensed interim financial instruments give a true and fair view of the assets, liabilities, financial position and profit and loss of the issuer as a whole as required by DTR 4.2.4.

The directors of Vernalis plc are listed in the Vernalis plc Report and accounts for year ended 30 June 2017. A list of current directors is maintained on the Vernalis plc website: www.vernalis.com.

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

By order of the Board

David Mackney

Chief Financial Officer

27 March 2018