##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 20-F (Mark One)o
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934ORo
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from May 1, 2003 to December 31, 2003
 Commission file number: 0-20104 VERNALIS plc  England and Wales
(Jurisdiction of incorporation or organization) Oakdene Court, 613 Reading Road, Winnersh, Berkshire RG41 5UA, United Kingdom
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None
 Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares of 5 pence each (Ordinary Shares)
American Depositary Shares each representing the right to receive two (2) Ordinary Shares Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
 Indicate the number of outstanding shares of each of the issuers class of
capital or common stock as of the close of the period covered by the transition
report: 142,126,883 Ordinary Shares of 5 pence each Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s)) and (2) has been subject to
such filing requirement for the past 90 days. Yes þ               No o Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 o               Item 18 þ




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TABLE OF CONTENTS PART 1ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    1A
    
    Selected Financial Data
    
    
    1B
    
    Capitalization and Indebtedness
    
    
    3C
    
    Reasons for the Offer and Use of Proceeds
    
    
    3D
    
    Risk Factors
    
    
    3ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    12A
    
    History and Development of the Company
    
    
    12B
    
    Business Overview
    
    
    14C
    
    Research Programs
    
    
    17D
    
    Commercial Collaborations
    
    
    19E
    
    Principal Markets in which Vernalis Competes
    
    
    23F
    
    Revenues
    
    
    24G
    
    Seasonality of the Company's Business
    
    
    24H
    
    Marketing Channels and Sales Methods
    
    
    24I
    
    Patents, Licenses and Proprietary Rights
    
    
    25J
    
    Competition
    
    
    27K
    
    Material Effects of Government Regulation
    
    
    28L
    
    Organizational Structure
    
    
    29M
    
    Property, Plant and Equipment
    
    
    30ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    31ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    46ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    61ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    62ITEM 9.
    
    THE OFFER AND LISTING
    
    
    63ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    64ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    79ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    79PART IIITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    80ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    80ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    80ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    80ITEM 16B.
    
    CODE OF ETHICS
    
    
    80ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    80ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES
    
    
    81ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    81PART IIIITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    82ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    82ITEM 19.
    
    EXHIBITS
    
    
    82SIGNATURES
    
    
    
    
    
    
    84EX-4.1(N)EX-4.4(D)EX-4.5(A)EX-4.5(B)EX-4.5(C)EX-12EX-13




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PREAMBLE THE ACQUISITION OF VERNALIS GROUP PLC AND USE OF CERTAIN DEFINED TERMS Vernalis plc is a public limited company incorporated under the laws of
England. On July 3, 2003, the Boards of British Biotech plc and Vernalis Group
plc announced that they had unanimously agreed the terms of a recommended
merger of the two companies by way of an offer by J P Morgan plc on behalf of
British Biotech plc to Vernalis Group plc to acquire the whole of the issued
and to be issued share capital of Vernalis Group plc in exchange for shares in
British Biotech plc. The offer was not made in the United States. The offer was
approved by British Biotech plcs shareholders at an extraordinary general
meeting held on August 13, 2003, and was declared unconditional in all respects
save as to admission of the new shares to the London Stock Exchange on August
29, 2003, by which date valid acceptances of the offer had been received in
respect of 76,328,753 Vernalis Group plc shares, representing approximately
87.29 per cent of the existing issued share capital of Vernalis Group plc.
Admission became effective at 8am on September 1, 2003. The offer closed on
September 23, 2003, by which date acceptances of the offer had been received in
respect of 80,178,155 Vernalis Group plc shares, representing approximately
91.58 per cent of the existing issued share capital of Vernalis Group plc.
British Biotech plc commenced the procedure to acquire compulsorily any
remaining Vernalis Group plc shares to which the offer related pursuant to
sections 428 to 430f of the Companies Act 1985 on September 23, 2003. The
compulsory acquisition procedure was concluded on November 4, 2003. On October 1, 2003, British Biotech shareholders approved the re-naming of the
Company as Vernalis plc. The accounting period end of Vernalis plc has been changed from April 30 to
December 31. Consequently this transition report is in respect of the eight
month period from May 1, 2003 to December 31, 2003. Vernalis Group had a
December 31 accounting period end. References in this document to fiscal
2001, fiscal 2002 and fiscal 2003 mean the 12-month periods ended on April
30, 2001, 2002 and 2003 respectively; references to the transition period
means the eight month period from May 1, 2003 to December 31, 2003; and
references to fiscal 2004 means the 12-month period ending December 31, 2004. The operating results of the Company for the eight month period ended December
31, 2003 and the three-year period ended April 30, 2003 reflect the merger with
Vernalis Group under UK GAAP merger accounting. In addition, provided in Item
18, is a reconciliation of such operating results from UK to US GAAP, as well
as summary financial statements prepared in accordance with US GAAP. Under US
GAAP, the transaction was accounted for as the acquisition of Vernalis Group
plc by the Company using purchase accounting. As used herein the term Company refers to Vernalis plc and the terms
Vernalis and Group refer to the Company and its consolidated subsidiaries.
The term Vernalis Group refers to the company Vernalis Group plc and Vernalis
Group plcs subsidiaries which have now become part of the Group as indicated
above. The market share information in this Transition Report relating to frovatriptan
has been independently arrived at by the Company on the basis of the data
provided by IMS Health Inc. and other information. IMS Health Inc. is not
responsible for the evaluation, compilation and presentation of such market
share information in this Transition Report. i




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PRESENTATION OF FINANCIAL INFORMATION: AVAILABLE INFORMATION The Company furnishes The Bank of New York, as Depositary, with annual reports
containing Consolidated Financial Statements and an opinion thereon by
independent public accountants. Such financial statements are prepared on the
basis of UK GAAP reflecting the merger between the Company and Vernalis Group.
The annual reports contain a reconciliation to US GAAP of net income and
shareholders equity. Under US GAAP the combination of the Company and Vernalis
Group has been accounted under purchase accounting as an acquisition of
Vernalis Group by the Company. The Company also furnishes the Depositary with
half-yearly reports prepared in conformity with UK GAAP, which contain
unaudited interim consolidated financial information. Upon receipt thereof, the
Depositary mails all such reports to recorded holders of American Depositary
Receipts (ADRs) evidencing American Depositary Shares (ADSs). The Company also
furnishes the Depositary with all notices of shareholders meetings and other
reports and communications that are made generally available to shareholders
meetings and other reports and communications that are made generally available
to shareholders of the Company. The Depositary makes such notices, reports and
communications available for inspection by recorded holders of ADRs and mails
to all recorded holders of ADRs notices of shareholders meetings received by
the Depositary. The Groups consolidated financial statements are reported in English pounds
sterling. In this Transition Report on Form 20-F, references to US dollars or
$ are to US currency and references to pounds sterling, £, pence or p
are to UK currency. Solely for the convenience of the reader, this Transition
Report contains translations of certain pound sterling amounts into US dollars
at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such US
dollar amounts or could be converted into US dollars at the rate indicated or
at any other rate. Unless otherwise stated, the translations of pounds sterling
into US dollars have been made at the noon buying rate in New York City for
cable transfers in pounds sterling as certified for customs purposes by the
Federal Reserve Bank of New York (the Noon Buying Rate) in effect on December
31, 2003, which was $1.78 to £l.00. ii




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FORWARD-LOOKING STATEMENTS Cautionary Statement for Purposes of the Safe Harbor Provisions of the US
Private Securities Litigation Reform Act of 1995.This Transition Report
(particularly material under Item 4B Information on the Company, Item 4C
Research Programs, Item 4D Commercial Collaborations, Item 5 Operating and
Financial Review and Prospects  Financial Review, and  Trend Information)
may contain forward-looking statements that reflect the Groups current
expectations regarding future events, including the clinical development and
regulatory clearance of the Groups products, including that of frovatriptan
for menstrually-associated migraine, the Groups ability to find partners for
the development and commercialization of its products, including a new
commercialization partner (or partners) for frovatriptan, as well as the terms
of such partnership(s), the projected benefits of reacquiring the rights to
frovatriptan in North America and/or any new partnership arrangement(s) on the
Groups liquidity and results of operations, as well as the Groups working
capital requirements and 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 Groups research strategies, the applicability of
the discoveries made therein, and the successful and timely completion of
clinical studies, including with respect to frovatriptan and the Groups other
products, the uncertainties related to the regulatory process, the ability of
the Group to identify and agree beneficial terms with suitable partners for the
commercialization and/or development of frovatriptan and other 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 ability of the Group to obtain additional financing for its
operations and the market conditions affecting the availability and terms of
such financing, the successful integration of completed mergers and
acquisitions and achievement of expected synergies from such transitions, and
the ability of the Group to identify and consummate suitable strategic and
business combination transactions and the risk described under Item 3D Risk
Factors below. iii




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PART I 
 ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3.  KEY INFORMATION 
 A            Selected Financial Data The selected financial data and other information presented below under Item 3A
represents financial data of the Group and its consolidated subsidiaries
reflecting the merger with Vernalis Group (under UK merger accounting). Under
UK GAAP, the merger of British Biotech plc and Vernalis Group plc was accounted
for as a merger of equals (pooling of interests). Under US GAAP the
transaction was accounted for as the acquisition of Vernalis Group plc by
British Biotech plc using purchase accounting. Under purchase accounting, the
costs of the investment is calculated at the market value of the shares issued
together with incidental costs and the assets and liabilities of the acquired
entity are recorded at fair value. The selected financial data set forth below as of December 31, 2003, and the
five years ended April 30, 2003, have been derived from the Consolidated
Financial Statements of the Group, which have been audited by its independent
auditors, PricewaterhouseCoopers LLP (PricewaterhouseCoopers for the years
ended April 30, 1999, 2000, 2001 and 2002). PricewaterhouseCoopers were
independent auditors to both the company and Vernalis Group prior to their
merger in 2003. This financial data should be read in conjunction with, and are
qualified in their entirety by reference to, the Consolidated Financial
Statements of the Group and Notes thereto included elsewhere in this transition
report. The Group prepares its Consolidated Financial Statements in accordance with UK
GAAP, which differ in certain respects from US GAAP. A description of the
significant differences and reconciliations of net income and shareholders
equity, as well as summary financial statements prepared in accordance with US
GAAP, are set forth in Note 3 of the Notes to the Consolidated Financial
Statements. Consolidated Statement of Operations Data: Amounts in Accordance with UK GAAP Year ended April 30,
    
    Eight months ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003
    
    2003£
    
    £
    
    £
    
    £
    
    £
    
    £
    
    $(In thousands, except for Ordinary share amounts)Revenues
    
    
    10,164
    
    
    
    7,560
    
    
    
    4,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,363Research and
development
expenditure
    
    
    (51,436
    )
    
    
    (43,605
    )
    
    
    (43,291
    )
    
    
    (38,152
    )
    
    
    (30,512
    )
    
    
    (26,890
    )
    
    
    (47,864
    )Net interest income
    
    
    10,882
    
    
    
    6,432
    
    
    
    4,199
    
    
    
    2,783
    
    
    
    2,803
    
    
    
    1,770
    
    
    
    3,151Net loss
    
    
    (51,758
    )
    
    
    (40,414
    )
    
    
    (44,369
    )
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
    
    
    (60,910
    )Net loss per Ordinary share
    
    
    (85.3
    )p
    
    
    (62.5
    )p
    
    
    (64.3
    )p
    
    
    (38.6
    )p
    
    
    (43.1
    )p
    
    
    (24.9
    )p
    
    
    (44.3
    )cOrdinary shares
used in computing
Net loss per
Ordinary share
(000s)
    
    
    60,710
    
    
    
    64,702
    
    
    
    69,021
    
    
    
    70,175
    
    
    
    71,010
    
    
    
    137,219
    
    
    
    137,219
 Consolidated Statement of Operations: Amounts in Accordance with US GAAP Year ended April 30,
    
    Eight months ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003
    
    2003£
    
    £
    
    £
    
    £
    
    £
    
    £
    
    $(In thousands, except for Ordinary share amounts)Revenue
    
    
    4,224
    
    
    
    2,624
    
    
    
    1,588
    
    
    
    1,450
    
    
    
    1,078
    
    
    
    5,009
    
    
    
    8,916Net loss
    
    
    (39,843
    )
    
    
    (25,397
    )
    
    
    (28,844
    )
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )
    
    
    (51,200
    )Net loss per
Ordinary share
    
    
    (120.6
    )p
    
    
    (76.3
    )p
    
    
    (74.6
    )p
    
    
    (52.4
    )p
    
    
    (66.0
    )p
    
    
    (28.0
    )p
    
    
    (52.9
    )c


1



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Consolidated Balance Sheets: Amounts in Accordance with UK GAAP At April 30,
    
    At December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003
    
    2003£
    
    £
    
    £
    
    £
    
    £
    
    £
    
    $(in thousands)Cash and cash equivalents
    
    
    140,350
    
    
    
    104,655
    
    
    
    83,022
    
    
    
    62,982
    
    
    
    48,454
    
    
    
    24,214
    
    
    
    43,101Property, plant and
equipment
    
    
    31,604
    
    
    
    30,352
    
    
    
    15,691
    
    
    
    10,245
    
    
    
    11,564
    
    
    
    7,508
    
    
    
    13,364Intangible fixed assets
and investments
    
    
    
    
    
    
    10,452
    
    
    
    8,502
    
    
    
    25,752
    
    
    
    29,794
    
    
    
    23,008
    
    
    
    40,954Total assets
    
    
    160,025
    
    
    
    132,260
    
    
    
    99,461
    
    
    
    104,736
    
    
    
    101,853
    
    
    
    65,770
    
    
    
    117,071Long-term debt
    
    
    (2,430
    )
    
    
    (3,802
    )
    
    
    (9,559
    )
    
    
    (22,227
    )
    
    
    (24,773
    )
    
    
    (8,119
    )
    
    
    (14,452
    )Total liabilities
    
    
    (21,472
    )
    
    
    22,269
    )
    
    
    (26,432
    )
    
    
    (41,434
    )
    
    
    (48,277
    )
    
    
    (31,982
    )
    
    
    (56,928
    )Total shareholders funds
    
    
    156,979
    
    
    
    128,458
    
    
    
    89,939
    
    
    
    63,302
    
    
    
    53,576
    
    
    
    33,789
    
    
    
    60,144Share capital
    
    
    34,733
    
    
    
    35,060
    
    
    
    35,161
    
    
    
    35,221
    
    
    
    36,895
    
    
    
    38,813
    
    
    
    69,087
 Net Cash and Cash Equivalents and Short-Term Deposits in Accordance with US GAAP At April 30,
    
    At December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003
    
    2003£
    
    £
    
    £
    
    £
    
    £
    
    £
    
    $(in thousands)Cash and cash equivalents
    
    
    6,313
    
    
    
    21,674
    
    
    
    18,990
    
    
    
    4,445
    
    
    
    24,868
    
    
    
    16,148
    
    
    
    28,743Short-term deposits
    
    
    91,500
    
    
    
    54,000
    
    
    
    45,746
    
    
    
    45,969
    
    
    
    19,138
    
    
    
    8,106
    
    
    
    14,429Total shareholders funds
    
    
    117,691
    
    
    
    95,183
    
    
    
    70,772
    
    
    
    53,389
    
    
    
    55,491
    
    
    
    71,320
    
    
    
    126,950
 Dividends No dividend has been paid by the Company in the five fiscal years up to and
including fiscal 2003 and the transition period ended December 31, 2003. Exchange Rates The Consolidated Financial Statements of the Group which form part of this
Transition Report are presented in English pounds sterling (£ or pounds). The following table sets forth, for the fiscal years and dates indicated,
certain information concerning the noon buying rate in New York City for pounds
expressed in US dollars ($ or dollars) per £1.00 as certified for customs
purposes by the Federal Reserve Bank of New York (the Noon Buying Rate). Months Highest
    
    Months LowestMonth
    
    Exchange Rate
    
    Exchange RateMay 2004
    
    
    1.8369
    
    
    
    1.7943April 2004
    
    
    1.8564
    
    
    
    1.7674March 2004
    
    
    1.8680
    
    
    
    1.7943February 2004
    
    
    1.90
    
    
    
    1.82January 2004
    
    
    1.85
    
    
    
    1.72December 2003
    
    
    1.78
    
    
    
    1.72November 2003
    
    
    1.71
    
    
    
    1.67October 2003
    
    
    1.70
    
    
    
    1.66September 2003
    
    
    1.67
    
    
    
    1.57
 Years ended April 30,
    
    Period End
    
    Average
    
    High
    
    Low1999
    
    
    1.61
    
    
    
    1.64
    
    
    
    1.72
    
    
    
    1.592000
    
    
    1.55
    
    
    
    1.58
    
    
    
    1.65
    
    
    
    1.552001
    
    
    1.43
    
    
    
    1.46
    
    
    
    1.56
    
    
    
    1.402002
    
    
    1.46
    
    
    
    1.43
    
    
    
    1.48
    
    
    
    1.372003
    
    
    1.60
    
    
    
    1.55
    
    
    
    1.65
    
    
    
    1.43Year ended December 31,2003
    
    
    1.78
    
    
    
    1.64
    
    
    
    1.78
    
    
    
    1.57
 On June 4, 2004 the noon buying rate for pounds was £1.00 = $1.8367 2




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Principal Accounting Policies The Consolidated Financial Statements of the Group which form part of this
Transition Report have been prepared in accordance with applicable Accounting
Standards in the United Kingdom. A summary of the principal Group accounting
policies, which have been applied consistently, is set forth in Note 2 of Notes
to the Consolidated Financial Statements. The Group is required to adopt
International Financial Reporting Standards in 2005 and is currently developing
the most appropriate accounting policies. 
 B  Capitalization and Indebtedness Not applicable. 
 C  Reasons for the Offer and Use of Proceeds Not applicable. 
 D  Risk Factors Prospective investors and shareholders should be aware that any investment in
the Group involves a high degree of risk and should be made only by those with
the necessary expertise to appraise the investment. In addition to the other
information in this document, the following risk factors should be considered
in evaluating whether to make or hold an investment in the Group. Additionally,
some risks may be unknown to Vernalis and other risks, currently believed to be
immaterial, could turn out to be material. Any or all of these factors could
have a material and adverse effect on the Groups operational results,
financial condition and prospects. Furthermore, the trading price of Vernalis
shares could decline, possibly rapidly, resulting in the loss of all or part of
any investment in Vernalis shares. For the foreseeable future, the Group will be highly dependent on the success
of frovatriptan in the marketplace. The discovery of any adverse reactions to
frovatriptan could have a material adverse effect on the cash position and
income of the Group. In addition, the intense competition to which frovatriptan
is subject could impede growth in frovatriptans market share. Frovatriptan is the Groups only approved product. As such the Groups future
is highly dependent on the sales of frovatriptan. The discovery of adverse
reactions, including those which might result in individual or class warnings
or contraindications, or its temporary or permanent withdrawal from the market,
could considerably undermine the financial state of the Group. Frovatriptan is
one of seven triptans currently marketed as an acute treatment for migraine.
The Companys principal competitors for frovatriptan include some of the
largest and most well-funded pharmaceutical companies in the world, including
GlaxoSmithKline, Merck, Pfizer and Astra Zeneca. Sumatriptan, marketed under
the name Imitrex ® and developed by GlaxoSmithKline, was the first
frovatriptan approved for the acute treatment of migraine, and remains the
dominant product in the United States and worldwide. By February 29, 2004, 20
months following launch in the United States, frovatriptans largest market,
and 15 months following launch in Germany, the products largest European
market, frovatriptan had achieved a share of the oral triptan migraine market
of approximately three per cent in the United States and 7.5 per cent in
Germany for the triptan class of drugs. The annualized average market share in
the United States for the calender year 2003 was 2.7 per cent. The Group may
not be able to increase or maintain the market share of frovatriptan in light
of such competition which, in turn, could have a significant adverse effect on
the Groups revenue. The Group may not be able to maintain and enhance sales of frovatriptan in the
North American market following reacquisition of the rights to frovatriptan in
this territory. The sales and marketing of frovatriptan is controlled territorially. On May 18,
2004, the Group agreed to reacquire the entirety of the rights to frovatriptan
in North America in consideration for the payment of $50 million (payable in
installments over 21 months up to December 31, 2005) from Elan Pharma
International Limited (Elan). Vernalis will also purchase certain inventory
from Elan at an expected approximate cost of $5.4 million payable no later than
December 31, 2004. An initial payment of $5 million was made to Elan in May
2004. Although the Group has reacquired the rights to frovatriptan in North
America, there are no current arrangements for the active marketing and sale of
the products by the Group in this territory. From May 18, 2004 and for a period
of up to 12 months, sales of the product will be supported by Elan under a
transitional services agreement. Since May 18, 2004, however, Elan is not
obliged actively to market the product. Ongoing income from sales of frovatriptan depends on the Groups ability to
secure a suitable new partner (or partners) in North America to exploit the
maximum potential of frovatriptan in this territory, its ability to put in
place appropriate arrangements actively to promote and market frovatriptan in
North America prior to securing a new partner, and Elans support of the
product during the transitional services period. Ongoing income from sales of
frovatriptan could decrease which, in turn, could have a significant adverse
effect on the Groups liquidity, its ability to promote frovatriptan and to
support its other product development, if Elan does not fulfill its obligations
under the transitional services agreement, if 3




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the Group is unable directly to promote frovatriptan during the period prior to
finding a suitable new partner for the product, or if it is unable to find a
suitable new partner for the product. Failure by the Group licensees, for any reason, to achieve and sustain the
level of sales anticipated by the Group could adversely impact the occurrence,
timing and /or amount of milestone payments and royalties and have a material
adverse effect on the cash position and income of the Group. The sales and marketing of frovatriptan in Europe is controlled by Menarini
International Operations, Luxembourg S.A. (Menarini). If that licensee or any
future licensee in respect of the North American market does not exercise
sufficient efforts in marketing and sales of frovatriptan, or otherwise does
not achieve the sales anticipated by the Group, this could reduce revenue and
royalties payable to the Group and have a material adverse effect on the cash
position and the income (and any resulting profitability) of the Group. Various situations might arise with respect to any new commercialization
partner in North America, Menarini or Elan (during the transitional services
period) or any of their respective subsidiaries or affiliates which could have
an adverse effect on the sales and marketing of frovatriptan. These include a
direct or indirect sale or proposed sale to a third party or an assignment or
proposed assignment of respective licenses in frovatriptan to a third party or
the commencement of insolvency proceedings in respect of any of those entities. The Group may experience delay or failure to achieve approval for a new
indication for frovatriptan The Group is working towards obtaining approval for the use of frovatriptan for
the prophylactic treatment for menstrual associated migraine (MAM).
Frovatriptan is currently in Phase III clinical trials in respect of approval
for this new indication. Although an initial clinical study into the efficacy
of frovatriptan for prophylaxis of MAM has demonstrated a highly statistically
significant improvement in the number of patients who are headache free during
the perimenstrual period, unfavorable results from the current Phase III
trials, or failure to achieve FDA approval for the new indication for
frovatriptan, or approval by the FDA but subject to restrictions on patients
suitable to be treated could adversely affect the anticipated sales potential
and, therefore income from the product. Such results could also affect the
ability of the Group to conclude a successful agreement with a new commercial
partner in the competitive US market and therefore have an adverse effect on
the income of the Group. The Group may be unable to secure financing for the acquisition of frovatriptan
under favorable terms Vernalis has reacquired the North American rights for frovatriptan from Elan
for a total of US $50 million, payable in installments up to December 31, 2005.
Vernalis will also purchase certain inventory from Elan at an expected
approximate cost of $5.4 million payable no later than December 31, 2004. An
initial payment of $5 million was made to Elan in May 2004. In order to meet its obligations to Elan, in particular to meet the payment of
$20 million in December 2004, and the payment of approximately $5.4 million for
related inventory no later than December 31, 2004, the Group intends to raise
funds by way of an equity fundraising. An equity fundraising will be subject to
shareholder approval. If the equity fundraising is delayed or does not proceed
due to a market downturn, a deterioration in the Companys business, inability
to obtain shareholder approval or any other reason, the Company would need to
take immediate action to curtail expenditure on its research and development
activities until further funds are available. In these circumstances, the
Company would continue to seek alternative sources of funding to ensure the
continuation of its business. This could include securing alternative sources
of funding from, for example, further collaborations with partners,
renegotiation of existing contractual arrangements and the sale of part of the
Companys future revenues from frovatriptan, although the terms under which
such funds might be secured are likely to be disadvantageous. There can be no
certainty that any alternative sources of funding would be available to the
Company if an equity fundraising did not proceed. The Group has a history of operating losses and negative cash flow and may
never become profitable Vernalis is an early stage biotechnology company that has a history of
operating losses. No assurance can be given that the operations of the Group
will become profitable. These losses have arisen mainly from the costs incurred
in research and development of its products and general administrative costs.
For the transition period, Vernalis pre-tax losses were £34.2 million. The
Groups cash amounted to £12.0 million as at April 30, 2004. To date, the Group
has generated revenues through royalties, license fees, milestone payments,
contract research, supply of compound and research and development funding from
its partners. Vernalis intends to continue to generate income from frovatriptan
in the US by direct sales revenue in the short term and through revenue agreed
in a future partnership arrangement, and from sales of the product in Europe
and any new territories. Sales of frovatriptan may not generate revenues at the
levels anticipated. The Group may not develop any additional products and any
other products it may develop may not generate revenues. In addition, the Group
is committed to making payments of the further $45 million in installments up
to December 31, 2005 to Elan in respect of the re-acquisition of the rights to
frovatriptan in the US, and approximately $5.4 million to Elan no later then
December 31, 2004, in respect of frovatriptan inventory. The Groups ability to
continue as a going 4




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concern beyond calendar 2004 is substantially dependent on the Group managing
to fund the payments due to Elan in December 2004. The Group intends to raise further funds to meet its obligations to Elan, and,
in particular, the payment of $20 million in December 2004 and the payment of
approximately $5.4 million for related inventory no later than December 31,
2004. The Group intends to raise funds by way of an equity fundraising in
addition to seeking upfront payments and milestones in relation to the
licensing of the rights to frovatriptan in North America to a new
pharmaceutical partner. In order to support the research and development of the Companys drug
candidates, the Group plans to incur expenses considerably in excess of
revenue. In general, researching new compounds and conducting pre-clinical and
clinical trials is expensive. The Groups need for capital at any given time
will be dependent on a number of factors, including:  
    
    the Groups degree of success in commercializing frovatriptan;
    
    the ability to enter into collaborations to support its research and development programs;
    
    the amount, and timing, of milestone payments the Group receives from its collaborators;
    
    the rate of progress and cost of the Groups research activities;
    
    the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights;
    
    the emergence of competing products and other adverse market development; and
    
    changes in, or termination of, the Groups existing collaboration and licensing arrangements. If the Group issues additional equity, it could lead to the dilution of the
interests of existing shareholders. If the Group obtains funds through a bank
credit facility or through the issuance of debt securities or preferred shares,
this indebtedness or preferred shares would have rights senior to the rights of
holders of its Ordinary Shares, and the terms of such indebtedness or preferred
shares could impose restrictions on its operations. If it is unable to raise
additional funds when it needs them, the Group may be required to delay, reduce
or eliminate some or all of its programs. The Group may also be forced to
license compounds or technology to others that it would prefer to develop
internally until a later and potentially more financially lucrative stage. If
the Group raises additional funds through collaborations and other licensing
arrangements, it may have to relinquish its rights to some of its compounds or
technologies or grant licenses on unfavorable terms. Additional funding will be
required to give the Group time to reach profitability. The Group may be unable to retain and attract certain important employees
which could weaken the Groups scientific and management capabilities. Biotechnology companies such as Vernalis are highly dependent on employees who
have an in-depth and long-term understanding of their companies technologies,
products, programs, collaborative relationships and strategic goals. The loss
of certain employees and the Groups inability to recruit new employees to
replace them could have a negative impact on the business and prospects of the
Group. The Group has undergone a significant program of redundancy following
the merger of the Company and Vernalis Group plc. The Group plans to reduce the
number of staff from 271 to approximately 110 in a cost saving exercise,
although headcount may increase in the future as a result of the reacquisition
of the North American rights for ftrovatriptan. As a result, the Group has
limited capacity to provide duplicate cover for key activities. Incentivisation
of certain important employees to remain with the Group following the
uncertainties of the post-merger redundancy program remains key to the Groups
success. The loss of such employees could weaken the Groups scientific and
management capabilities, resulting in delays in the development of its drugs
and impacting negatively on the Groups business. Although the Group has
entered into employment or consultancy arrangements with such employees aiming
to secure their services, their retention cannot be guaranteed. The
biotechnology industry has a highly competitive market for qualified scientific
and managerial employees and competitors may try to recruit some of the Groups
important employees. In addition, as the Group develops it may also need to attract new personnel to
manage new programs and to provide the management experience necessary for the
Group to make the transition from a development-focused company to a company
with strong sales, marketing, production and distribution capabilities. The
Group may also need to attract new personnel to support the promotion of
frovatriptan in North America, at least until a new commercialization partner
is found for that territory. There can be no assurance that the Group will be able to identify suitable
partners, enter into business combinations with them and successfully integrate
their operations with the Groups operations. The biotechnology sector in the United States and in Europe has been
characterized by consolidation. It is the Companys goal to participate further
in the consolidation of the biotechnology sector. The Groups competitors may
also pursue business combinations and bid for companies that the Group views as
potential partners in a business combination. As a result, the Group may be
unable to locate or enter into business combinations with partners that are the
most suitable to its product platform and business strategy, which would limit
the synergies created by a business combination. The Group may be unable to
secure a suitable partner for the commercialization of the reacquired rights in
frovatriptan in the North American market. There can be no guarantee that the
Group will be able successfully to integrate any businesses or assets that it
may acquire in future transactions. Part of the Groups strategy is to acquire 5




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businesses, or assets of businesses, specialising in pharmaceutical research
and development and related services. At this time, Vernalis is not a party to
any definitive agreement for the acquisition of any material business or assets
other than agreements in the ordinary course of business) and no guarantee can
be given that definitive agreements may be reached with any person, or that if
definitive agreements are executed, that such agreements will be consummated. The Group may experience difficulties managing its growth. The Groups failure
to meet its growth or development challenges could have a material adverse
effect on its operations. Notwithstanding the program of redundancy following the merger of the Company
and Vernalis Group plc, the Group plans significant growth in all areas of its
operations as it expands its business either through organic growth or through
mergers and acquisitions. The reacquisition of frovatriptan rights for North
America will necessitate that the Group expand its business and undertake a
number of tasks not previously required, particularly until the Group finds a
new commercialization partner for that territory. The Groups failure to meet
any growth or development challenges, noted below, could have a material
adverse effect on its operations. To compete effectively and manage its growth, the Group will need to continue to:  
    
    improve its managerial controls and procedures;
    
    train, manage and motivate the employee base;
    
    develop the necessary computer capacity and information systems to support its
increasing operational needs and its discovery and development efforts;
    
    secure suitable office and laboratory facilities to accommodate its growing needs;
    
    accurately forecast demand for its research capability and products; and
    
    expand existing operational, financial and management information systems. No assurance can be made that the Group will be able to bring any of the drug
candidates it is developing to market. Development of drug candidates involves a lengthy and complex process. Any drug
candidate which the Group wishes to offer commercially to the public must be
put through extensive research, development and pre-clinical and clinical
testing which will be costly to the Group. This development process takes
several years. In addition, the Group or its partners will need to obtain
regulatory approvals to conduct clinical trials and manufacture drugs before
they can be marketed. Results of pre-clinical studies are not necessarily
indicative of results that may be obtained in clinical trials and results in
early clinical trials may be different from those obtained in long-term testing
or in general use. Adverse or inconclusive results from pre-clinical testing or
clinical trials may substantially delay, or halt entirely, the development of
products. The Group may fail successfully to develop a drug candidate for many reasons, including:  
    
    the failure to establish any collaborative third party agreements to support drug development;
    
    the failure to produce a promising compound in sufficient quantities to conduct clinical trials
or to manufacture the compound at commercially acceptable quantities and prices;
    
    the failure of the drug in pre-clinical studies;
    
    the inability of clinical trials to demonstrate that the drug is safe and effective in humans; or
    
    the failure to obtain required regulatory approvals. The drugs that the Group brings to market may not be commercially successful. The Groups success depends on acceptance of the Groups products by the
market, including by physicians and third-party payors, and consequently the
Groups progress may be adversely affected if it is unable to achieve market
acceptance of its products. Some factors that may affect the rate and level of
market acceptance of any of the Groups products include:  
    
    the existence or entry onto the market of superior competing products or therapies;
    
    the price of the Groups products compared to competing products;
    
    public perception regarding the safety, efficacy and benefits of the Groups products compared to competing products or
therapies;
    
    the effectiveness of the Groups sales and marketing efforts and those of the Groups marketing partners;
    
    regulatory developments related to manufacturing or use of the Groups products;
    
    the willingness of physicians to adopt a new treatment regimen; and
    
    publicity concerning the product type in general. 6




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There can be no assurance that the Groups products will receive and maintain
regulatory approval. The complexity and multi-jurisdictional nature of the
applicable regulatory processes could result in delays in achieving such
regulatory approval. The international pharmaceutical industry is highly regulated by numerous
governmental authorities in the US, the UK and Europe and by regulatory
agencies in other countries where the Group intends to test or market products
it may develop. National regulatory authorities administer a wide range of laws
and regulations governing the testing, approval, manufacturing, labelling and
marketing of drugs and also review the quality, safety and effectiveness of
pharmaceutical products. These regulatory requirements are a major factor in
determining whether a substance can be developed into a marketable product and
the amount of time and expense associated with such development. Government regulation imposes significant costs and restrictions on the
development of pharmaceutical products for human use, including those the Group
is developing. The development, clinical evaluation, manufacture and marketing
of the Groups products and ongoing research and development activities are
subject to regulation by governments and regulatory agencies in all territories
within which the Group intends to manufacture and market its products (whether
themselves or through a partner). No assurance can be given that any of the
Groups products will successfully complete the clinical trial process or that
regulatory approvals to manufacture and market these products will ultimately
be obtained. The time taken to obtain regulatory approval varies between territories and no
assurance can be given that any of the Groups products will be approved in any
territory within the timescale envisaged, or at all. This may result in a
delay, or make impossible, the commercialization of its products. Furthermore,
each regulatory authority may impose its own requirements (for instance, by
restricting the products indicated uses) and may refuse to grant, or may
require additional data before granting, an approval, even though the relevant
product candidate may have been approved by another countrys authority. If regulatory approval is obtained, the product and its manufacture will be
subject to continual review and this approval may be withdrawn or restricted.
Changes in applicable legislation or regulatory policies, or discovery of
problems with the product, or its production process, site or manufacturer, may
result in the imposition of restrictions on the product, its sale, manufacture
or use, including withdrawal of the product from the market, or may otherwise
have an adverse effect on the Groups business. Even if the Groups products are approved, they may still face later regulatory
difficulties Even if the Group receives regulatory approval to sell any of its products, the
US Food and Drug Administration (FDA), the UK Medicines & Healthcare Products
Regulatory Agency or comparable foreign regulatory agencies could require the
Group to conduct post-marketing trials or could prevent the Group from using
the labelling claims which the Group would like to use to promote its products.
Regulators will undertake periodic reviews and inspections. If they discover
previously unknown problems with a product or its manufacturing facility or if
the Group fails to comply with regulatory requirements, regulators could:  
    
    impose fines against the Group;
    
    impose restrictions on the product, its manufacturer, or the Group;
    
    require the Group to recall or remove a product from the market;
    
    suspend or withdraw its regulatory approvals;
    
    require the Group to conduct additional clinical trials;
    
    require the Group to change its product labelling; or
    
    require the Group to submit additional marketing applications. If any of these events occur, the Groups ability to sell its products will be
impaired and the Group may incur substantial additional expense to comply with
the regulatory requirements. In addition, in certain countries, even after
regulatory approval, the Group is still required to obtain price reimbursement
approval. This may delay the marketing of the Groups products or, when
approval cannot be obtained, mean that the product cannot be sold at all. The Groups business faces intense competition from major pharmaceutical
companies and specialized biotechnology companies engaged in the development of
drugs directed at the conditions and disorders that are the focus of the
Groups drug programs. The Groups competitors in the biotechnology and pharmaceutical industries may
have superior research and development capabilities, drugs, manufacturing
capability or marketing expertise. Many of the Groups competitors have
significantly greater financial and human resources and may have more
experience in research and development. As a result, the Groups competitors
may develop safer or more effective drugs, implement more effective sales and
marketing programs or be able to establish superior proprietary positions. In
addition, the Group anticipates that it will face increased competition in the
future as new companies enter the Groups markets and alternative drugs and
technologies become available. 7




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The Groups products under development are expected to address a broad range of
markets. The Groups competitive position will be determined in part by the
potential indications for which the Groups products are developed and
ultimately approved by regulatory authorities. In addition, the first
pharmaceutical product to reach the market in a therapeutic or preventative
area may be at a significant competitive advantage relative to late entrants to
the market. Accordingly, the relative speed with which the Group or its
collaborative partners can develop products, complete the clinical trials and
approval processes and supply commercial quantities of the products to the
market, are expected to be important competitive factors. The Groups competitors are developing products that could compete with the
drug candidates the Group is developing. The Group and its collaborators will
need to persuade patients and physicians to adopt its products over its
competitors products. Technological changes could overtake the Group. The biotechnology and pharmaceutical industries are subject to rapid
technological change which could affect the success of the Groups drugs or
make them obsolete. The field of biotechnology is characterized by significant
and rapid technological change. Research and discoveries by others may result
in medical insights or breakthroughs which render the Groups drug candidates
less competitive or even obsolete before they generate revenue. The Group may not be able to sell its drugs profitably if reimbursement from
third-party payers, including government and private health insurers, is
unavailable or limited. The Group may be adversely affected by third-party reimbursement and healthcare
cost containment initiatives. A significant portion of the Groups future
revenue is likely to depend on payments by third-party payers, including
government health administration authorities and private health insurers. The
Group may not be able to sell its drugs profitably if reimbursement from these
sources is unavailable or limited. Third-party payers are increasingly
attempting to contain healthcare costs through measures that are likely to
impact the drugs the Group is developing, including:  
    
    challenging the prices charged for healthcare products, by limiting
both coverage and the amount of reimbursement for new therapeutic
products, and by denying or limiting coverage for drugs that are
approved by the regulatory agencies but are considered experimental by
third-party payers; and
    
    refusing to provide coverage when an approved drug is used in a way
that has not received regulatory marketing approval. The Group may be unable to successfully establish and protect its intellectual
property which is significant to the Groups competitive position. The Groups success depends in part on its ability to obtain and maintain
protection for its inventions and proprietary information, so that it can stop
others from making, using or selling its inventions or proprietary rights. The
Group owns a portfolio of patents and patent applications and is the authorized
licensee of other patents. There is a significant delay between the time of
filing of a patent application and the time its contents are made public, and
others may have filed patent applications for subject matter covered by the
Groups pending patent applications without the Group being aware of those
applications. The Groups patent applications may not have priority over patent
applications of others and its pending patent applications may not result in
issued patents. Even if the Group obtains patents, they may not be valid or
enforceable against others. Moreover, even if the Group receives patent
protection for some or all of its products, those patents may not give the
Group an advantage over competitors with similar products. To develop and maintain its competitive position, the Group also relies on
unpatented trade secrets and improvements, unpatented know-how and continuing
technological innovation, which it protects with security measures it considers
to be reasonable, including confidentiality agreements with its collaborators,
consultants and employees. The Group may not have adequate remedies if these
agreements are breached and the Groups competitors may independently develop
any of this proprietary information. If the Group fails to obtain adequate protection for its intellectual property,
the Groups competitors may be able to take advantage of the Groups research
and development efforts. The Groups success will depend, in large part, on its
ability to obtain and maintain patent or other proprietary protection for its
technologies in general and, in particular, drugs and processes. The Group may
not be able to obtain patent protection for the composition of matter of
discovered compounds, processes developed by its employees or medical uses of
compounds discovered through its technology. Legal standards relating to
patents covering pharmaceutical or biotechnological inventions and the scope of
claims made under these patents are still developing. There is no consistent
policy regarding the breadth of claims allowed in biotechnology patents. The
Groups patent position is therefore highly uncertain and involves complex
legal and factual issues. 8




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The Group may incur substantial costs as a result of disputes relating to
intellectual property. The Group may have to initiate litigation to enforce its patent and license
rights. If the Groups competitors file patent applications that claim
technology also claimed by the Group, the Group may have to participate in
interference or opposition proceedings to determine the priority of invention.
An adverse outcome could subject the Group to significant liabilities and
require the Group either to cease using a technology or to pay license fees. The Group could incur substantial costs in any litigation or other proceeding
relating to patent rights, even if it is resolved in the Groups favor. Some of
the Groups competitors may be able to sustain the costs of complex litigation
more effectively or for a longer time than the Group can because of their
substantially greater resources. In addition, uncertainties relating to any
patent, pending patent or intellectual property litigation could have material
adverse effect on the Groups ability to bring a drug candidate to market,
enter into collaborations in respect of the disputed drug candidate or other
drug candidates, or raise additional funds. Foreign exchange rate fluctuations may adversely affect the Groups results of
operations and financial condition. The Group records its transactions and prepares its financial statements in
pounds sterling, but a substantial proportion of the Groups income from sales
of frovatriptan and collaborative agreements is received in US dollars or
Euros. In addition, the Group has a 20 million US dollar-denominated liability
to GlaxoSmithKline at December 31, 2003, and following the reacquisition of
North American rights to frovatriptan will pay Elan approximately $55 million
before December 2005 (of which $5 million is already paid). The Group also
incurs a proportion of its expenditure in US dollars, relating primarily to the
clinical trials that it conducts in the United States. See item 4D Information
on the Company  Commercial Collaborations for a description of the
arrangements with GlaxoSmithKline and Elan. The Groups cash balances are
predominantly held in pound sterling. To the extent that the Groups foreign
currency assets and liabilities are not matched, fluctuations in exchange rates
between pounds sterling, the US dollar and the Euro may result in realized or
unrealized exchange gains and losses on translation of the underlying currency
into pounds sterling that may increase or decrease the Groups results of
operations and may adversely affect the Groups financial condition each as
stated in pounds sterling. In addition, if the currencies in which the Group
earns its revenues and/or holds its cash balances weaken against the currencies
in which it incurs its expenses, this could adversely affect the Groups
profitability and liquidity. Where a substantial net foreign currency liability
exists, the Group will consider hedging against it to minimize foreign currency
expense. However, such hedging is based on estimates of liabilities and future
revenues and will not fully eliminate future foreign currency exchange
fluctuations. The Group cannot guarantee that its collaborators will devote sufficient
resources to collaborations with the Group or that the Groups drug candidates
can be developed and commercialized without these collaborators. The Groups success is dependent on its current collaborators and contractors
and the ability of the Group to attract new collaborators and contractors in
the future. The Groups collaborators have and in the future are likely to have
substantial responsibility for some of the development and commercialization of
the Groups drug candidates. Certain of the Groups collaborators also have,
and in the future are likely to have, significant discretion over the resources
they devote to these efforts. The Groups success, therefore, will depend on
the ability and efforts of these outside parties in performing their
responsibilities. Currently, Vernalis most important collaborators are Elan
(for the transitional services period), Menarini, Roche, Serono, Oscient
Pharmaceuticals Corp (of which Genome is a subsidiary) (Oscient) and Novartis
Institutes for Biomedical Research Inc (Novartis). Any future new collaboration
in respect of frovatriptan in the North American market will also represent an
agreement of major importance for the Group. For additional information see
Item 4D, Information on the Company  Commercial Collaborations. The Groups business will rely significantly on these strategic partners. If
the relationship with any one of these partners (or their co-partners) is
adversely affected, the Groups results of operations may be adversely
impacted. As the Group is unable to provide for all of its research, development,
manufacturing, marketing or sales needs, the Group is also dependent on
third-party contractors and their services and upon their effort and skill in
providing those services. The Group cannot guarantee that:  
    
    existing collaborative arrangements or license agreements
or agreements with third-party contractors will be able
to be maintained;
    
    any new collaborative arrangements or license agreements
or agreements with third-party contractors will be on
favorable terms; or
    
    any collaborative arrangements or license agreements or
agreements with third-party contractors will prove
successful. 9




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If the Group is unable to continue with any of the existing collaborations and,
following negotiations with the relevant partners, terminates a collaboration,
no assurance can be given that this will not have a negative impact on the
reputation of the Group or its ability to secure additional collaborations in
the future. The termination of any agreements with third party contractors or
their failure to perform their obligations under such agreements could have a
disruptive effect on the Groups business. The Group is dependent on single sources of supply for frovatriptan and some of
its components. The Group currently depends on single sources of supply for components it needs
to conduct its research activities and for some of the raw materials used to
manufacture frovatriptan. These suppliers may be unwilling or unable to meet
the Groups future needs. Replacing one of these suppliers or finding
additional suppliers could take a long time. For example, if circumstances
required the Group to locate an alternative supplier for the raw materials used
to manufacture frovatriptan or an alternative secondary manufacturer,
manufacture and delivery to the marketplace of frovatriptan could be
interrupted. Similarly, if the Group had to interrupt its research programs in
order to locate an alternative supplier of essential components, the Group
could be forced to delay pre-clinical or clinical trails. Any of these events
would adversely affect the Groups programs and projected revenues. If the Group fails to maintain its computer hardware, software and related
infrastructure, market acceptance would be delayed and revenues lost. The Groups research and development programs involve the analysis of large
amounts of data. The Group depends on the continuous, effective, reliable and
secure operation of its computer hardware, software and related infrastructure.
If the Groups hardware or software malfunctions, or if their operations are
interrupted by forces beyond the Groups control, the Group will experience
reduced productivity. Investors should consider the Groups business and prospects in light of the
heightened risks and unexpected expenses and problems the Group may face as a
business in an early stage of development in a new and rapidly evolving
industry. Vernalis limited operating history makes it difficult for an investor to
evaluate the Groups business and prospects. The Groups product pipeline may
not result in any meaningful benefits to the Group. Due to the limited
operating history referred to above, the Group may have difficulty accurately
forecasting its revenue. In addition, because the number of product candidates
to which the Group can devote development effort is limited by the availability
of financial and scientific resources, the Group is exposed to the risk that
the delay or failure of individual product development programs will adversely
affect the content and delivery over time of the Groups product development
pipeline. Vernalis shares may fluctuate in value substantially The market price for Vernalis shares and the securities of other emerging
biotechnology companies have been volatile. During the transitional period
Vernalis closing share price ranged from 57 pence to 84 pence and from January
1, 2004 to May 21, 2004 ranged from 50.5 pence to 76.5 pence. Factors that
could significantly impact the market price of Vernalis shares in the future
other than those described elsewhere in this transition report include:  
    
    sales of frovatriptan and the ability to be secure a new
commercialization partner for frovatriptan in North America;
    
    announcements concerning research activities, technological innovations, clinical trials or financial results by the Group
or its competitors;
    
    termination of collaborations by the Group or its partners;
    
    governmental regulatory initiatives;
    
    the FDA, United Kingdom Medicines & Healthcare Products Regulatory Agency or European Medicines Evaluation Agency approving
or denying new drug applications;
    
    patent or proprietary rights developments;
    
    public concern as to the safety or ethical implications of biotechnology products;
    
    ability to raise additional funds to reacquire rights to frovatriptan in North America and to fund research and development
projects;
    
    sales of substantial amounts of the Groups shares by existing shareholders;
    
    price and volume fluctuations in the stock market at large that do not relate to the Groups operating performance;
    
    changes in financial estimates by securities analysts, comments by securities analysts, or the Groups failure to meet
analysts expectations;
    
    actual or anticipated variations in periodic operating results;
    
    new products or services introduced or announced by the Group or its competitors;
    
    changes in the market valuations of other similar companies;
    
    announcements by the Group of significant acquisitions, strategic partnerships, joint ventures or capital commitments; and
    
    additions or departures of key personnel. The Group may be unable to secure adequate insurance at an acceptable cost. 10




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The Groups business exposes it to potential product liability, and
professional indemnity and other risks that are inherent in the research and
development, pre-clinical studies, clinical trials, manufacturing, marketing
and use of pharmaceutical products. No assurance can be made that product
liability, clinical trials or any future necessary insurance cover will be
available to the Group at an acceptable cost, if at all, or that, if there is
any claim, the level of the insurance the Group carries now or in the future
will be adequate or that a product liability, professional indemnity or other
claim would not materially and adversely affect the Groups business. In
addition, it may be necessary for the Group to secure certain levels of
insurance as a condition to the conduct of clinical trials. In the event of any
claim, the Groups insurance coverage may not be adequate. Competition regulation may have an impact on the way the Group conducts its
business and its dealings with private counter-parties and government
collaborators. The Groups activities will be subject to several competition law regimes such
as those of the European Union, the US and the UK. Article 81(1) of the EC
Treaty prohibits agreements between undertakings, which have as their object,
or effect, the restriction, prevention or distortion of competition within the
European Union and which may affect trade between member states. The UK has a
similar system of competition law. Agreements restricting competition within the meaning of Article 81(1) are void
in whole or in part. The European Commission may impose fines of up to 10 per
cent of the respective worldwide turnover in the preceding business year on
parties entering into such agreements. Persons who have suffered loss by reason
of the anti-competitive restrictions may claim damages against those parties.
Agreements satisfying certain criteria are automatically exempt from the
application of Article 81(1) by virtue of the fact that they do not have an
appreciable effect on competition or fall within a block exemption.
Prior to May 1 2004, parties to
an agreement not covered by a block exemption could apply to the
European Commission for an individual exemption. Since May 1 2004, the parties themselves must assess
whether the exemption criteria under Article 81(3) are met and
it is no longer possible to apply to the European Commission for an
individual exemption. Certain agreements that Vernalis have, or a member of the Group has, entered
into or the Group may enter into, for example with collaborators and licensees,
contain provisions that might be said to be restrictive of competition under
Article 81(1). In particular, certain license agreements that a member of the
Group have entered into, or the Group may enter into, involving the grant of
exclusive licenses of patents, patent applications, other intellectual property
rights and know-how covering the EU territory and/or territorial restrictions
may appreciably restrict competition under Article 81(1). If a block
exemption is not applicable and the Article 81(3) criteria are
not met, provisions of any agreement that restrict competition
under Article 81(1), including those relating to the exclusivity rights, may be
unenforceable, which could have a material adverse effect on that company. The
relevant company could also potentially be subject to fines and/or claims for
damages in relation to any anti-competitive arrangements that it enters. The Groups activities will also be subject to the EC rules on State aid.
Article 87(1) of the EC Treaty prohibits any aid granted by a Member State or
through State resources which distorts or threatens to distort competition by
favoring certain undertakings or the production of certain goods and which
affects trade between Member States. Articles 87(2) and 87(3) provide a list of
exhaustive categories of aid compatible with the common market. The European Commission must be informed of any plans to grant or alter aid
falling within the meaning of Article 87(1) unless it qualifies
under the block exemption de minimus threshold and, if it finds that a State aid has been granted or altered without prior
notification, it is entitled to require the Member State in question to suspend
the aid pending the outcome of its decision. If the European Commission finds
that the aid is incompatible with the common market, it will generally require
repayment of the aid with interest. Certain arrangements that a member of the Group has entered into or the Group
may enter into, for example with Governmental collaborators, may involve
benefits which might be said to be State aid under Article 87(1). The relevant
company will determine on a case-by-case basis whether the effect of any
arrangement is to grant or alter aid that should be notified to the European
Commission. Any such arrangements which are not notified and subsequently found
to be incompatible with the common market could potentially have to be repaid. The use of hazardous materials may subject the Group to additional compliance
costs and/or liability, in the event of a hazardous waste spill or other
accident. The Groups research work involves the controlled use of biological waste,
chemicals, and hazardous, infectious and radioactive materials. The Group is
subject to UK and European environmental laws and regulations governing the
use, storage, handling, and disposal of these materials and other waste
products. Despite its precautions for handling and disposing of these
materials, the Group cannot eliminate the risk of accidental contamination or
injury. In the event of a hazardous waste spill or other accident, the Group
could be liable for damages, penalties or other forms of censure. If 11




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the Group fails to comply with any laws or regulations, or if an accident
occurs, the Group may have to pay significant penalties and will be held liable
for any damages that result. This liability could exceed the Groups financial
resources and could harm its reputation. The Group may also have to incur
significant additional costs to comply with current or future environmental
laws and regulations. The Groups failure to comply with any government regulation applicable to its
laboratory and the materials used in its laboratory may adversely affect its
ability to develop, produce or market any products it may develop. The Group may face product liability claims. In addition, the Group may become
subject to shareholders action. The Group in carrying out its activities will potentially face contractual and
statutory claims, or other types of claim. In addition, the Group is exposed to
potential product liability risks that are inherent in the research and
development, pre-clinical study, clinical trials, manufacturing, marketing and
use of drug products. Consumers, healthcare producers or persons selling
products based on the Groups technology may be able to bring claims against
the Group based on the use of such products in clinical trials and the sale of
products based on the Groups technology. The Group may be subject to special interest groups and adverse public opinion. Government bodies and regulatory agencies require that potential pharmaceutical
products are subject to pre-clinical studies, including animal testing, prior
to conducting human trials. Vernalis arranges for such work either directly or
through its collaborators. Such work can be subject to adverse public opinion
and has attracted the attention of special interest groups, including those of
animal rights activists. Such special interest groups have targeted Vernalis in
the past but this has not had a significant impact on Vernalis operations to
date. There can, however, be no assurance that such groups will not, in the
future, focus on the Groups activities or those of its licensees or
collaborators, or that any such public opinion would not adversely affect the
Groups operations. The pharmaceutical industry is frequently subject to adverse publicity on many
topics, including corporate governance or accounting issues, product recalls
and research and discovery methods, as well as to political controversy over
the impact of novel techniques and therapies on humans, animals and the
environment. Adverse publicity about the Group, its collaborators, its
products, or any other part of the industry may hurt the Groups public image,
which could harm its operations, cause its share price to decrease or impair
its ability to gain market acceptance for its products. 
 ITEM 4.  INFORMATION ON THE COMPANY Items 4A and 4E, reflect primarily the history and development and the revenues
of the Company before merger with Vernalis Group (under UK merger accounting).
The remaining Items present information for the Group as of the date of the
filing. 
 A  History and Development of the Company The Company was founded in 1986 as British Bio-technology Limited and
re-registered in 1989 as British Biotech plc, a public limited company under
the laws of England with registered number 2304992. In April 2003, British
Biotech acquired RiboTargets Holdings plc, a privately-held, research-oriented
biotechnology company, and in September 2003 it completed a merger with
Vernalis Group plc, a publicly-listed biotechnology company engaged in the
discovery, development and commercialization of drugs for the treatment of
diseases related to the central nervous system. On October 1, 2003, following
this merger, British Biotech plc re-registered as Vernalis plc, which is the
Groups parent company. The Company is listed on the London Stock Exchange
(referenced VER) and on the NASDAQ National Market System in the United States
(referenced VNLS) following an initial public offer of its shares in July 1992.
The Group does not have an agent in the United States. The Group is principally engaged in pharmaceutical research and development,
this work being undertaken by Vernalis Research Ltd, Vernalis Development Ltd,
and Vernalis (R&D) Ltd (formerly Vernalis (Oxford) Ltd and formerly British
Biotech Pharmaceuticals Ltd), all of which are wholly-owned subsidiaries of the
parent. The companies are currently conducting research and development of new
pharmaceutical products with a focus on cancer and diseases and disorders of
the central nervous system. Vernalis currently has one marketed product,
frovatriptan, which is approved as an acute treatment for migraine, four
products (including frovatriptan with respect of MAM) in clinical development
and three main programs of drug discovery. For additional information see Items
4 B and C. Business Overview and Research Programs. Vernalis principal executive offices are located at Oakdene Court, 613 Reading
Road, Winnersh, Berkshire, RG41 5UA, United Kingdom (telephone number:
+44-118-977-3133) from where the management of clinical development activities
are undertaken. Certain research and development activities are conducted in
Cambridge, UK, and, in collaboration with other companies, at other locations.
At December 31, 2003, Vernalis employed 156 full-time 12




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employees. Of these, 44 were PhDs or held other post-graduate qualifications.
Additional post-merger restructuring is continuing to take place to reduce the
cost base of the business and plans are in hand to reduce headcount further to
approximately 110 during H1 2004. Headcount may increase in the future as a
result of the reacquisition of the North American rights for frovatriptan. Frovatriptan was launched in June 2002. As a result of the transaction with
Elan whereby the Company reacquired rights to frovatriptan in North America the
Company will exchange royalty income and potential milestone payments from Elan
for what the Company expects to be enhanced cash flow arising from sales of
frovatriptan, either directly by the Group or in conjunction with a new
partner. Vernalis continues to receive royalty and milestone payments and
payments for supply from Menarini in respect of frovatriptan. Revenues are at
an early stage. The Group has incurred net losses since foundation and expects
to continue to incur losses as its research and development programs progress.
Other than frovatriptan, there can be no assurance that any of the Groups
products will be approved for sale in the US, UK, Europe or elsewhere or that
any of those other products, if approved, or frovatriptan, will perform to the
Groups expectations. Important Events Since April 30, 2003. On July 3, 2003, the Boards of the Company and Vernalis Group plc announced
that they had unanimously agreed the terms of a recommended merger of the two
companies by way of an offer by J P Morgan plc on behalf of the Company to
acquire the whole of the issued and to be issued share capital of Vernalis
Group plc in exchange for shares in the Company. The offer was not made in the
United States. The offer was approved by the Companys shareholders at an
extraordinary general meeting held on August 13, 2003, and was declared
unconditional on August 29, 2003, by which date valid acceptances of the offer
had been received in respect of 76,328,753 Vernalis Group plc Shares,
representing approximately 87.29 per cent of the existing issued share capital
of Vernalis Group plc. The offer closed on September 23, 2003, by which date
acceptances of the offer had been received in respect of 80,178,155 Vernalis
Group plc shares, representing approximately 91.58 per cent of the existing
issued share capital of Vernalis Group plc. The Company commenced the procedure
to acquire compulsorily any remaining Vernalis Group shares to which the offer
relates pursuant to sections 428 to 430f of the Companies Act 1985 on September
23, 2003. The compulsory acquisition procedure was concluded on November 4,
2003. On September 1, 2003 Mr Peter Worrall, formerly Finance Director of Vernalis
Group plc became Corporate Development Director; Dr John Hutchison, formerly
Senior Vice President, Development and Chief Medical Officer of Vernalis Group
plc, became Development Director; Mr George Kennedy, formerly Non-Executive
Chairman of Vernalis Group plc, became Deputy Chairman and Senior Independent
Director; and Dr Peter Read and Ms Carol Ferguson, formerly Non-Executive
Directors of Vernalis Group plc, became Non-Executive Directors of the Company.
On September 10, 2003 Mr Timothy Edwards stepped down from the Board. On October 1, 2003, shareholders approved the re-naming of the Company as
Vernalis plc. Also in October 2003, Vernalis signed an initial research agreement with Astra
Zeneca relating to Vernalis structure-based drug discovery technology. In November 2003, a development candidate was selected to progress into
pre-clinical studies from the Companys collaborative research program with
Roche for obesity. The Company also announced that it had started Phase I
clinical studies with V2006, its development candidate targeting Parkinsons
disease. Also in November 2003, the Company announced that it repaid a £7 million
convertible loan made to Vernalis Group plc by Roche. Roche became entitled to
repayment as a result of the change of control of Vernalis Group plc caused by
the merger with the Company. In December 2003, the Company formed a research collaboration with the Novartis
Institutes for BioMedical Research, Inc., (NIBRI) in Cambridge, MA, USA, to
investigate inhibitors of a target implicated in the progression of a range of
cancers. Under the agreement Vernalis will provide elements of its ongoing
oncology research to NIBRI for an initial six-month evaluation period after
which NIBRI will have the right to enter a longer-term research and development
collaboration. Following the evaluation, if NIBRI exercises its option to enter
the longer-term research and development agreement, it will make further
payments to Vernalis, which may include an equity investment in Vernalis. In January 2004, the Company announced the results of a review of its research
and development portfolio. As part of this review, the agreements with
ImmunoGen and MethylGene to develop BB-10901 and MG98 respectively were
renegotiated and Vernalis relinquished its rights to these products. The
Company will not undertake any further development of these products beyond the
completion of certain ongoing clinical studies. In addition, the Company
announced that it had ended clinical development of VML-670. Also in January 2004, the Company announced that its peptide deformylase
inhibitor program in the antibiotic field had been out-licensed in its entirety
to GeneSoft (now part of the Oscient Pharmaceuticals Corp. group). Oscient is 13




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responsible for all further research and development with the Company receiving
milestone and royalty payments (dependent on progress in development and sales
respectively). In March 2004, the Company reached agreement with Elan to reacquire in their
entirety the North American rights for frovatriptan from Elan for a total of
$50 million payable over 21 months and to purchase certain frovatriptan
inventory from Elan at an expected approximate cost of $5.4 million payable no
later than December 31, 2004 subject to Vernalis shareholder approval. Also in March 2004, the Company announced positive findings from a Phase II
clinical study of V10153 (formerly BB 10153) in acute myocardial infarction
patients and plans for a follow-up study in stroke, positive results from Phase
I study of V2006 (in development for Parkinsons disease), and successful
initial Phase I studies with the novel analgesic, V140. In May 2004, the reacquisition of the rights to Frovatriptan in North America
was approved by the Companys shareholders and the agreement with Elan was
completed. An initial payment of $5 million was made to Elan in May 2004. Also in May 2004, Vernalis announced the appointment of Dr Allan Baxter (54)
(Senior Vice President, Drug Discovery at GlaxoSmithKline) as a Non-Executive
Director of the Company, and the intended retirement of three current
Non-Executive Directors: Ian Kent, Eugene Williams (who will retire at the 2004
Annual General Meeting) and Keith Merrifield (who will retire at the end of
2004). Principal Capital Expenditures Since April 30, 2001. The purchase of tangible fixed assets, comprising laboratory, leasehold
improvements and computing equipment, amounted to £180,000 in the transition
period, £1,310,000 in fiscal 2003, £2,623,000 in fiscal 2002 and £1,798,000 in
fiscal 2001. In addition, in the transition period, a provision was capitalized
of £500,000 in respect of the leasehold property at Winnersh, which is expected
to be released at the end of the lease. Expenditure on fixed asset investments,
relating to the purchase of shares in businesses with which Vernalis
collaborates, was £nil in the transition period, £nil in fiscal 2003,
£1,406,000 in fiscal 2002, and £1,623,000 in fiscal 2001. Expenditure on
intangible fixed assets, representing payments made to third parties to acquire
licenses to develop their intellectual property, was nil in the transition
period, £3,227,000 in fiscal 2003, £2,447,000 in fiscal 2002 and £1,236,000 in
fiscal 2001. In the transition period no significant amounts were raised by the sale of
fixed assets. The Oxford property is currently being marketed and is expected
to be sold during fiscal 2004. In fiscal 2003, £222,000 was raised from the
sale of plant and machinery to Evotec OAI. In fiscal 2002, £7,264,000 was
raised through the transfer of pre-clinical facilities to OSI Pharmaceuticals,
Inc. In fiscal 2001, £11,169,000 was raised from the sale of freehold property
and £57,000 was raised from the sale of plant and machinery. Principal Capital Expenditures in Progress. There are no significant capital expenditure programs in existence at this
time. In the near future, there will continue to be some expenditure on new
laboratory equipment, at similar levels to the transition period. It may be
necessary to fit out the currently vacant Granta Park Phase II property in
order to sublet the property. Such expenditure is to be funded from existing
cash reserves. 
 B  Business Overview Business Strategy Vernalis is an R&D-based biotechnology company, with a marketed product, a
pipeline of drug candidates in clinical development and late-stage research
programs. Its strategy is to build a profitable company both through organic
growth and by pursuing opportunities to merge with or acquire other
biotechnology companies. To execute its strategy, the Company aims to maximize
revenue opportunities from its marketed product, frovatriptan, and to progress
its portfolio of clinical development products and research programs itself and
in collaboration with other companies. Vernalis has an experienced internal
discovery team and a development group that has undertaken international drug
development successfully and achieved regulatory approvals in the United States
and Europe. Medical Focus Vernalis is primarily focused on developing products to fight disorders of the
central nervous system and cancer. The Company has considerable scientific and
clinical experience in these fields and is currently engaged in the research
and development of new pharmaceutical products to meet medical needs in these
areas. 14




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Marketed Product and Product Development Programs This section summarizes the Groups marketed product and product development
programs. On October 1, 2003 Vernalis announced that, following a review of the combined
portfolio, it would focus future investment on four products in development:
frovatriptan (with respect to menstrually associated migraine), V10153, V140
and V2006. Frovatriptan Frovatriptan is a selective 5-HT1B/1D receptor agonist that was developed by
Vernalis as an acute oral treatment for migraine headache and its associated
symptoms. It is one of a class of drugs called triptans, a number of which are
already approved for this indication. These drugs are currently available only
by prescription. Vernalis is currently conducting further studies to develop
the compound as a prophylactic oral treatment for menstrually associated
migraine, a form of migraine suffered by over 50 per cent of female
migraineurs. None of the triptan class of drugs is currently approved for
prophylactic use in migraine. Frovatriptan was licensed from SmithKline Beecham, the discoverer of the
compound, in 1994, when SmithKline Beecham had completed most of the
pre-clinical development work required to initiate human clinical trials.
Vernalis completed the outstanding pre-clinical work and in January 1995 began
a series of Phase I clinical trials. In January 1996, Vernalis began a series
of Phase II clinical trials in over 1,600 migraineurs. In March 1997, Vernalis began a series of Phase III clinical trials in over
3,000 migraineurs in a total of 17 countries. During the course of the clinical
development program Vernalis also conducted further pre-clinical studies and
carried out the necessary development work on the chemistry and manufacturing
process for the compound. A new drug application was filed in the United States
in January 1999 and a marketing authorization application in Europe in February
1999. In November 2001, the FDA granted marketing approval for frovatriptan in the US
for the acute treatment of migraine. Elan and its co-promotion partner UCB
Coprom L.P. (UCB) launched frovatriptan in the US during June 2002, under the
trademark FrovaTM. In the US, migraineurs are treated primarily by neurologists
and primary care physicians (PCPs), so the marketing program for Frova in the
US is directed mainly towards these two groups of prescribers. In December 2000, the French regulatory authorities, acting as the reference
member state for the pan-European Union regulatory review, formally granted
marketing approval for frovatriptan in France. Regulatory approval for
frovatriptan in 14 additional European Countries was subsequently granted in
January 2002, following completion of the European mutual recognition process,
under which the French authorities submitted a summary of the full frovatriptan
regulatory dossier, together with their recommendations, to the other European
countries. The products European licensee, Menarini, launched frovatriptan in
the first European market, Germany, during November 2002. Menarini has also
launched frovatriptan in The Republic of Ireland (March 2003) the United
Kingdom (April 2003), Austria (November 2003) and The Netherlands (April 2004).
In January 2004, frovatriptan received marketing approval in Switzerland and
pricing approval in Italy. Further European launches are expected during 2004. In March 2004, Vernalis announced that it had entered into an agreement to
reacquire in their entirety the North American rights for frovatriptan from
Elan for a total of $50 million payable over 21 months. Vernalis would also
purchase certain frovatriptan inventory from Elan at an expected approximate
cost of $5.4 million payable not later than December 31, 2004. The transaction
was completed in May 2004. Although the Group has reacquired the rights to
frovatriptan in North America, there are no current arrangements for the active
marketing and sale of the product by the Group in that territory. From May 18,
2004 and for a period of up to 12 months, sales of the product will be
supported by Elan under a transitional services agreement providing for certain
services, including, supply chain management, medical enquiries, medical
monitoring, adverse event reporting and administration and financial accounting
reporting in the US. Since May 18, 2004, Elan is not obliged to actively market
the product Vernalis intends to seek a major pharmaceutical partner to realize
frovatriptans significant commercial potential, including the new proposed
menstrually-associated migraine indication (see below) in North America and
other territories not licensed to Menarini. Vernalis also intends to raise
funds by way of an equity fundraising rights issue to assist with the
reacquisition of frovatriptan. Frovatriptan  clinical development in menstrually-associated migraine Vernalis is conducting additional clinical studies of frovatriptan that, if
successful, may enhance the commercial potential of the drug. In the third quarter of 2002, Vernalis announced positive preliminary results
from a study exploring frovatriptans potential use in the prophylaxis
(prevention) of menstrually associated migraine. The study, a double blind,
placebo controlled cross-over design, was conducted at 36 clinics in the United
States and involved more than 500 menstrual migraine sufferers. Patients were
evaluated over three menstrual cycles over the course of which each patient
received 15




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all three dose regimens  placebo, 2.5mg frovatriptan once daily and 2.5mg
frovatriptan twice daily. During each cycle, patients took the treatment for a
total of six days, commencing two days before the expected onset of their
headache. The headline results showed that both dose levels of frovatriptan were highly
effective in reducing the incidence, severity and duration of
menstrually-associated migraines compared to the placebo. By the
intention-to-treat analysis, 50 per cent of patients were completely
headache-free during the six-day period when they took 2.5mg frovatriptan twice
daily and 39 per cent were headache-free at a once-daily dose of 2.5mg,
compared to only 26 per cent when they took the placebo. The full results of
the study were presented to the American Academy of Neurology in the United
States in April 2003, and will be published in key scientific and clinical
journals in 2004. A long-term Phase III safety study is under way and a confirmatory Phase III
efficacy trial is planned to commence in the second half of 2004 to support
extension of frovatriptans existing label to include this novel indication. If
the positive initial results are confirmed, these studies should lead to
regulatory submissions in the US and Europe during the second half of 2005. It
is expected that the requirements to submit applications to extend European
licenses will be broadly similar to those in the United States. See also below,
Item 4K Material Effects of Government Regulation. V10153 V10153 is a recombinant protein designed to prevent and dissolve blood clots,
with potential to improve the treatment of thrombolytic diseases such as Acute
Myocardial Infarction (AMI) stroke, or deep vein thrombosis (DVT). These
conditions may be under-treated because of the risk of bleeding, particularly
intracranial hemorrhage, associated with current thrombolytic agents. A Phase I study of V10153 was completed in 1999, showing it to be well
tolerated in healthy volunteers. In 2001, the Companys contractor, DSM
Biologics Company Inc., produced sufficient compound to allow initiation of a
Phase II proof-of-concept study in 2002. In March 2002, the FDA gave clearance for this study to proceed in AMI
patients. It was managed by The Thrombolysis In Myocardial Infarction (TIMI)
Study Group in the United States and was designed to test the ability of
V10153, administered at doses up to 10mg/kg, to dissolve clots and restore
blood flow in the coronary arteries of heart attack patients. The study also
evaluated the safety of treatment with V10153, especially with respect to
bleeding. The study has now been successfully completed. V10153 was well tolerated
throughout the dose range of 110mg/kg. Full restoration of bloodflow was
observed in blocked coronary arteries in around 40 per cent of patients after
60 minutes following doses of 5mg/kg and greater. This is comparable to the
efficacy reported for currently marketed thrombolytic therapies using a similar
experimental protocol. Initial analysis of safety (episodes of bleeding) is
encouraging with no reported instances of spontaneous bleeds. The next stage in development of V10153 is to conduct a Phase II study in
approximately 100 patients with acute stroke. Vernalis is currently evaluating
whether to undertake this study itself or to wait until a collaboration has
been secured. V140 V140 (alphadolone acetate) is a GABAA agonist targeted at the treatment of pain
in cancer patients. It was in-licensed from Monash University, Melbourne,
Australia and has been administered to man in an open label pilot study
conducted in Australia under the Clinical Trial Notification (CTN) Scheme. In
this study, indications of analgesic efficacy were seen in patients who
received a single dose of V140 after orthopedic knee surgery. No sedative side
effects were seen in this study. V140 presents an opportunity to be used alongside, or as a replacement for,
current opiate-based pain therapies. It has the potential to improve the
overall management of pain in cancer patients. Preliminary pre-clinical studies
indicate that V140 is capable of providing an improved profile over current
therapies since it is expected to produce non-sedating analgesia. A Phase I clinical program to evaluate V140s safety and pharmacokinetic
properties in single and multiple dose studies was started in September 2003.
Following the conclusion to the initial Phase I studies, a Phase Ic study to
investigate the analgesic properties of the compound in healthy volunteers has
commenced. The test system is believed to be a model of neuropathic pain.
Results from this study are expected during the middle of 2004. V2006 Vernalis began a research program in 1998 to assess the potential of selective
adenosine A2A receptor antagonists in the chronic treatment of Parkinsons
disease. Parkinsons disease is a debilitating and progressive movement disorder that
affects approximately one per cent of the population over the age of 65 years.
Common symptoms include stiffening of the muscles and difficulty in initiating
movement. Sufferers may develop a tremor or shaking. The primary cause of the
problems of co-ordination and 16




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movement in Parkinsonian patients is nerve degeneration and cell death in the
brain, leading to the loss of dopamine, a chemical produced in the brain that
is involved in the control of voluntary movement. Most conventional therapies
for Parkinsons disease are based on dopamine replacement. Although generally
effective in the short-term, these treatments can have severe, or even
disabling, side effects and their effectiveness tends to decrease over time. Another brain chemical called adenosine also plays an important role in motor
co-ordination and movement control. Vernalis believes that by using selective
adenosine A2A receptor antagonists to restore the imbalance of the other
neurotransmitters caused by the loss of dopamine, Vernalis may be able to
provide a novel approach to treat the symptoms of Parkinsons disease and to
slow or stop the progression of the disease. This hypothesis is supported by
pre-clinical research that Vernalis and other companies have carried out with
this type of compound, which has shown that motor function in models of
Parkinsons disease can be restored without inducing dopaminergic like side
effects. In particular it is hoped that A2A receptor antagonists can restore
function in Parkinsons disease without inducing unwanted side effects such as
nausea and dyskinesia (uncontrolled movements). The initial Phase I study of V2006, a single ascending dose study in healthy
male volunteers designed to investigate the drugs safety and pharmacokinetics
has been successfully completed. Single oral doses of V2006 were administered
to groups of male volunteers in the dose range 5100mg. The drug was safe and
well tolerated in this range and exposure increased with dose. Potentially
therapeutic blood levels (based on predictions from pre-clinical studies) were
achieved following the lowest dose of 5mg, which provides reassurance that a
wide therapeutic ratio might be achieved in patients. Furthermore, the plasma
half-life of V2006 in normal subjects was in the region of 18 hours, which
would be consistent with a simple, once-daily dosing regimen. The Phase I clinical program continues and is expected to be completed during
2004. This will include single and multiple dose escalation studies in healthy
young and elderly volunteer subjects. Discussions are currently in progress
with a number of companies interested in collaborating in the V2006 program.
Such collaborations may also encompass Vernalis research into the A2A receptor
subtype as a novel target for a new class of antidepressant drugs. Other clinical products BB-83698 In August 2002, Vernalis entered into a collaboration with GeneSoft
Pharmaceuticals Inc (now part of the Oscient Pharmaceuticals Corp. group) to
discover and develop novel anti-infectives based on Vernalis proprietary
anti-bacterial PDF and other metalloenzyme inhibitors. In September 2003,
Vernalis peptide deformylase inhibitor research program in the antibiotic
field was out-licensed to Oscient. Under this out-licensing agreement, Oscient
has assumed responsibility for all further research and development, with
Vernalis receiving milestone and royalty payments. BB-83698 is a peptide deformylase (PDF) inhibitor discovered by Vernalis that
has shown potency in pre-clinical studies against a range of gram-positive
bacteria, including several drug resistant strains. Development of this
compound is currently under review by Oscient. VML 670; BB-10901; MG98 A Phase II clinical trial of VLM670 involving approximately 240 male and female
patients with sexual dysfunction failed to achieve its primary end point,
although some secondary endpoints were positive. Following an internal review,
Vernalis announced in October 2003 that it would not undertake any further
development of VML670. The agreements with ImmunoGen and MethylGene to develop
BB-10901 and MG98 respectively have been renegotiated. Vernalis has
relinquished all rights to these products and will not undertake any further
development beyond the completion of certain ongoing clinical studies. 
 C  Research programs This section summarizes the Groups main research programs. The Groups aim is
to conduct approximately half of the research programs under collaboration
agreements. Obesity: 5-HT2Creceptor agonists Vernalis is investigating the potential use of selective 5-HT2C receptor
agonists to treat obesity and related disorders. In 1999 Vernalis partnered
this program with Roche, the worlds leading pharmaceutical company in sales of
prescription treatments for obesity, and granted Roche exclusive worldwide
rights to develop and commercialize compounds discovered in the program. In 1997, Vernalis scientists, working with the drug dexfenfluramine, a
clinically effective appetite suppressant previously marketed by American Home
Products that was withdrawn due to adverse cardiovascular side effects, were
the first to discover that the 5-HT2C receptor subtype is the key receptor for
dexfenfluramines effects in controlling satiety. The evidence for this
breakthrough came from the results of experiments Vernalis conducted in
transgenic models and in pre-clinical models using selective 5-HT receptor
antagonists. This was a significant finding since it is known that 5-HT2C
receptors are present in high density in the brain (in particular in areas that
control eating, such as 17




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the hypothalamus), but are not present in the cardiovascular system.
Accordingly, Vernalis believes that the adverse effects seen with
dexfenfluramine are due to its activity at another 5-HT receptor subtype and
that a selective 5-HT2C receptor agonist could be an effective and safe
treatment for obesity. Following this finding, Vernalis research program has been focused on
discovering selective 5-HT2C receptor agonists. Over the last four years
Vernalis has designed, synthesized and patented a large number of compounds
that it has shown to be highly selective for the 5-HT2C receptor. The first compound nominated for development by Vernalis and Roche was
discontinued early in Phase I in July 2002 due to failing to achieve
pharmacokinetic criteria for further development. Roche has selected a second
development candidate which is undergoing pre-clinical studies. Upon successful
completion of pre-clinical testing, further development would also be
undertaken by Roche. In an amendment agreement made as of February 1, 2004,
Roche agreed to an extension to the collaboration until September 30, 2004 in
order to continue pre-clinical development. Depression: A2Areceptor antagonists Recent pre-clinical research by Vernalis and a number of other companies
suggests that adenosine, and specifically the adenosine A2A receptor subtype,
may be a novel target for the discovery of a new class of antidepressant drugs.
Transgenic animals with the A2A receptor gene deleted have shown a pattern of
activity in pre-clinical models of depression that appears to be predictive of
antidepressant activity in humans. Vernalis has also synthesized selective
adenosine A2A receptor antagonists that show activity in pre-clinical models of
depression. It is currently working to optimize the selectivity and
pharmacokinetic properties of the most promising compounds and expects to
select a development candidate during 2004. Discussions are currently being
held with a number of companies interested in collaborating in this program.
Such collaborations may encompass the development of V2006 for Parkinsons
disease. Cancer: Hsp90 inhibitors The scientific rationale for Hsp90 as a therapeutic cancer target is based on
the hypothesis that many of the signaling proteins that behave aberrantly in
cancer cells require Hsp90 as a chaperone molecule to ensure that they are
maintained in an active form. Inhibition of Hsp90 results in interference in
multiple signaling pathways that mediate cancer growth and cell survival. Vernalis has been optimizing small molecule compounds which inhibit the ATPase
function of Hsp90 and has filed patent applications in this area. The project
is in the lead optimization phase and is scheduled to identify a pre-clinical
development candidate in 2004. This program is being conducted in collaboration
with the Institute of Cancer Research, under an exclusive research and
development agreement that provides access to relevant cancer models. Obesity: CB1antagonists The objective of this research program is to develop potent and selective
cannabinoid CB1 receptor antagonists for the treatment of obesity. Currently,
two cannabinoid receptors have been described: the CB1 receptor, which is
distributed widely in the central nervous system and is also present in the
periphery (e.g. in the gastrointestinal tract); and the CB2 receptor, which is
generally localized in the periphery (e.g. immune cells). These cannabinoid
receptors are activated by the endocannabinoids, a family of endogenous lipids.
Extensive pre-clinical data support the hypothesis that CB1 receptor
antagonists have potential utility for the treatment of obesity. A focused medicinal chemistry program has rapidly identified novel, selective,
CB1 receptor antagonists with oral efficacy in pre-clinical feeding models. The
program aims to identify a development candidate during 2004. Inflammation: metalloenzyme inhibitors In October 2000, Vernalis entered into a two-year research collaboration with
Serono, to identify new compounds for clinical development for the treatment of
inflammatory diseases, particularly multiple sclerosis. In October 2002, the
term of the research collaboration was extended for a further year to October
2003, with the aim of identifying candidates for development. That research
collaboration has now expired. The parties are in discussion about selection of
candidates for further development. For any candidates selected Serono will
undertake the further development with Vernalis receiving milestone payments
and royalties upon successful commercialization of products. Infection: metalloenzyme inhibitors In the field of anti-infectives, Vernalis has identified several metalloenzymes
not present in mammalian cells that are essential for the survival of
pathogenic bacteria. In August 2002, Vernalis entered into a broad-based collaboration with GeneSoft
Pharmaceuticals Inc (now part of the Oscient Pharmaceuticals Corp group), a
private US biopharmaceuticals company, to discover and develop novel
antibiotics. The collaboration covered clinical development of BB-83698 and
other PDF inhibitors, and research into other metalloenzyme targets. In
September 2003, the parties terminated the August 2002 agreements and replaced
them with a new Research Agreement relating to four anti-infective projects in
respect of Vernalis proprietary bacterial metalloenzyme inhibitors, and a new
agreement relating to BB-83698. Under the revised September 2003 arrangements
GeneSoft will conduct all further research and development at no cost to
Vernalis and Vernalis will receive milestone 18




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and royalty payments if products progress through development and to market. Biodefence research: metalloenzyme inhibitors As part of the UK Governments biodefence initiative, Vernalis has entered into
an agreement with the Defence, Science and Technology Laboratory (DSTL) in
Porton Down, UK, to investigate the efficacy of selected Vernalis metalloenzyme
inhibitors against anthrax lethal toxin and botulin toxin. 
 D  Commercial Collaborations The following section describes the Groups existing commercial collaborators
and the commercial agreements with respect to the Groups principal research
and development programs and marketed products. SmithKline Beecham (frovatriptan) Frovatriptan is the Companys most advanced program and the Companys only
currently marketed product. Vernalis originally licensed frovatriptan from
SmithKline Beecham in 1994. In 1998, SmithKline Beecham waived its option to
commercialize the compound and worldwide marketing rights passed to Vernalis in
return for a residual royalty payable to SmithKline Beecham on future worldwide
sales of frovatriptan. During 2000, in connection with SmithKline Beechams
merger with Glaxo Wellcome plc, Vernalis made two important amendments to the
1994 agreement:  
    
    in July 2000, SmithKline Beecham assigned to Vernalis all of
SmithKline Beechams patents covering frovatriptan (with no
substantive changes in the royalty arrangements); and
    
    in December 2000, SmithKline Beecham waived all of its rights to
royalties on sales of frovatriptan in return for a series of five $5
million cash payments by Vernalis. The first installment of $5 million
was paid on September 16, 2002. The second installment due in
September 2003 was deferred, with $2.5 million paid in March 2004 and
$2.5 million payable in September 2004. Subsequent installments are
due on each anniversary of the initial payment. The final payment is
subject to cumulative worldwide sales of frovatriptan from launch
exceeding $300 million. Elan (frovatriptan) Throughout the transition period, a license agreement was in place between
Vernalis and Elan under which Elan was marketing frovatriptan in North America.
This agreement was terminated in May 2004. Vernalis signed the original license agreement with Elan in 1998 granting Elan
exclusive marketing rights for frovatriptan in the United States, Canada and
Mexico. On signing, Elan paid Vernalis a fee of $7.5 million and made a $10
million investment in Vernalis Group ordinary shares at a negotiated price of
£6.25 per share. Elan subsequently paid Vernalis a further $7.5 million in 1999
when the FDA formally accepted Vernalis frovatriptan New Drug Application
(NDA) for review, and a further $15 million in the fourth quarter of 2001
following FDA marketing approval. Under the terms of the 1998 license
agreement, Vernalis could have potentially received three additional milestone
payments exceeding $30 million in total on achievement by Elan of agreed sales
targets for frovatriptan. In addition, Elan would pay Vernalis a royalty based
on its net sales of frovatriptan. In December 2000, Vernalis entered into a new
financing agreement with Elan under which Elan made a $10 million loan to
Vernalis and a further equity investment of £4.96 million. Following that
investment, Elan held 2,943,396 Ordinary Shares, representing approximately 6.7
per cent of Vernalis Groups issued share capital, which was subsequently sold
in July 2002. Elan no longer has any shareholding in Vernalis. In the first quarter of 2002 Elan appointed UCB as its co-promotion partner for
frovatriptan in the US market. The co-promotion agreement was between Elan and
UCB and Vernalis had/has no contractual relationship directly with UCB. In
conjunction with the appointment of UCB, Vernalis agreed to revised commercial
arrangements with Elan. Under the new terms, Elan forgave the full amount of
its loan to Vernalis, including accrued interest, and accelerated a $5.4
million sales milestone payment due under the restated 1998 license agreement
to 30 days following the US launch. In return, Vernalis would have received
royalties at a reduced rate on US sales up to a pre-determined level during the
launch phase and early years of marketing of frovatriptan. At the end of an
initial three-year period following the US launch of frovatriptan, Elan would
have had an option to extend the reduced royalty period by up to four years by
making an additional lump sum payment to Vernalis. This payment replaced the
second sales milestone payment due under the 1998 license agreement. Thereafter, or if Elan elected not to the make the lump sum payment, the
royalty rate due to Vernalis would have reverted to the previous levels. The
third sales milestone payment was not affected by the new agreement. This was a
payment of $15 million from Elan to Vernalis, which would have been triggered
when the net sales of frovatriptan by Elan and UCB in North America had
exceeded $100 million in any 12-month period. Elan made its first royalty
payment to Vernalis in August 2002 and payments have subsequently been received
on a quarterly basis (prior to the agreement for the reacquisition of North
American rights). For additional information on frovatriptan, see above under
Item 4B Business Overview. In the period from launch to the end of 2002, Elan reported Frova sales of
$11.2 million, including initial stock to trade ahead of the June launch. In
2003, Elan reported sales of frovatriptan in the United States of $37.5
million. Vernalis received its first royalty payment from Elan in August 2002
and (prior to the reacquisition of North American rights 19




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from Elan) royalty payments were received on a quarterly basis. By December
2003, 18 months following launch, Frova had achieved an annualized share of
approximately 2.7 per cent of the US market for the triptan class of drugs (it
stood at three per cent as at February 29, 2004). In the first quarter of 2004,
Elan reported sales of $6.7 million. Under the amended terms of the license agreement, Vernalis was also committed
to funding and conducting a number of additional clinical studies with
frovatriptan up to a predetermined total cost. These included the ongoing
studies in the prophylaxis of menstrually associated migraine and a new study
in the treatment of adolescent migraine, which Vernalis commenced in April
2003. A total commitment of approximately $8 million was outstanding as at
December 31, 2003. In March 2004, Vernalis announced that it has entered into an agreement to
reacquire in their entirety the North American rights for frovatriptan from
Elan for a total of $50 million payable over 21 months. The transaction was
completed in May 2004. Vernalis intends to seek a major pharmaceutical partner
to realize frovatriptans significant commercial potential, including the new
proposed menstrually-associated migraine indication. Vernalis also intends to
raise additional funds by way of an equity fundraising to assist with the
reacquisition of frovatriptan. Under the terms of the agreement, Vernalis made an initial payment of $5
million to Elan on completion. This will be followed by payments of $20 million
on December 31, 2004 and $25 million on December 31, 2005. Vernalis would also
purchase certain frovatriptan inventory from Elan at an expected approximate
cost of $5.4 million payable no later than December 31, 2004. The license previously granted by Vernalis to Menarini International in respect
of Europe and Central America remains in place (see below). For additional detail on the current contractual arrangements with Elan, see
Item 10C below. Menarini (frovatriptan) Vernalis has also signed a license agreement with Menarini granting Menarini
exclusive marketing rights for frovatriptan in the European Union, Eastern
Europe and specified countries in Central America. Under this agreement
Vernalis will supply Menarini with the finished packed product ready for sale.
Vernalis receives revenue on supply of product and also from royalties. Potential Additional Marketing Partners (frovatriptan) Vernalis is exploring opportunities to generate further revenues by selecting
marketing partners for frovatriptan in other geographic areas not covered by
its existing marketing agreements. Diosynth and Evotec OAI (frovatriptan) Vernalis also has agreements in place with Diosynth Limited and Evotec OAI,
with respect to the manufacture and supply of the bulk active pharmaceutical
ingredient in frovatriptan. This bulk active is used by Galen Limited to
produce finished product that is supplied by Vernalis to Menarini. Galen Limited (frovatriptan) Vernalis has an agreement with Galen Limited for tableting and packaging of
frovatriptan, which is supplied as finished product to Menarini. Following the
reacquisition of the North American rights to frovatriptan from Elan, Vernalis
has also taken assignment of an agreement under which Galen supplies tableting
and packaging services with regard to North America. Vernalis is in discussion
with Galen about a proposed assignment of the two Galen agreements from Galen
to Pharmaceutical Development & Manufacturing Services Limited. DSM Biologics Company Inc. (V10153) Vernalis has had a series of agreements with DSM Biologics, the most recent
being January 1, 2003, all of which concern the supply of V10153 for clinical
trials. Monash University (V140) In October 2002, Vernalis was granted an exclusive license to develop and
commercialize the compound alphadolone (V140) for all human and animal
prophylactic and therapeutic analgesic indications from Monash University and
Professor Colin Goodchild (Victoria, Australia). In return for an exclusive
license, Vernalis will pay Monash and Professor Goodchild success milestones
and royalties upon the sale of product. Currently, V140 is in Phase I studies. Roche (5-HT2Creceptor) In December 1999, Vernalis signed an agreement with Roche to collaborate on
Vernalis research program directed toward selective 5-HT2C agonists as
potential anti-obesity agents. Under the terms of this agreement, Vernalis received funding for an initial
two-year joint research program with Roche. Vernalis also received a license
fee on signature of the agreement and three subsequent milestone payments from
Roche. The first was received in November 2000 on the selection of VR-1065 as
the first lead development compound. 20




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The second was received in June 2001, when this compound was confirmed as the
first clinical development candidate. The third was received in May 2002 when
this compound entered Phase I studies. In February 2002, Vernalis and Roche entered into a further two-year research
collaboration to support the objective of bringing further product candidates
into Phase I clinical trials. In an amendment agreement made as of February 1,
2004, Roche agreed to an extension to the collaboration until September 30,
2004, in order to continue pre-clinical development. Under the terms of this
new agreement, Vernalis receives additional research funding for the period of
the new research collaboration. In May 2002, Roche commenced Phase I clinical
trials with VR 1065. Although there were no side effects, the pharmacokinetic
data on VR 1065 did not meet the criteria for progression to Phase II. Together
with Roche, Vernalis is now focusing on follow-on compounds from different
chemical series that have already been identified in the substantial 5-HT2C
library generated by the collaboration so far. Roche has exclusive worldwide rights to develop, manufacture and market all the
product candidates coming out of the program for the treatment of obesity and
related eating disorders, and will also fund and conduct all aspects of the
development program for each compound it elects to take into development for
this indication. Novartis Institutes for Biomedical Research, Inc. In December 2003, Vernalis formed a research collaboration with the Novartis
Institutes for BioMedical Research, Inc., (NIBRI) in Cambridge, MA, USA, to
investigate inhibitors of a target implicated in the progression of a range of
cancers. Under the agreement with NIBRI, Vernalis is providing elements of its
ongoing oncology research to NIBRI for an initial six-month evaluation period
after which NIBRI will have the right to enter a longer-term research and
development collaboration. During this evaluation period NIBRI is conducting
its own research and is also funding research at Vernalis laboratories in
Cambridge, UK. Serono S.A. (MEIs: inflammation) In October 2000, Vernalis and Serono S.A. (Serono) (SWX: SEO; NYSE: SRA) signed
a two-year agreement to jointly research, develop and commercialize
metalloenzyme inhibitors for the treatment of various inflammatory diseases.
Under the terms of the agreement, Vernalis received from Serono an up-front
payment of $5 million. The agreement with Serono covered BB-2827, BB-76163 and research activities.
The clinical development, manufacture and commercialization of BB-2827, a
collagenase inhibitor with potential application in rheumatoid arthritis, and
the pre-clinical research of BB-76163, an aminopeptidase inhibitor, with
potential application in multiple sclerosis, were terminated in 2001. In October 2002, the term of the research agreement was extended to October
2003. The research agreement has now concluded. Serono is now in the process of
selecting candidates for further development and will undertake the further
development of these compounds, with the Company receiving milestone and
royalty payments. GeneSoft Pharmaceuticals Inc. (MEIs: infection) In August 2002, Vernalis signed agreements with GeneSoft Pharmaceuticals Inc.
(now part of the Oscient Pharmaceuticals Corp group) for a broad-based
collaboration to discover and develop novel anti-infective drugs based on
Vernalis proprietary bacterial metalloenzyme inhibitors. The collaboration
combined Vernalis novel targets, chemistry and clinical development with
GeneSofts experience in antibiotic lead optimization and clinical expertise. GeneSoft made an initial payment to Vernalis in August 2002 of $4 million. Upon
initiation of the initial Phase I study of the lead compound, BB-83698, in
October 2002, Vernalis received a further payment from GeneSoft of $1 million
and one million shares of convertible-preferred stock (representing
approximately 3.45 per cent of GeneSofts outstanding equity as of the date of
the transaction, on a fully-diluted basis). In September 2003, the parties terminated the August 2002 agreements and
replaced them with a new Research Agreement relating to four anti-infective
projects in respect of Vernalis proprietary bacterial metalloenzyme
inhibitors, and a new agreement relating to the development and
commercialization of BB-83698. Under the revised September 2003 arrangements
GeneSoft will conduct all further research and development at no cost to
Vernalis and Vernalis may receive milestone and royalty payments (dependent on
progression of development and sales respectively). Chroma Therapeutics Limited On November 24, 2003, Vernalis entered into an agreement with Chroma
Therapeutics Limited (Chroma) under which Vernalis granted Chroma an exclusive
license covering BB-76163 for use in cancer. Vernalis was paid a small sum on
signature and will receive royalties if Chroma progresses development and sells
product. Institute of Cancer Research (Hsp90 inhibitors) This program for cancer is being conducted in collaboration with the Institute
of Cancer Research, under an exclusive research and development agreement that
provides access to relevant cancer models. 21




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Other collaborations ImmunoGen Inc. (BB-10901) In May 2000, Vernalis and ImmunoGen Inc., (NASDAQ: IMGN) (ImmunoGen), a US
biotechnology company, entered into a collaboration to develop and
commercialize ImmunoGens huN901-DM1, subsequently re-named as BB-10901,
targeted at the treatment of small cell lung cancer. Under the agreement, Vernalis was granted exclusive rights to apply for
regulatory approval and commercialize BB-10901 in Europe and Japan. Upon
signature of the agreement, Vernalis paid $1.5 million for its rights to
BB-10901. On January 7, 2004, the parties entered into a termination agreement under
which Vernalis relinquished all rights to this product. The Company will not
undertake any further development beyond the completion of certain ongoing
clinical studies. MethylGene Inc. (MG98) In February 2002, Vernalis signed an agreement with MethylGene Inc., a
privately-held Canadian biopharmaceuticals company, granting Vernalis the
European development and commercialization rights for MG98, MethylGenes
leading experimental anti-cancer drug Under the License, Development and Commercialization Agreement, Vernalis made
an initial research and development payment to MethylGene of $1.7 million, to
be followed by milestone payments of up to $12.8 million based on successful
regulatory approval and commercialization for MG98 in Europe. MethylGene would
also receive undisclosed royalties on sales. In addition, under a separate
Stock Purchase Agreement, Vernalis made an equity investment of $2 million in
the private stock of MethylGene. On November 25, 2003, the parties entered into a termination agreement under
which Vernalis relinquished all rights to this product. The Company will not
undertake any further development beyond the completion of one ongoing clinical
study. Eli Lilly & Company (VML 670) In 1998 Vernalis signed an agreement with Lilly for Vernalis to develop an
early development stage drug discovered by Lilly, VML 670, in one or more
indications, including as a treatment for sexual dysfunction experienced by
people taking a class of drug for depression called SSRIs. An initial Phase IIa study with the product in treatment emergent sexual
dysfunction met some secondary end-points but failed to meet its primary
end-point. The study data have been provided to Lilly. Vernalis will not
undertake any further development. The agreement was terminated on April 26,
2004. Roche (A2Areceptor) In May 2002, Vernalis entered a collaboration with Roche to discover and
develop new drugs for the treatment of depression. Under the terms of this
agreement, Roche had an option to license worldwide rights to develop,
manufacture and commercialize compounds arising from Vernalis adenosine A2A
antagonist research program in depression. Roches option terminated in June
2003 and Vernalis now has complete control over its A2A antagonist programs,
which are targeted at a range of indications including Parkinsons disease and
depression. AstraZeneca On October 17, 2003 Vernalis signed an initial research agreement with
AstraZeneca. The work under this agreement is now completed and Vernalis
received $200,000 for the services it provided. Under the agreement, AstraZeneca used Vernalis structure-based drug discovery
(SBDD) technology to investigate a number of proprietary AstraZeneca compounds
against certain anti-infective drug targets. MerLion Pharmaceuticals In May 2003 MerLion Pharmaceuticals Pte Ltd., a Singapore-based drug discovery
company, and Vernalis entered into a two-year research agreement to discover
and develop new classes of anti-bacterial ribosomal inhibitors from natural
sources. OSI Pharmaceuticals, Inc. In August 2001, Vernalis transferred part of its pre-clinical research
facilities to OSI Pharmaceuticals, Inc. (OSI) for consideration of £8.7 million
in cash. In addition, Vernalis and OSI entered into an agreement whereby OSI
acquired rights to screen Vernalis metalloenzyme inhibitor (MEI) and other
chemical libraries. The agreement with OSI expired in November 2003. Tanabe Seiyaku In November 1996, Vernalis signed a development and license agreement with
Tanabe Seiyaku (Tanabe) to develop 22




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and market marimastat in the territories of Japan, China (including Hong Kong),
Taiwan and Indonesia. Under the agreement, Tanabe made an initial payment to
Vernalis of $7 million, to be followed by further payments of up to $67
million, subject to the successful development and marketing of marimastat in
its territories. In addition, Tanabe assumed the cost and responsibility for
the development of marimastat in its territories. Tanabe commenced Phase I
clinical trials of marimastat in healthy volunteers in Japan in October 1997
and initiated the first of a planned series of Phase II clinical trials during
that year in gastric and lung cancer. Tanabe has taken the results of Vernalis
and Schering-Ploughs (an ex-licensee in North America and Europe) clinical
trials into account and has now decided to discontinue development in Japan.
The parties are in discussions about the possibility of terminating the
agreement DevCo Pharmaceuticals Limited In March 2000, Vernalis and DevCo Pharmaceuticals Limited (DevCo) announced
that they had signed an agreement to develop the platelet activating factor
(PAF) antagonist, lexipafant, for prophylaxis of certain serious neurological
and renal complications experienced by patients undergoing cardiac surgery. The terms of the agreement grant DevCo exclusive rights to develop, manufacture
and sell lexipafant for the treatment of human disease other than in the fields
of oncology and ophthalmology. DevCo will undertake all development and, if
lexipafant is brought to market, pay Vernalis a royalty on sales. R&D Systems Europe Limited Following the sale in July 1993 of British Bio-technology Products Ltd (now
known as R&D Systems Europe Ltd) to Techne Corporation, a joint biological
research agreement was entered into between Vernalis, R&D Systems Europe Ltd
and Techne Corporation. Under the terms of this agreement, R&D Systems Europe
Ltd paid Vernalis research fees for the exclusive rights to develop,
manufacture and sell products to the basic research reagent or diagnostic
markets arising from biological molecules developed by Vernalis. Royalties are
payable to Vernalis on any products developed by R&D Systems Europe Ltd from
such biological molecules. The agreement was terminated on December 31, 1999,
however, royalties continue to be paid in respect of the sale by R&D Systems
Europe Ltd of research reagents and diagnostic kits that arose from the
biological molecules supplied by Vernalis. External Consultation Establishing a network of collaborations and external consultation is
fundamental to the operation of the Companys business. Under some of its
commercial collaborations joint committees of the Company and the relevant
collaborative partner are established to assess findings and determine action.
The Company consults widely with experts to challenge and verify important
decisions for each of its major projects. Additionally, an independent Safety
Review Board reviews all aspects of the Companys clinical development
programs. Safety Review Board The Safety Review Board comprises a Chairman and six other members all of whom
are independent of the Board and the Group. The Safety Review Board meets when
necessary to provide an independent technical review and monitoring of the
development programs of the Company and to ensure adequate risk benefit
assessment for clinical trials. Additional consultants/experts may be used on
an ad hoc basis if the Safety Review Board requires highly specialized advice. 
 E  Principal Markets in which Vernalis Competes The Groups continuing revenues have been derived primarily from: (i) licensing
and collaborative research and development agreements, including from Elan with
respect to frovatriptan; (ii) royalties from Elan and from Menarini for sales
of frovatriptan by those companies in the United States and in Europe,
respectively, and sales revenues from Menarini for supply of finished
frovatriptan product for European markets; and (iii) government research
grants. In addition, the Group has earned substantial interest income from its
cash balances held with banks over the period under review (see Note 5 of Notes
to the Consolidated Financial Statements). The licensing and collaborative research and development revenues include
royalties received in respect of sales of frovatriptan, research support fees,
milestone payments, and exercise of option fees and licensing fees. Currently,
frovatriptan is licensed to Menarini for sales in Europe. Frovatriptan was
previously licensed to Elan/UCB for sales in North America but following the
Companys reacquisition of the North American rights to frovatriptan the
Company intends to seek a major pharmaceutical partner to realize
frovatriptans significant commercial potential, including the new proposed
menstrually associated migraine indication. Other licensing arrangements may be
made in the future to cover territories outside North America and Europe.
Frovatriptan is also in clinical development as a prophylactic migraine
treatment. Vernalis other development and research programs are in therapeutic markets
with significant growth potential: cancer, thrombosis, Parkinsons disease,
depression and obesity. 23




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The Groups losses have fluctuated and are expected to fluctuate from year to
year due to a number of factors, including, but not limited to:  
    
    the introduction of frovatriptan into new markets;
    
    the restructuring of the commercial arrangements for the sale of frovatriptan in North America;
    
    frovatriptans performance, in terms of market share, in the countries in which it is marketed;
    
    the approval or not of frovatriptan as a treatment for menstrually associated migraine;
    
    commencement or termination of other collaborative research and development agreements;
    
    the timing of milestone payments under those agreements, the timing of product option and licensing fees;
    
    the time and cost required for clinically developed products to obtain regulatory approvals;
    
    competitive technological developments;
    
    additional government-imposed regulation and control;
    
    changes in healthcare systems that affect reimbursement, pricing or availability of drugs and market acceptance of drugs;
    
    government grants;
    
    the level of interest income; and
    
    variations in the level of expenditures relating to research and clinical development programs. The production and potential marketing of Vernalis products and its ongoing
research and development activities are subject to regulation by numerous
governmental authorities in the US (including the FDA), the UK and Europe and
by regulatory agencies in other countries where Vernalis intends to test or
market products it may develop. The uncertainties involved in the regulatory
approval process could significantly affect the Groups operational results and
its ability to achieve profitability. 
 F  Revenues The geographical analysis of revenue, under UK GAAP, based on origin of payment
for the transition period and for fiscal 2003, fiscal 2002 and fiscal 2001 is
as follows: Eight months endedYear ended April 30,
    
    December 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000United Kingdom
    
    
    1,377
    
    
    
    602
    
    
    
    90
    
    
    
    49United States
    
    
    190
    
    
    
    
    
    
    
    420
    
    
    
    2,937Rest of World
    
    
    3,049
    
    
    
    14,164
    
    
    
    8,633
    
    
    
    5,6454,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631
 The analysis of revenue by category is: Eight months endedYear ended April 30,
    
    December 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Product sales and royalties
    
    
    491
    
    
    
    799
    
    
    
    2,097
    
    
    
    2,592Collaborations
    
    
    4,125
    
    
    
    13,967
    
    
    
    7,046
    
    
    
    6,0394,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631
 
 G  Seasonality of the Companys Business The Company does not consider its business to be materially affected by
seasonal variations. 
 H  Marketing Channels and Sales Methods In November 2001, the FDA granted marketing approval for frovatriptan in the US
for the acute treatment of migraine. Elan and its co-promotion partner UCB
launched frovatriptan in the United States during June 2002, under the
trademark Frova. Under the agreement for the reacquisition of the rights to
frovatriptan in North America, Vernalis has secured the assignment of all
registered trade marks in respect of Frova that are owned by Elan in the North
American territories. Sales and marketing of frovatriptan are carried out
currently in North America by Elan under a transitional arrangement, effective
for up to 12 months from May 18, 2004. Under the transitional arrangement Elan
will not be required to carry out any active marketing of frovatriptan, but
will facilitate sales on which the Group will receive income by providing
certain services, including supply chain management, medical inquiries, medical
monitoring, adverse event reporting, and administration and financial
accounting reports in the US. In the United States, migraineurs are treated primarily by neurologists and
primary care physicians (PCPs). The marketing program for Frova in the US has,
under Elan, been directed mainly towards neurologists, as both UCB and Elan
have specialist neurology sales forces. 24




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In future collaborations involving the exploitation of frovatriptan in the US
Vernalis will seek a commercial partner with the potential to actively market
frovatriptan in the PCP market. Vernalis has also signed a license agreement with Menarini granting Menarini
exclusive marketing rights for frovatriptan in the European Union, Eastern
Europe and specified countries in Central America. Under this agreement
Vernalis supplies Menarini with the finished packed product ready for sale. In addition to Vernalis current activities in seeking a new collaborator to
commercially exploit frovatriptan in the North American market, Vernalis is
exploring opportunities to generate further revenues by selecting marketing
partners in other geographic areas not covered by existing marketing agreements
with Menarini. 
 I  Patents, Licenses and Proprietary Rights Vernalis pursues a policy of seeking to obtain patent protection for its
inventions in the UK, the US, Europe, Japan and in selected other countries.
Vernalis also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position. To date, Vernalis has not threatened or instituted proceedings
against any third party on patent or other proprietary rights nor has any third
party threatened or instituted proceedings against Vernalis. Certain products and processes currently being developed or considered for
development by Vernalis are in the area of biotechnology. The number of patent
filings by biotechnology firms in major jurisdictions is particularly high and
the outcome of such applications is generally uncertain and involves complex
legal and factual questions. To date, no consistent international policy has
emerged regarding the breadth of
claims allowed in biotechnology patents. Accordingly, there can be no assurance
that the Group will develop products or processes that are patentable, that
patent applications made by the Group, or made by parties who have agreed to
license their inventions to the Group, will result in patents being issued or
that, if issued, the claims allowed will be sufficiently broad to protect what
Vernalis believes to be its proprietary rights or that such patents will
prevent others from developing similar or functionally equivalent products or
processes. In addition, there can be no assurance that products or processes covered by
such patents, or any other products or processes developed by the Group or
licensed to the Group, will not infringe patents owned by third parties or be
subject to claims of patent infringement by these parties. In such a situation,
Vernalis may have to obtain a license, defend an infringement action in court
or challenge the scope or validity of any infringed or allegedly infringed
patents. There can also be no assurance that such required licenses will be
available to the Group at all, or if available, that such licenses will be on
terms acceptable to the Group or that Vernalis will prevail in any patent
litigation. Failure to obtain a license or prevail in any patent litigation
relating to any technology that Vernalis may require to commercialize its
products or processes may have a material adverse impact on the Group. Litigation may also be necessary to enforce any patents granted to Vernalis or
to determine the scope and validity of third party patents. Patent litigation
is time consuming and expensive. There can be no assurance that Vernalis will
have, or will devote, the necessary resources to conduct patent litigation.
International policy with regard to the breadth of claims allowed in chemical
patents is better defined than that of biological entities and is therefore of
greater certainty, but there can be no assurance that patent applications made
by or licensed to the Group will result in patents being issued or that, if
issued, the patents will provide the right to exclude competitors with similar
technology. The Group maintains an active policy of filing patent applications. Vernalis
normally commences its patent filing process by filing in the UK, which filing
is generally followed by a filing under the Patent Co-operation Treaty (PCT).
The PCT allows for multi-jurisdictional filings to be made under the same
application. The countries normally covered by the various applications and
designated under the PCT system are the UK, the US, Canada, Japan and European
countries that are parties to the European Patent Convention (EPC) or the PCT.
Applications in respect of additional countries are filed in certain cases. A
PCT application fragments during its pendency into a number of national and
regional (for example, EPC) applications. An EPC application matures on grant
into a European patent, which, if appropriate action is taken, can be regarded
as a bundle of national rights equivalent to a collection of national patents
in the countries designated. The time taken to research and develop medicinal products reduces the marketing
time protected by a product patent or patents, and can therefore reduce the
period available to the developer in which to recoup its investment through
sales. In 1992, the European Union introduced Regulation 1768/92 creating a
Supplementary Protection Certificate (SPC) for authorized products. While
this does not constitute an extension to the patent from which a product
derives, it does confer certain rights of a similar nature in respect of the
product(s) derived from the patent after that patent has expired. The period during which the SPC is effective depends on calculations based upon
the date of the application for the patent and the grant of the first marketing
authorization for a product derived from the patent with an upper limit of five
years. It may be possible to extend the patent expiry date of some or all
issued patents by up to five years in European 25




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Community countries by applying
for supplementary patent protection. There is a similar arrangement in the
United States, where the term of extension is equal to the time that the FDA
review extends beyond the patent issue date, provided that the extension does
not exceed 14 years from the date of FDA approval. There can be no assurance that patents will be granted on pending applications
made by the Group or parties that have licensed their inventions to the Group
or that any issued patents will provide significant proprietary protection or
commercial advantage or will not be infringed or designed around by others.
Since publication of inventions or discoveries in scientific or patent
literature often lags behind actual
invention or discovery, Vernalis cannot be certain that it was the first to
make the inventions covered by each of its pending patent applications or that
it was the first to file applications for such inventions. There can be no
assurance that Vernalis patents or patent applications will not become
involved in opposition proceedings instituted by third parties. If such
proceedings were initiated against Vernalis rights, the defense of such rights
could involve substantial costs and the outcome cannot be anticipated. If
patents are issued to other parties that contain valid claims that are
interpreted to cover any of Vernalis products, there can be no assurance that
the Group would be able to obtain licenses to such patents at a reasonable
cost, if at all, or be able to develop or obtain alternative technology.
Competitors or potential competitors may have filed applications for, may have
received patents covering, or may obtain additional patents and proprietary
rights that may relate to, compounds or processes competitive with those of
Vernalis. Vernalis also relies upon unpatented proprietary technology, and no assurance
can be given that others will not independently develop substantially
equivalent proprietary technology and techniques, or otherwise gain access to
the Groups proprietary technology or disclose such technology, or that the
Group can meaningfully protect its rights to its unpatented proprietary
technology, secrets and know-how. It is Vernalis policy generally to require its consultants, outside scientific
collaborators, sponsored researchers and other advisers to execute
confidentiality agreements prior to the commencement of consulting or other
relationships with the Group. Employees have a similar confidentiality
provision in their employment contracts. These agreements provide that all confidential information developed or made
known to the individual during the course of the individuals relationship with
the Group is to be kept confidential and not disclosed to third parties except
in specific, limited circumstances. Vernalis also requires signed
confidentiality or material transfer agreements from any person who is to
receive confidential data or proprietary material from Vernalis. In the case of
consultants, the agreements generally provide that all inventions conceived by
the individual while rendering services to the Group shall be assigned to
Vernalis as the exclusive property of Vernalis. Similar provisions are
contained in Vernalis employment contracts, and provisions of many national
laws provide that intellectual property rights created during the course of
employment belong to the employer. There can be no assurance, however, that
these agreements and provisions will provide meaningful protection or adequate
remedies for the Groups intellectual property rights, trade secrets or other
confidential information in the event of unauthorized use or disclosure. The status of the outstanding patents and patent applications on the Companys
four most advanced programs is summarized below. Frovatriptan Frovatriptan is the single enantiomer form of a racemic compound. Vernalis owns
composition of matter patents covering the racemic compound and the single
enantiomer form. Patents covering the compound have been issued in the United
States, Europe, Japan and a number of other countries with a priority date of
1991, and will expire in 2012. Patents covering the single enantiomer form have
been issued in the United States, Europe and Japan with a priority date of 1992
and will expire in 2013. An application has been filed to extend the term of
one of the issued US patents to 2015. The Company has applied in 14 European
Countries for Supplementary Protection Certificates (SPCs) on patents covering
the compound and several of these applications have now been granted. A process
patent covering the manufacturing process for the single enantiomer form of
frovatriptan has been issued in the United States with a priority date of 1998
and
is due to expire in 2019. Applications are pending in Europe and Japan. V2006 V2006 is currently protected by 22 national/regional patent applications filed
in July 2003, including applications in the United States, Europe and Japan
that are based on an earlier International Application covering the molecule
both generically and specifically, and which has a priority date of January 10,
2001. V10153 Four patent families relate to V10153. Of the three families that protect
plasminogen mutants, all have been issued with US and Japanese patents, and two
with European patents, the third European case considered by the European
Patent Office to be in a state of allowance. These patents are due to expire
between 2010 and 2014. A further family protecting V10153 in association with
tPA has been issued with US and European patents due to expire in 2017 and 2015
respectively; the corresponding Japanese application is still pending. 26




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V140 Vernalis is responsible for the prosecution of the V140 patent portfolio
licensed from Monash University. This includes a pending European application
for the use of V140 in analgesia, and a corresponding US patent due to expire
in 2016. National/regional applications, including applications in the United
States, Europe and Japan, have recently been filed for the use of V140 in
neuropathic pain, based on an earlier International Application that is
entitled to a priority date of August 28, 2001. 
 J  Competition The biotechnology and pharmaceutical industries are characterized by rapidly
evolving technology and intense competition. Vernalis competitors include
major pharmaceutical, chemical and specialized biotechnology companies, many of
which have financial, technical and marketing resources significantly greater
than those of the Group. In addition, many biotechnology companies have formed
collaborations with large, established companies to support research,
development and commercialization of products that may be competitive with
those of the Group. Academic institutions, governmental agencies and other
public and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products on
their own or through collaborations. Vernalis is aware of certain products
manufactured or under development by competitors that are used for the
prevention or treatment of certain diseases and health conditions targeted by
the Group for product development. The existence of these products, or other
products or treatments of which the Group is not aware, or products or
treatments that may be developed in the future, may adversely affect the
marketability of products developed by the Group. Frovatriptan is the Groups only marketed product. Frovatriptan is one of seven
triptans currently approved for the acute treatment of migraine. By February
29, 2004, 20 months following launch in the United States, frovatriptans
largest market, and 15 months following launch in Germany, the products
largest European market, frovatriptan had achieved a share of the oral triptan
market of approximately three per cent in the United States and 7.5 per cent in
Germany for the triptan class of drugs. In 2003, the products annualized
average share in the United States was 2.7 per cent. Frovatriptan faces intense
competition from large, well-funded pharmaceutical companies. Sumatriptan,
marketed under the name Imitrex® and developed by GlaxoSmithKline, was the
first triptan approved for the acute treatment of migraine, and remains the
dominant product in the United States and worldwide, with annual sales in
excess of $1 billion. Five other triptans are on the market, including Zomig®
(zolmitriptan), originally from Astra-Zeneca (now marketed by Medpointe),
Maxalt® (rizatriptan) from Merck, Amerge®/Naramig® (naratriptan), a follow-up
compound to Imitrex® from GlaxoSmithKline, Axert® (almotriptan) from Johnson &
Johnson and Relpax® from Pfizer. None of the triptans is currently approved for
prophylactic use in migraine. There are also a number of new approaches to the treatment of migraine that are
in research and development by other companies. For instance, Pozen Inc has a
combination therapy for the treatment of migraine in Phase III clinical trials
on which it has recently announced a collaboration with GlaxoSmithKline. Pozen
also has an injectable preparation of one compound in Phase II clinical trials
and a 5-HT2B antagonist licensed from Roche in early development. Vernalis products under development are expected to address a broad range of
markets. Vernalis competition will be determined in part by the potential
indications for which the Groups products are developed, and ultimately
approved, by regulatory authorities. In addition, the first pharmaceutical
product to reach the market in a therapeutic or preventive area is often at a
significant competitive advantage relative to later entrants to the market.
Accordingly, the relative speed with which Vernalis or its collaborative
partners can develop products, complete clinical trials and approval processes,
and supply commercial quantities of the products to the market are expected to
be important
competitive factors. The Groups competitive position will also depend on its
ability to attract and retain qualified scientific and other personnel (current
retention rates remain at normal levels), develop effective proprietary
products, develop and implement production and marketing plans, obtain and
maintain patent protection and secure adequate capital resources. Vernalis
expects its products, if approved for sale, to compete primarily on the basis
of product efficacy, safety, patient convenience, reliability, value and patent
position. The biotechnology sector, both in the United States and Europe, has recently
been characterized by rapid consolidation as biotechnology companies strive to
combine their forces to address the shortage of equity and debt financing due,
in part, to the difficult global trading environment. In light of these industry developments and of the fact that Vernalis cash
reserves will not suffice to support its existing operations beyond this
calendar year, the Company intends to raise further funds through an equity
fund raising before the end of calendar year 2004. Vernalis management is
considering a number of other options to maintain Vernalis business beyond
calendar 2004, including re-partnering frovatriptan, entering into business
combinations with other biotechnology companies that could provide liquidity,
enhance Vernalis ability to exploit its technologies and research and
development capabilities, as well as to reduce costs. If Vernalis is unable to
conclude a business combination or secure alternative ways of financing before
the end of calendar 2004, it will not be able to meet its obligations to Elan
in December 2004 and will have to curtail all or some of its existing
operations as it approaches the end of its cash reserves. For additional
information, see also item 5B, Operating and Financial Review and Prospects 
Liquidity and Capital Resources. 27




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K Material Effects of Government Regulation The international pharmaceutical industry is highly regulated by numerous
governmental authorities in the US, the UK, Europe, and by regulatory agencies
in other countries where Vernalis intends to test or market products it may
develop. National regulatory authorities administer a wide range of laws and
regulations governing the testing, approval, manufacturing, labeling and
marketing of drugs and also review the quality, safety and effectiveness of
pharmaceutical products. These regulatory requirements are a major factor in
determining whether a substance can be developed into a marketable product and
the amount of time and expense associated with such development. The national regulatory authorities have high standards of technical appraisal.
Consequently, the introduction of new pharmaceutical products generally entails
a lengthy development and approval process. Of particular importance is the
requirement that products be authorized or registered prior to marketing and
such authorization or registration be maintained. Of particular significance in
the US are the US Food and Drug Administration (FDA) requirements covering
research and development, testing, manufacturing, quality control, labeling and
marketing of drugs for human use. A pharmaceutical product cannot be marketed
in the US until it has been approved by the FDA, and then can only be marketed
for the indications and claims approved by the FDA. As a result of these requirements, the length of time, the level of expenditure
and the laboratory and clinical information required for approval of a New Drug
Application (NDA) or a product license application are substantial and can
require a number of years, although recently revised regulations are designed
to reduce the time for approval of new products. In Europe, two systems for the
registration of pharmaceutical products are in operation, the centralized
procedure and the mutual recognition procedure. In the centralized system,
review of the proposed new product is co-ordinated by the European Medicines
Evaluation Agency (EMEA) located in London and, if the product is found to meet
the criteria for marketing authorization, a European Marketing Authorization is
granted which is valid throughout the EU. In the mutual recognition procedure,
the initial review is undertaken by the national health authority of one of the
EU member states and, if this country considers the product acceptable for
marketing authorization, the other EU member states are asked to recognize this
approval and issue their own authorization. The mutual recognition procedure
thus results in a national authorization in each member state. However,
irrespective of the procedure followed, the technical requirements for
marketing authorization are the same. For European countries that are outside
the EU, national marketing authorization procedures with similar technical
standards exist. Vernalis anticipates that the introduction of new products
will continue to require substantial effort, time and expense in order to
comply with regulatory requirements. No new drug is permitted to be sold in developed countries without extensive
data on its quality, safety and efficacy first being obtained, organized and
submitted to governmental regulatory authorities. The development stage of this
process may be divided into two parts: (i) pre-clinical, and (ii) clinical
development. Included in pre-clinical development are the development of
processes for manufacturing the product candidate, toxicology studies and other
activities such as pharmacology and drug metabolism studies. Clinical trials
run until, and in some cases after, the product is marketed and cover several,
sometimes overlapping, phases. In Phase I trials, a small number of healthy human volunteers are exposed to a
product candidate. Typically, the volunteers are administered single or
multiple doses, following which the effects of the candidate drug are closely
monitored. The way the body deals with the product candidate from
administration to elimination (pharmacokinetics) is also studied. Phase II
trials involve the first studies on patients and explore the doses required to
produce the desired benefits. Safety and pharmacokinetic information is also
collected. Phase III trials typically involve larger numbers of patients and
geographically dispersed test sites. The trials in this Phase may compare the
new agent with other available treatments. In Phase III trials, costs are
significantly higher than in earlier Phases due to the larger number of
patients and longer duration of trial. In respect of Vernalis portfolio, this
would be particularly true in the case of frovatriptan for the prevention of
menstrual migraine. The clinical protocols, which detail the objectives of the study and the
parameters to be used to monitor safety and efficacy, must be approved by the
national regulatory authorities. Further, each clinical study must be conducted
under the auspices of an independent institutional review board, also known in
Europe as an ethic committee, at
the institution where the study will be conducted. The institutional review
board considers, among other things, the scientific appropriateness of the
study, the safety of human subjects and the potential liability of the
institution. The institutional review board is also responsible for monitoring
the approved protocols in active trials. The institutional review board may
require changes in a protocol and it may decide not to permit a study to be
initiated or completed. This process can be conducted in parallel with the
regulatory approval process, but may add considerable time and expense to the
early regulatory review process. After completion of clinical trials of a new drug, marketing approval must be
obtained in each country in which the product will be sold. The data generated
in each of the clinical trial phases, together with data from the pre-clinical
studies and the development of the manufacturing process, forms the basis of
the regulatory dossier that is submitted to the regulatory authorities for
review and approval to market the drug. In the United States, this dossier is
called the New Drug Application. In Europe it is called the Marketing
Authorization Application. This dossier will also be used to 28




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establish the text of the product label, which forms the basis of the marketing
platform and often requires negotiation between the licensing authority and the
sponsor company. In addition to the forms of regulation referred to above, the prices of
pharmaceutical products in many countries are controlled by law. In some
countries, such as France and Japan, the prices of individual products are
regulated. By contrast, in the UK, prices are controlled by reference to limits
upon the overall profitability, measured by the rate of return on capital
employed, of sales of products supplied under the UK National Health Service.
The permitted rate of return on capital employed for each pharmaceutical
company is determined through negotiations with the UK Department of Health
under the 1999 Pharmaceutical Price Regulation Scheme. If a companys actual
rate of return exceeds the agreed rate, it is required to negotiate either a
repayment of past profits that the Department of Health considers to be
excessive or future price reductions. There is no assurance that the current
arrangements will continue in the future. Governments may also influence the price of pharmaceutical products through
their control of national healthcare organizations, which may bear a large part
of the cost of supply of such products to consumers. In the US and Germany,
indirect pressure can be exerted on prices by government funded or private
medical care plans. Vernalis is unable to predict whether, or to what extent, its business may be
affected by legislative and regulatory developments relating to specific
pharmaceutical products or the pricing of such products, or to its overall
business. The uncertainties involved, or any adverse regulatory developments,
could significantly affect the Groups operational results and its ability to
achieve profitability. 
 L  Organizational Structure Within the Group, Vernalis plc is the holding company listed on the London
Stock Exchange and quoted on NASDAQ. The four principal operating subsidiaries during the transition period were
Vernalis (R & D) Limited (formerly Vernalis (Oxford) Limited and formerly
British Biotech Pharmaceuticals Limited), (research, development and
commercialization) Vernalis Research Limited (research, development and
commercialization), Vernalis Development Limited (research, development and
commercialization), and Vernalis (Cambridge) Limited, formerly RiboTargets
Limited (research, development and commercialization). By an assignment of
assets on December 31, 2003, Vernalis (Cambridge) Limited assigned all of its
assets to Vernalis (R &D) Limited. At December 31, 2003, the Company had the following principal wholly owned
subsidiary undertakings: Subsidiary Undertaking
    
    Nature of business
    
    IncorporationVernalis (R&D) Limited (previously Vernalis (Oxford)
Limited, which waspreviously British Biotech Pharmaceuticals)
    
    R&D
    
    England & Wales(E&W)British Biotech Services Limited
    
    Support Services
    
    E&WBritish Biotech International Limited
    
    Pharmaceuticals
    
    E&WBritish Biotech Investments Limited
    
    Holding company
    
    E&W British Biotech (UK) Limited
    
    Pharmaceuticals
    
    E&W British Biotech Americas Inc.
    
    Holding company
    
    USAVernalis (Cambridge) Limited (previously RiboTargets Limited)
    
    R&D
    
    E&WVernalis Group Limited
    
    Holding company
    
    E&W Vernalis Development Limited (previously Vernalis Limited)
    
    R&D
    
    E&W Vernalis Research Limited
    
    R&D
    
    E&W Vernalis Group Share Scheme Trustees Limited
    
    Trust
    
    Jersey
 29




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M  Property, Plant and Equipment Vernalis headquarters are in Winnersh and Vernalis has research and
development facilities in both Winnersh and Cambridge. The complete schedule of
Vernalis offices, laboratory and storage facilities is:- ApproximateProperty
    
    Description
    
    Title
    
    Location
    
    area (m2)Oakdene Court
    
    Office and laboratory facilities
    
    Leasehold
    
    Winnersh
    
    
    4,400Granta Park (Phase I)
    
    Office and laboratory facilities
    
    Leasehold
    
    Cambridge
    
    
    2,608Granta Park (Phase II)
    
    Office and
laboratory facilities, unoccupied
    
    Leasehold
    
    Cambridge
    
    
    2,4184-10 The Quadrant
    
    Offices and laboratory facilities, leased to Celltech R&D Limited
    
    Leasehold
    
    Oxford
    
    
    1,944Thames Court
    
    Office and laboratory facilities, unoccupied
    
    Freehold
    
    Oxford
    
    
    2,525Brook House
    
    Office and laboratory facilities, unoccupied
    
    Freehold
    
    Oxford
    
    
    2,396Cherwell House
    
    Stores, unoccupied
    
    Freehold
    
    Oxford
    
    
    1,196Cherwell House car park
    
    Car park
    
    Freehold
    
    OxfordEx British Gas Site
    
    Car park
    
    Freehold
    
    Oxford
    
    
    2,196
 These properties are believed to be in good condition. Vernalis has a
continuing program of repair and improvement considered appropriate to meet the
needs of Vernalis. Vernalis currently operates from the sites at Winnersh and Granta Park (Phase
I), Cambridge. The lease of the premises at Winnersh expires in 2017, with the
option to terminate early in 2012. The leases for the premises at Cambridge
expire in 2019. These premises provide adequate facilities for the operations
of Vernalis in the short term. Manufacturing of clinical trial supplies and
commercial supplies of frovatriptan is subcontracted to third party
manufacturers who comply with nationally and internationally accepted quality
standards, including good manufacturing practice, good laboratory practice and
good clinical practice. The Company has no plans to establish its own
manufacturing capability in the foreseeable future. Granta Park, Phase I is currently operating at close to full capacity. Phase II
is currently unoccupied and the Company is reviewing options for this site. The
Company has entered into a guarantee of the obligations of Vernalis (Cambridge)
in respect of the lease of Granta Park, Phase I and will be required to enter
into a guarantee of the obligations of Phases I and II in respect of securing
the consent of the landlord to the assignment of the benefit of the lease from
Vernalis (Cambridge) Limited to Vernalis (R&D) Limited as part of the
assignment of assets between the two companies. Vernalis operations in Oxford have ceased and all operations at the Oxford
site are now closed. The Company is actively seeking to sell or let its
freehold properties (Thames Court, Brook House and Cherwell House together with
the car parks) in Oxford. In July 2003, Vernalis disposed of its leasehold
interest in a fourth neighboring building in Oxford, Harrow House. The properties of Thames Court and Brook House are held under mortgage (see
Note 14 to the Notes to the Consolidated Financial Statements). Health, safety and the environment The Group has well-developed health and safety policies and procedures,
safeguarding staff, contractors and visitors, and it complies with current
legislation and best practice. The Group follows principles to minimize the
impact of its activities on the environment by reducing waste and, wherever
possible, recycling. Mr Weir is the Executive Director responsible for health,
safety and the environment. Health and safety is managed on each site through committees with competent
persons representing all disciplines and with external expert support. The
Groups health and safety policies and procedures are published on the Groups
intranet and are readily available in hard copy. They form a key component in
the staff induction program. Appropriate health and safety training is provided
(for example manual handling, fire safety, cylinder gas safety) with quarterly
internal safety audits, and annual audits by specialists and governmental
agencies (for example the Environment Agency). No significant issues have been
identified by these audits. Risk and Control of Substances Hazardous to Health
assessments are regularly reviewed and updated as necessary. Waste is minimized with packaging and containers returned to suppliers where
possible. Paper waste is recycled and confidential paper waste is shredded on
site and recycled. The Group does not knowingly discharge toxic materials into
the environment other than very small amounts via fume cupboard extraction
systems, arising from small scale synthetic chemistry, and low-level
radioactive waste which is discharged into public drainage, as permitted under
the Groups Certificate of Authorization from the Environment Agency. 30




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ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS This operating and financial review discusses the operating results and
financial condition of Vernalis for the eight-month period ended December 31,
2003 and for the three-year period ended April 30, 2003. The Groups financial
results for these periods reflect the merger between the Company (formerly
British Biotech plc) and Vernalis Group as a merger of equals (pooling of
interests) in accordance with the principles of merger accounting that have
been adopted under UK GAAP. In contrast, under U.S. GAAP, the transaction has
been accounted for as an acquisition of Vernalis Group by the Company using
purchase accounting. A description of the significant differences and
reconciliations of net income and shareholders equity, as well as summary
financial statements prepared in accordance with US GAAP, are set forth in Note
3 of the Notes to the Consolidated Financial Statements. See also Comparative
Results of Transition Period Ended December 31, 2003 and Fiscal Years Ended
April 30, 2003, 2002 and 2001 (US GAAP) below. Business Overview Vernalis is engaged in pharmaceutical research and development. The Groups
only marketed product is frovatriptan. Frovatriptan is a selective
5-HT1B/1D
receptor agonist developed as an acute oral treatment for migraine headache and
its associated symptoms. Vernalis is currently conducting further studies to
develop the compound as a prophylactic oral treatment for menstrually
associated migraine. Frovatriptan was launched in the United States in June 2002 by Elan,
frovatriptans original US licensee (which co-promoted the product with UCB).
In May 2004, Vernalis terminated its agreement with Elan and reacquired the
North American rights to frovatriptan for a total consideration of $50 million
payable in installments over 21 months up to December 31, 2005 (Vernalis has
also agreed to purchase certain inventory from Elan at an expected approximate
cost of $5.4 million, which will be paid no later than December 31, 2004). From
May 18, 2004 and for a period of up to 12 months, sales of the product will be
supported by Elan under a transitional services agreement. From May 18, 2004,
however, Elan will not be obliged to actively market the product. Vernalis is
now responsible for all selling, general and administration costs and revenues
in respect of the North American rights to frovatriptan. The Group intends to
actively seek a new partner for frovatriptan in North America. Menarini,
frovatriptans European licensee, has already launched frovatriptan in Germany
(November 2002), Austria (November 2003), The Republic of Ireland (March 2003),
the United Kingdom (April 2003) and The Netherlands (April 2004). In January
2004, frovatriptan received marketing approval in Switzerland and pricing
approval in Italy. Further European launches are expected during 2004. By
February 29, 2004, frovatriptan had achieved a share of the oral triptan
migraine market of approximately thee per cent in the United States and of
approximately 7.5 per cent in Germany. The Group has three products in development, in addition to frovatriptan with
respect to menstrually associated migraine. V10153 is a recombinant protein
designed to preserve and dissolve blood clots, with potential to improve the
treatment of thrombolytic diseases such as Acute Myocardial Infraction (AMI)
stroke, or deep vein thrombosis (DVT). V140 (alphadolone acetate) is
a GABAA
agonist targeted at the treatment of pain in cancer payments. V2006 is an
adenosine A2A receptor antagonist targeted at the chronic treatment of
Parkinsons disease. The Group also maintains a number of collaboration agreements including: with
Roche, in connection with a research program directed toward selective 5-HT2C
agonists as potential anti-obesity agents; with Serono, for the development and
commercialization of metalloenzyme inhibitors for the treatment of various
inflammatory diseases; with Oscient, for the development and commercialization
of metalloenzyme inhibitors for the treatment of infection; with Novartis, in
the field of cancer, and with Astra Zeneca, in the field of infection. For
additional information and the current status of these collaborations, see Item
4D, Information on the Company  Commercial Collaborations. In recent years, Vernalis has kept its product portfolio and commercial
collaborations under constant review with a view towards focusing available
resources to frovatriptan and a selected number of products in development.
Consequently, the Group has recently discontinued or restructured a number of
other research and development projects and collaborations. Financial Overview The Group has made losses since its foundation. As at December 31, 2003, the
Groups accumulated losses were £456,011,000 as compared to £421,792,000 at
April 30, 2003, to £390,595,000 at April 30, 2002 and £363,695,000 at April 30,
2001. The Groups key financial objective is the enhancement of its liquidity
position in order to fund the promotion of frovatriptan in its existing market
and its introduction into new markets, its development for menstrually
associated migraine, as well as research and development for the Groups other
products in development. The following are the most critical aspects of the
Groups operating results and financial condition and the most significant
challenges the Group is facing in order to achieve its financial objectives. 31




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##### Table of Contents




    
    The Groups cash as at April 30, 2004 amounted to £12.0 million. In
the short term and no later than December 31, 2004, the Group will
have to secure additional funds either through an equity fund raising
or a new collaboration agreement with respect to the North American
rights for frovatriptan, in order to fund payments of approximately
$25 million due to Elan by December 31, 2004.
    
    The Group has derived revenue from collaborations with other
pharmaceutical companies and, since the launch of frovatriptan in
2002, through milestone and royalty payments received from Elan and
Menarini and payments for the supply of finished product from Menarini
relating to sales of frovatriptan. Following the re-acquisition of the
North American rights on frovatriptan, the Group is earning direct
sales revenue from the sales of frovatriptan in the United States. The
Group intends actively to seek a new partner for frovatriptan in North
America. Until the Group enters into a new collaboration agreement, it
will have to support the promotion of frovatriptan on its own in this
key market, possibly also by developing a sales force. The Group is
not yet incurring any substantial promotional costs. The Group
believes that the re-acquisition of the North American rights to
frovatriptan will benefit the Group in the short term through enhanced
cash flows from full sales, net of any related costs, of the product
and will eventually lead to a considerable increase in the Groups
revenue from North American sales of frovatriptan, even though sales
of frovatriptan may suffer during the current transitional period.
Consequently, the ability of the Group to form a new collaboration
arrangement for the sale of frovatriptan in the United States on
favorable terms in a timely manner, and to support frovatriptan
successfully on its own until such collaboration agreement is reached,
are critical to the Groups ability to realize the benefits of the
reacquisition and to its profitability and liquidity over the short
and medium term.
    
    In light of the Groups current and future cash requirements, tight
control of operating costs and expenses and efficient allocation of
available funds among the promotion of frovatriptan and the Groups
research and developments programs are pivotal to the Groups efforts
to maintain liquidity. In recent years, the Group has sought to
realize cost savings though a series of restructurings of its
workforce, product portfolio and operational capability, primarily in
connection with recent mergers and acquisitions. The Groups losses have fluctuated and are expected to fluctuate from year to
year due to a number of factors, including, but not limited to:  
    
    the introduction of frovatriptan into new markets;
    
    the restructuring of the commercial arrangements for the sale of frovatriptan in North America;
    
    frovatriptans performance, in terms of market share, in the countries in which it is marketed;
    
    the approval or not of frovatriptan as a treatment for menstrually associated migraine;
    
    commencement or termination of other collaborative research and development agreements;
    
    the timing of milestone payments under those agreements, the timing of product option and licensing fees;
    
    the time and cost required for clinically developed products to obtain regulatory approval;
    
    competitive technological developments;
    
    additional government-imposed regulation and control;
    
    changes in healthcare systems which affect reimbursement, pricing or availability of drugs and market acceptance of drugs;
    
    government grants;
    
    the level of interest income; and
    
    variations in the level of expenditures relating to research and clinical development programs. Major Recent Transactions The acquisition of RiboTargets On April 22, 2003, the Company acquired RiboTargets Holdings plc. The
acquisition of RiboTargets Holdings plc has been accounted for under purchase
accounting. The Companys intangible assets increased to £28.7 million (2002:
£23.8 million) due to the addition of £8.2 million of goodwill arising on the
acquisition, which is being written off through the income statement in three
years (under UK GAAP). The amortization charge for the transition period
amounted to £3,031,000 for goodwill, and £954,000 for other intangibles. Other reserves increased to £50.8 million (2002: £30.7 million) as a result of
the issue of 33 million ordinary shares in connection with the transaction. A
total of £14.8 million of cash and short-term investments (net of expenses of
acquisition) were received on completion of the transaction. For fiscal 2002,
RiboTargets Holdings had reported a net loss of £7.7 million on total revenues
of £2.2 million. RiboTargets Holdings plc had net assets at that date of £4.3
million, with net cash and cash equivalents and short-term deposits of £4.3
million. The merger with Vernalis Group The merger between the Company and Vernalis Group was completed on November 4,
2003. Under UK GAAP, the merger was accounted as a merger of equals (pooling
of interests), while under US GAAP the merger was accounted for as an
acquisition of Vernalis Group by the Company using purchase accounting (under
purchase accounting, the cost of the investment is calculated at the market
value of the shares issued together with the incidental costs and the assets
and liabilities of the acquired entity are recorded at fair value). 32




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##### Table of Contents



The table below shows certain income statement data for each of the Company,
Vernalis Group and the combined Group for the eight month transition period
ended December 31, 2003. British Biotech plc
    
    Vernalis Group plc
    
    Vernalis plc
    
    Vernalis plcFour months ended
    
    Four months ended
    
    Four months ended
    
    Eight months ended31 August,
2003
    
    31 August,
2003
    
    December 31,
2003
    
    December 31,
2003£000
    
    £000
    
    £000
    
    £000Turnover
    
    
    243
    
    
    
    3,444
    
    
    
    4,944
    
    
    
    8,631Operating loss
    
    
    (11,319
    )
    
    
    (4,862
    )
    
    
    (13,207
    )
    
    
    (29,388
    )Loss on disposal of fixed assets
    
    
    (2,538
    )
    
    
    
    
    
    
    (450
    )
    
    
    (2,988
    )Merger transaction expenses
    
    
    (5,396
    )
    
    
    
    
    
    
    
    
    
    
    (5,396
    )Loss on ordinary activities before
interest and taxation
    
    
    (19,253
    )
    
    
    (4,862
    )
    
    
    (13,657
    )
    
    
    (37,772
    )Net interest receivable and similar
income/charges
    
    
    379
    
    
    
    (168
    )
    
    
    697
    
    
    
    908Loss on ordinary activities before taxation
    
    
    (18,874
    )
    
    
    (5,030
    )
    
    
    (12,960
    )
    
    
    (36,864
    )Tax on loss on ordinary activities
    
    
    1,060
    
    
    
    396
    
    
    
    1,189
    
    
    
    2,645Loss on ordinary activities after taxation
    
    
    (17,814
    )
    
    
    (4,634
    )
    
    
    (11,771
    )
    
    
    (34,219
    )
 Merger transaction expenses relate only to the costs of the merger between the
Company and Vernalis Group. The table below shows certain income statement data for each of the Company,
Vernalis Group and the combined Group for the year ended April 30, 2003. British Biotech plc
    
    Vernalis Group plc
    
    TotalYear ended
    
    Year ended
    
    Year endedApril 30,
    
    April 30,
    
    April 30,2003
    
    2003
    
    2003£000
    
    £000
    
    £000Turnover
    
    
    1,078
    
    
    
    8,065
    
    
    
    9,143Operating loss
    
    
    (19,862
    )
    
    
    (16,387
    )
    
    
    (36,249
    )Loss on ordinary activities before interest and taxation
    
    
    (19,862
    )
    
    
    (16,387
    )
    
    
    (36,249
    )Net interest receivable and similar income/charges
    
    
    636
    
    
    
    1,368
    
    
    
    2,004Loss on ordinary activities before taxation
    
    
    (19,226
    )
    
    
    (15,019
    )
    
    
    (34,245
    )Tax on loss on ordinary activities
    
    
    1,738
    
    
    
    1,921
    
    
    
    3,659Loss on ordinary activities after taxation
    
    
    (17,488
    )
    
    
    (13,098
    )
    
    
    (30,586
    )
 At the time of the merger, Vernalis Group had cash and cash equivalents of £16
million. In May 2003, Vernalis Group plc conducted a rights issue raising
approximately £14.4 million net of expenses. Application of Critical Accounting Policies Purchase and pooling of interests Under UK GAAP, the combination of British Biotech plc and Vernalis Group plc
was accounted for as a merger of equals (pooling of interests). Due to the
specific conditions of the merger (i.e. relative size, relative number of
directors, etc) the company was required to treat the transaction using merger
accounting, in compliance with FRS 6 and the Companies Act 1985. Under US GAAP
the transaction was accounted for as the acquisition of Vernalis Group plc by
British Biotech plc using purchase accounting. Under UK merger accounting, the results of the operations are added together as
though the companies have always been in the same group. The result of this is
to increase the net loss for the transition period ended December 31, 2003 by
£4.6 million (period prior to the merger), for fiscal 2003 by £13.1 million,
for fiscal 2002 by £9.9 million and for fiscal 2001 by £21.0 million. In addition, the share capital issued for the merger with Vernalis Group is
treated as though they had always been issued. The net result is to increase
the average number of shares in issue for the purposes of calculating Loss per
share, to 71,010,000 for fiscal 2003, 70,175,000 for fiscal 2002 and 69,021,000
for fiscal 2001. The Loss per share for the prior periods has been restated as
43.1p for fiscal 2003, 38.6p for fiscal 2002 and 64.3p for fiscal 2001. Under UK GAAP, the shares issued for the merger with Vernalis Group were issued
at par and to acquire RiboTargets Holdings plc were valued at the market price
on the date of acquisition (April 23, 2003) respectively. Under US GAAP, the
shares issued were valued at the average market price for two days before and
after the announcement of the 33




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the transactions on July 3, 2003 and March 21, 2003,
respectively. The difference between the par value of shares issued by Vernalis
plc and the share capital and share premium of Vernalis Group are taken to a
merger reserve. The movement of the Companys share price between these dates
and methods decreases the UK GAAP value of the purchase price by £42.5 million
in respect of Vernalis Group and £4.0 million in respect of RiboTargets
Holdings plc. In accordance with US GAAP (EITF 95-3) an adjustment was made to
the opening net assets position to reflect the redundancy costs arising
following a reorganization of the Group after these transactions. In accordance
with UK GAAP, these costs were expensed in the post-acquisition result in 2003. Under US GAAP, purchase price is allocated to all tangible and identifiable
intangible assets based upon estimated fair value at the date of acquisition.
For US GAAP purposes, fair values have been assigned to intangible assets,
which included in-process research and development (£4.1 million) and
technology platform (£56.5 million) in respect of Vernalis Group and which
included in-process research and development (£5.0 million) and technology
platform (£2.5 million) in respect of RiboTargets. Under UK GAAP merger
accounting, the assets already included within the balance sheet relating to
intangibles (£17.6 million), remained on the balance sheet. The specifically
identifiable intangible assets have not been recognized under UK GAAP for the
acquisition, as they do not meet the criteria for recognition required by FRS
10, Goodwill and intangible assets. Under US GAAP, the amount of purchase consideration allocated to in-process
research and development is immediately written off to the profit and loss
account. The portion of the purchase price allocated to the technology platform
under US GAAP is amortized over the estimated useful economic life. Under UK
GAAP these amounts are included in goodwill for an acquisition. A full summary of the accounting differences resulting from the purchase
accounting of the Vernalis Group merger is set out in Part III, Item 18. Under US GAAP, the FAS 141 gives a number of criteria for determining which
party is the accounting acquirer. These criteria include, relative voting
rights, composition of senior management, whether a premium was paid and by
whom. Based on the FAS 141 criteria the company has concluded that British
Biotech plc was the accounting acquirer. Revenue The Group enters into collaborative research agreements whereby other
pharmaceutical and biotechnology companies assist in the research and
development of Vernalis intellectual property. Under these collaborations, the
Group receives revenue from the collaborator and participates with them in the
future research and development of the program. The Group receives revenue from
these agreements that are
related either to the achievement of specified objectives or to a commitment of
resources by the Group over a period of time. Revenues related to the
achievement of specific objectives are recognized when those objectives have
been met. Revenues that are related to the commitment of resources over a
period of time are recognized in proportion to the work completed. In August
2002, Vernalis entered into a collaborative agreement with GeneSoft
Pharmaceuticals Inc. (now part of the Oscient Pharmaceuticals Corp. group) and
received an initial payment of £3.2 million. This has now been fully recognized
following the termination of the research agreement in August 2003. In October
2000, Vernalis entered into a collaborative agreement with Serono S.A. and
received an initial payment of $5 million (£3.3 million). This was recognized
as revenue over the initial two-year period of the research agreement; hence at
December 31, 2003 the revenue had been fully recognized. Goodwill and Intangible Assets Vernalis has entered into in-licensing arrangements with other pharmaceutical
and biotechnology companies for which payments are made, first, to acquire
licenses to develop their intellectual property and, second, in relation to the
achievement of specific research and development milestones. Under UK GAAP, the
Group is required to capitalize these payments as intangible fixed assets and
amortize them over their expected useful life. Following the termination of
these agreements in the period, these have been disposed of, and a loss on
disposal of £1.8 million has been recorded. In addition, following the merger
with Vernalis Group, the company has intangible assets relating to the
acquisition of Cerebrus and payments made to GlaxoSmithKline (GSK) in respect
of the rights to frovatriptan of £17.6 million, which have been revalued under
US GAAP. The expected useful life is based upon the shorter of the length of the
agreement or the expected patent life, and is subject to an impairment review,
which is based on the net present value of expected returns from the
arrangement. Under US GAAP, these payments are subject to an additional review
and may only be recognized as an asset if an alternative primary use exists for
the product or technology. Vernalis believes that such an alternative primary
use does not exist for the acquired products still in development and, under US
GAAP, has made an additional charge of £1,089,000 for the year ended April 30,
2001 and £898,000 for the year ended April 30, 2002 reducing the carrying value
of intangible fixed assets to zero. Fixed Asset Investments Vernalis has investments in quoted and unquoted stocks acquired as a result of
collaborations with other companies. Under UK GAAP, these investments are
carried at cost less any permanent diminution in value. During the period,
under UK GAAP, provision for the permanent diminution in value of listed
investments was made by reference to the 34




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##### Table of Contents



evolution of the market price of the
shares and to reflect the downturn in share values across the biotechnology
sector. As at December 31, 2003, the carrying value of investments in quoted
companies was £83,000 representing an acquisition cost of £649,000 net of a
provision of £566,000 for a permanent diminution in value. Under US GAAP, marketable securities are valued at market value, with temporary
diminution in value being taken to other comprehensive income and permanent
diminutions taken to the Statement of Operations. The definition of permanent
is more prescriptive under US GAAP. The market value of securities at December
31, 2003 resulted in a difference to the realizable value of the securities of
£23,000. At April 30, 2003, there was an increase of £17,000 to the realizable
value of securities and at April 30, 2002 there was no difference in the value
of securities between UK and US GAAP. As at December 31, 2003, the carrying value of unlisted investments was nil. In September 2003, Vernalis disposed of its holding in CareScience Inc for
$268,787. Principal Factors Affecting Results of Operations and Financial Condition Revenue The following table shows revenues by activity and by geographic area for the
three years ended April 30, 2003 and the eight months ended December 31, 2003: Years ended
    
    Eight months endedApril 30,
    
    December 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000(a) Revenues by activityContinuing operationsProduct sales and royalties
    
    
    491
    
    
    
    799
    
    
    
    2,097
    
    
    
    2,592Collaborations
    
    
    4,125
    
    
    
    13,967
    
    
    
    7,046
    
    
    
    6,0394,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631(b) Revenues by geographic areaUnited Kingdom
    
    
    1,377
    
    
    
    602
    
    
    
    90
    
    
    
    49United States
    
    
    190
    
    
    
    
    
    
    
    420
    
    
    
    2,937Rest of World
    
    
    3,049
    
    
    
    14,164
    
    
    
    8,633
    
    
    
    5,6454,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631
 Historically, revenue has been derived primarily from licensing and
collaborative research and development agreements, including research support
fees, milestone payments and product option and licensing fees. The Group has also derived revenues from product sales of frovatriptan,
primarily in the United States. Until May 2004, the Group earned revenue with
respect to sales of frovatriptan in the United States in the form of quarterly
royalty payments from Elan, frovatriptans original U.S. licensee. Sales for
the year ended December 31, 2003, by Elan were $37.5 million. In the first
quarter of 2004, Elan reported sales of $6.7 million. In May 2004, Vernalis
re-acquired from Elan the North American rights for frovatriptan. Consequently,
the Group is now receiving direct sales revenue from the sale of frovatriptan
in the United States. However, the Group intends to seek a major pharmaceutical
partner for the marketing and sale of frovatriptan in North America. Vernalis
has also received quarterly royalties on European sales, as well as sales
revenues for the supply of finished frovatriptan product for European markets
from Menarini, frovatriptans European licensee. The Group expects revenue from
product sales of frovatriptan to comprise its major source of revenue in the
near future. The Group has also received revenue from various government research grants,
which is included within product sales. Research and development expenditure The Groups research and development costs consist primarily of: Internal Costs  
    
    salaries and other related costs of staff who are engaged directly in research and development activities;
    
    the cost of consumables that are used in the Groups research laboratories; and
    
    an appropriate allocation from the Groups general and administrative expenses that are indirectly related to research
and development. 35




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##### Table of Contents



External Costs  
    
    the cost of services provided by third-party research and manufacturing organizations that Vernalis employs to conduct
pre-clinical and clinical development work on its behalf;
    
    expenses related to the filing, defense and enforcement of patent and other intellectual property rights; and
    
    amounts Vernalis pays to third parties under the terms of the collaboration agreements and joint ventures into which it
enters. During the transition period, internal costs amounted to £18.1 million and
external costs amounted to £8.8 million. In fiscal 2003, internal costs were
£20.2 million and external costs were £10.3 million. The following is a
breakdown of the Groups costs on research and development projects: Years ended
    
    Eight months endedApril 30,
    
    December 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Marimastat
    
    
    3,137
    
    
    
    1,623
    
    
    
    399
    
    
    
    62BB-10901
    
    
    974
    
    
    
    1,078
    
    
    
    662
    
    
    
    671V10153
    
    
    953
    
    
    
    2,742
    
    
    
    1,781
    
    
    
    360V140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650Anti Infective program
    
    
    802
    
    
    
    1,218
    
    
    
    2,227
    
    
    
    111Serono collaboration
    
    
    1,522
    
    
    
    
    
    
    
    
    
    
    
    E21R
    
    
    
    
    
    
    654
    
    
    
    
    
    
    
    BB-94 Stent
    
    
    
    
    
    
    964
    
    
    
    528
    
    
    
    MG98
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    379Frovatriptan
    
    
    2,667
    
    
    
    4,033
    
    
    
    2,287
    
    
    
    1,238VML 670
    
    
    125
    
    
    
    841
    
    
    
    1,430
    
    
    
    496V2006
    
    
    
    
    
    
    389
    
    
    
    1,147
    
    
    
    756Other Vernalis Group programs
    
    
    2,875
    
    
    
    937
    
    
    
    
    
    
    
    Other R&D projects and infrastructure
    
    
    30,236
    
    
    
    23,673
    
    
    
    19,151
    
    
    
    22,16743,291
    
    
    
    38,152
    
    
    
    30,512
    
    
    
    26,890
 Vernalis is conducting additional clinical studies on frovatriptan exploring
its use in the prevention of menstrually-associated migraine. A long term Phase
III safety study has recently completed recruitment and a confirmatory Phase
IIIb efficacy trial is under way. The external costs of these studies in fiscal
2004 are expected to be around £4 million. A Phase I study and a Phase II proof-of-concept study for V10153 have been
completed and the next stage in the development is to conduct a Phase II study
in approximately 100 patients with acute stroke. Vernalis is currently
evaluating whether to undertake this study itself or wait until collaboration
has been secured. Following the conclusion of the initial Phase I studies for V140, a Phase Ic
study to investigate the analgesic properties of the compound in healthy
volunteers has commenced. The external costs of this study in fiscal 2004 are
expected to be around £1.5 million. The first part of the Phase I clinical program for V2006 is under way and is
expected to be completed during 2004. This will include single and multiple
dose escalation studies in healthy young and elderly volunteer subjects. The
external costs of these studies in fiscal 2004 are expected to be around £0.5
million. BB-83698 is a peptide deformylase inhibitor discovered by Vernalis that has
shown potency in pre-clinical studies against a range of gram-positive
bacteria. Under the out-licensing agreement between Vernalis and Oscient,
Oscient has assumed responsibility for all further research and development,
with Vernalis
receiving milestone and royalty payments. Vernalis has relinquished all rights to VML 670, BB-10901 and MG98 and will not
undertake any further development beyond completion of certain ongoing clinical
studies. All other research and development programs undertaken and reflected
in the table above have been discontinued. Expected costs of approximately £1
million have been accrued in the period ended December 31, 2003, in respect of
the closure of these programs. The major risk to all research and development projects is that the Group may
not be able to secure adequate funds, additional to the funds the Group needs
to raise before December 31, 2004 to finance the payments to Elan, in order to
support its research and development activities. If the Group is unable to
secure adequate financing for its research and development projects, the
Groups research and development efforts could be delayed or significantly
curtailed which, in turn, could lead to delays in bringing drug candidates to
market or even the termination of some or all of the Groups research and
development projects. 36




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##### Table of Contents



Cost of goods sold The Groups costs of goods sold reflect the cost of manufacturing frovatriptan
for sales to the European market. Selling, general & administration (SG&A) expenses The Group does not incur significant selling expenses. However, following the
reacquisition of frovatriptan, Vernalis is responsible for all selling costs in
relation to sales in the US market. The level of costs for 2004 will depend on
whether and how soon a new partner is found for the product. Administrative expenses consist primarily of the salaries and other related
costs of the personnel employed by the Group in various support functions,
including finance, legal, corporate communications, information technology,
human resources, facilities and general management, together with the costs of
facilities, fees for professional advisers, depreciation and amortization of
goodwill. Foreign currency fluctuations Although the Group maintains its accounting records in pounds sterling, a
substantial proportion of its transactions by value, including receipts and
payments, are in other currencies. The Groups balances are predominantly held
in pounds sterling. The Group received payments under its commercial agreement with Elan in US
dollars and expects that the payments under any future collaboration agreement
for the sale of frovatriptan in the United States will also be denominated in
US dollars. The Groups receipts under some of its commercial agreements,
including those with GeneSoft (now Oscient), Serono and Novartis, are also
denominated in US dollars. The Groups receipts under the agreement with
Menarini are denominated in Euros. The Group has an outstanding balance of $20 million that is owed to GSK. In
addition, the Group is facing payments of approximately $30 million in fiscal
2004 (of which $5 million was paid in May 2004) and $25 million in fiscal 2005
to be made to Elan in connection with the re-acquisition of the North American
rights to frovatriptan. The Group is also carrying out some of its clinical
development programs in the United States, using US-based contract research
organizations and, as a result, its agreements with contract research
organizations are commonly denominated in US dollars. Where a substantial net foreign currency liability exists and is known with
certainty, the Group may hedge against it to minimize foreign currency expense.
However, such hedging is based on estimates of liabilities and future revenues
and will not fully eliminate future foreign currency exchange fluctuations. To
the extent that that the Groups foreign currency assets and liabilities are
not matched, fluctuations in exchange rates between pounds sterling, the US
dollar and the euro may result in an adverse translation effect on the Groups
operating profit and net income. In addition, if the currencies in which the
Group earns its revenues and/or holds its cash balances weaken against the
currencies in which it incurs its expenses, this could adversely affect the
Groups profitability and liquidity. 37




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##### Table of Contents



Results of Operations The following table shows certain income statement data for the eight month
transition period ended December 31, 2003, and the three-year period ended
April 30, 2003. Years ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Revenue
    
    
    4,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631Costs and expensesCost of goods sold
    
    
    
    
    
    
    
    
    
    
    (418
    )
    
    
    (228
    )Research and development expenditure
    
    
    (43,291
    )
    
    
    (38,152
    )
    
    
    (30,512
    )
    
    
    (26,890
    )Selling, general & administration expenses
    
    
    (9,485
    )
    
    
    (11,732
    )
    
    
    (14,276
    )
    
    
    (10,901
    )Other operating (expenses) / income
    
    
    (276
    )
    
    
    164
    
    
    
    (186
    )
    
    
    Total operating costs & expenses
    
    
    (53,052
    )
    
    
    (49,720
    )
    
    
    (45,392
    )
    
    
    (38,019
    )Operating loss
    
    
    (48,436
    )
    
    
    (34,954
    )
    
    
    (36,249
    )
    
    
    (29,388
    )Profit/(provisions for loss) on disposal
of fixed assets
    
    
    
    
    
    
    2,505
    
    
    
    
    
    
    
    (2,988
    )Merger transaction expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,396
    )Amount written off investments
    
    
    (799
    )
    
    
    (324
    )
    
    
    (799
    )
    
    
    (862
    )Costs of restructuring
    
    
    (1,182
    )
    
    
    
    
    
    
    
    
    
    
    Net Interest
    
    
    4,199
    
    
    
    2,783
    
    
    
    2,803
    
    
    
    1,770Loss before provision for income taxes
    
    
    (46,218
    )
    
    
    (29,990
    )
    
    
    (34,245
    )
    
    
    (36,864
    )Provision for income taxes
    
    
    1,849
    
    
    
    2,899
    
    
    
    3,659
    
    
    
    2,645Net loss
    
    
    (49,369
    )
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
 The table below shows some comparative, unaudited income statement data for the
eight months ended December 31, 2002. The results of operations from such
period have been fully reflected in fiscal 2002 and are provided here solely
for comparative purposes. Transition period comparative data Eight months ended December 31,2002
    
    2003(unaudited)
    
    £000£000Revenues
    
    
    6,095
    
    
    
    8,631Gross profit
    
    
    5,817
    
    
    
    8,403Income before income taxes
    
    
    (22,830
    )
    
    
    (36,864
    )Income taxes
    
    
    2,439
    
    
    
    2,645Net income
    
    
    (20,391
    )
    
    
    (34,219
    )
 Comparative Discussion of Transition Period Ended December 31, 2003 and Fiscal
Years Ended April 30, 2003, 2002 and 2001 (UK GAAP) Revenue Product sales and royalties in the transition period of £2,592,000 increased
from £2,097,000 in fiscal 2003 primarily due to an increase in the sales of
frovatriptan resulting from an improvement in market share in the United
States, as well as the first full-period contribution of frovatriptan sales in
Germany, where frovatriptan was launched in November 2002. The increase in
fiscal 2003 compared to product sales and royalties amounting to £799,000 in
fiscal 2002 was due to the launch of frovatriptan in the United States in June
2002 and in Germany in November 2002. The increase in fiscal 2002 compared to
product sales and royalties of £491,000 in fiscal 2001 reflected a royalty
following the disposal of British Biotechnology Products Limited in 1993 and
government grant income received in fiscal 2002. 38




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##### Table of Contents



During the eight month period ended December 31, 2003 and the three years ended
April 30, 2003, the Group earned income under a number of collaborative
agreements as set out in the following table. The amounts received are
non-refundable. Years ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Oscient Corp.
    
    
    
    
    
    
    
    
    
    
    420
    
    
    
    2,820Serono Inc
    
    
    1,300
    
    
    
    1,378
    
    
    
    568
    
    
    
    Roche
    
    
    2,825
    
    
    
    530
    
    
    
    
    
    
    
    1,230Elan
    
    
    
    
    
    
    12,059
    
    
    
    6,058
    
    
    
    1,872Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1174,125
    
    
    
    13,967
    
    
    
    7,046
    
    
    
    6,039
 During the transition period, Vernalis recognized the remaining £2,820,000 of
revenue from Oscient following the termination of the original agreement with
GeneSoft in August 2003, as compared to £420,000 in fiscal 2003, which related
to the resources committed in that period. The Group did not earn any revenues from its collaboration with Serono during
the transition period following the termination of the research agreement in
October 2003. The Group earned £568,000 of revenue from Serono during fiscal
2003 in connection with the resources committed in that period relating to the
research agreement. In fiscal 2002, the Group earned £1,378,000 due to the
resources committed in that period relating to the research agreement. In
fiscal 2001, revenue earned from Serono amounted to £1,300,000. The revenue
recognized in each year reflected the allocation over the life of the
collaboration of $5 million received in fiscal 2001, in proportion to the
resources committed during each period. In the transition period, the Group earned £1,230,000 of revenue from Roche
comprising research funding for its obesity program. No revenues were
recognized in fiscal 2003. In fiscal 2002, the Group received £530,000 from
Roche relating to its obesity program and, in particular, a milestone payment
on entry into Phase I. In fiscal 2001, the Group earned total income of
£2,825,000 from Roche relating to the collaboration on its obesity program,
made up of £2,100,000 of research funding and a £725,000 milestone payment
following selection of VR-1065 as a clinical development candidate. Three milestone payments have been received from Elan, which are being
recognized as income in proportion to the resources committed by Vernalis in
each period. These milestone payments were: £10.3 million in fiscal 2001
relating to the FDA approval of frovatriptan in the United States; £3.7 million
in fiscal 2002 following the launch of frovatriptan in the United States; and
the waiver of a loan of £7.5 million in fiscal 2002. As a result, income of
£1,872,000 was recognized in the transition period, £6,058,000 was recognized
in fiscal 2003, and £12,059,000 in fiscal 2002. In the transition period, the Group earned £117,000 of revenue in connection
with other research collaborations. Cost of goods sold Cost of goods sold in fiscal 2003 reflected costs to manufacture frovatriptan
for the European market. Research and development expenses Research and development expenditure in the transition period reflected an
eight-month period and the inclusion of all three group companies before
post-integration infrastructure savings. Research and development expenditure
in fiscal 2003 decreased, as compared to fiscal 2002, by £7.7 million due to
reduced infrastructure costs. The reduced infrastructure costs in fiscal 2003
follows the agreement with OSI in August 2001 to transfer certain pre-clinical
facilities, together with a general reduction in headcount across the Group.
The reduction in infrastructure costs in fiscal 2002 as compared to fiscal 2001
was also due to the transfer of certain pre-clinical facilities to OSI. For a detailed breakdown of external research and development expenses during
the transition period and the fiscal years 2003, 2002 and 2001, see above under
Principal Factors Affecting Results of Operations and Financial Condition 
Research and Development Expenses. Selling, general & administration (SG&A) expenses SG&A expenses in the transition period of £10.9 million comprise: £2.3 million
in respect of restructuring costs in connection with the integration of
Vernalis Group and RiboTargets; £3.0 million of amortization of goodwill
relating to the acquisitions of RiboTargets and Cerebrus (by Vernalis Group
prior to the merger); and other administrative costs of £5.6 million reflecting
the operating costs of the three combined businesses before significant cost
cutting. 39




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##### Table of Contents



SG&A expenses for fiscal 2003 were lower due to there being no amortization of
goodwill on RiboTargets and a lower level of restructuring costs of £1.6
million. The results of RiboTargets are not included in this year. SG&A expenses in fiscal 2002 and fiscal 2001 were lower because of smaller
restructuring costs in the periods, and amounted to £11.7 million in fiscal
2002 and £9.5 million in fiscal 2001. Operating loss Operating loss in the transition period of £29.4 million reflects the factors
referred to in the commentary above. The pro-rata losses are higher in the
transition period than for fiscal 2003 because the transition period includes
the results of RiboTargets, which was acquired on April 23, 2003. The modest
increase in operating loss from £34,954,000 in fiscal 2002 to £36,249,000 in
fiscal 2003 was primary attributable to lower milestone payments recognized
from Elan in 2003 as compared to 2002 and higher SG&A expenses in connection
with the Groups restructuring programs undertaken in 2003, partly offset by
lower research and development expenditure due to reduced infrastructure costs
during the same period. The decrease in operating loss from £48,436,553 in
fiscal 2001 to £34,954,000 in fiscal 2002 reflected increased revenues from
Elan in fiscal 2002 and the benefit of the sale of certain pre-clinical
facilities to OSI and reduced headcount across the Group. Profit/ (provision for loss) on disposal of fixed assets Provision for loss on disposal of fixed assets of £2,988,000 in the transition
period reflected the Companys intention to divest its Oxford facility. Profit
on disposal of fixed assets of £2,505,000 in fiscal 2002 arose from the
transfer of certain of the Groups pre-clinical facilities and 59 employees to
OSI along with the leases of two properties and certain fixed assets. Merger transaction expenses Merger transaction expenses have been incurred in 2003 in relation to the
merger with Vernalis Group. Amount written off investments Amounts written off investments were £862,000 in the transition period,
£799,000 in fiscal 2003 and £324,000 in fiscal 2002. In each year, this
consisted of an estimate of the permanent impairment in the value of certain
investments (BresaGen Ltd, CareScience Ltd, MethylGene Inc.) by reference to
their market value. Costs of restructuring Costs of restructuring in fiscal 2001 related to the integration of the
operations of Vernalis Group plc into the Winnersh site, the closure of its
Guildford facility and the related redundancy program. Net interest Net interest (interest receivable net of interest expense) was £1,770,000 in
the transition period, as compared to £2,803,000 in fiscal 2003, £2,783,000 in
fiscal 2002 and £4,199,000 in fiscal 2001. The decrease in net interest during fiscal 2003 and, fiscal 2002 was due to
lower average cash balances and falling interest rates reducing the Groups
interest receivable which amounted to £1,136,000 in the transition period,
£2,129,000 in fiscal 2003, £3,651,000 in fiscal 2002 and £4,756,000 in fiscal
2001. Interest expense amounting to £544,000 in the transition period, £739,000 in
fiscal 2003, £868,000 in fiscal 2002 and £557,000 in fiscal 2001 primarily
consisted of payments on a fixed-rate mortgage by a fixed charge secured on
three of the Groups freehold properties and on various finance leases. Provision for income taxes No liability for UK corporation tax has arisen in any of the periods to
December 31, 2003. The Group had losses, as computed for taxation purposes, of
approximately £413 million at December 31, 2003, (£412 million at April 30,
2003 and £393 million at April 30, 2002) available to be carried forward to
future periods. Tax losses can be carried forward with no expiry date against the profits of
the same trade. In the event that there is a change of ownership of the Group
(where one party or a group of connected parties gain control) then under
current UK tax law, if there is also a major change in the nature or conduct of
the trade within a period of three years either side of the change of
ownership, any tax losses at the time of change of ownership may not be
available for relief against future trading profits. In accordance with the provisions of the Finance Act 2000 in respect of
Research and Development Allowances, the Group is entitled to claim tax credits
for certain research and development expenditure. The tax credit receivable by
the Group the transition period amounted to £2,645,000 (2003: £3,659,000; 2002:
£2,899,000; 2001: £1,849,000). Net loss Net loss in the transition period of £34.2 million reflects the factors
referred to above, and in particular is higher than in previous periods, on a
pro-rata basis due to the provision for loss on disposal of £3.0 million and
merger transition 40




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##### Table of Contents



expenses of £5.4 million. The increase in net loss from £27,091,000 in fiscal
2002 to £30,586,000 in fiscal 2003 reflected a higher operating loss during the
same period and the profit recognized in 2002 on the sale of certain
pre-clinical activities to OSI. A decrease in net loss from £44,369,000 in
fiscal 2001 to £27,091,000 in fiscal 2002 was attributable to a higher
operating loss, costs of restructuring and lower provision for income taxes,
partly offset by higher net interest for fiscal 2001. Liquidity and Capital Resources Since Vernalis foundation, cash expenditures have exceeded revenues. The Group
has financed its research and development operations primarily by the issuance
of equity securities, acquisitions, revenues from joint development and
licensing agreements, interest earned on cash deposits and a mortgage of £4
million. For information on the Companys development of share capital, see
Item 10B, Additional Information  Share Capital. Since the US and first European launches of frovatriptan, in June and November
2002 respectively, Vernalis has received quarterly royalty revenues from its US
and European licensees, on sales of frovatriptan in those markets. Following
the re-acquisition of the North American rights to frovatriptan from Elan on
May 18, 2004, Vernalis receives direct sales revenue from the sales of
frovatriptan in the United States. The Group also receives sales revenues from
Menarini, its European licensee, for supply of finished frovatriptan product
for European markets. The Group plans to generate its commercial returns through sales of
frovatriptan and by actively seeking partners for its products in all
territories in the world while retaining commercialization rights for certain
products in niche markets. The Groups cash resources will be used to expand
and progress the portfolio of development products and research programs
principally focused on oncology and diseases of the central nervous system.
Substantial increases in administrative support costs, marketing and
commercialization expenditure will only be incurred once product approvals are
certain. The Groups operating cash outflows consist principally of:  
    
    payroll and related staff costs;
    
    payments to contract research organizations and consultants working on its development projects;
    
    payments to suppliers of consumables used in its research laboratories;
    
    lease payments, property taxes and other costs relating to its facilities;
    
    payments to professional advisers; and
    
    payments to third parties under the terms of its collaboration agreements. Cash Outflows and Net Funds (UK GAAP) The following table shows certain cash flow data for the transition period
ended December 31, 2003, and the three year period ended April 30, 2003: Years ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Net cash outflow from operating
activities
    
    
    (40,644
    )
    
    
    (30,302
    )
    
    
    (36,448
    )
    
    
    (34,089
    )Returns on investments and servicing of
finance
    
    
    5,042
    
    
    
    3,026
    
    
    
    1,952
    
    
    
    659Taxation
    
    
    1,703
    
    
    
    1,618
    
    
    
    3,169
    
    
    
    2,783Capital expenditure
    
    
    6,569
    
    
    
    799
    
    
    
    (4,299
    )
    
    
    (16
    )Cash utilized by operations
    
    
    (27,330
    )
    
    
    (24,859
    )
    
    
    (35,626
    )
    
    
    (30,663
    )Acquisitions  purchase of subsidiary
undertakings
    
    
    
    
    
    
    
    
    
    
    1,967
    
    
    
    Management of liquid resources
    
    
    21,260
    
    
    
    19,453
    
    
    
    27,443
    
    
    
    25,786Financing
    
    
    6,531
    
    
    
    4,757
    
    
    
    6,215
    
    
    
    6,478Increase/(decrease) in cash in the period
    
    
    461
    
    
    
    (649
    )
    
    
    (1
    )
    
    
    1,601
 In the transition period an operating loss of £29.4 million resulted in a cash
outflow of £34.1 million. This increase principally related to adverse working
capital movements, in particular a reduction of £4.8 million in deferred income
(consistent with the Groups revenue recognition policies), and £5.4 million of
merger expenses paid that were not included within operating loss, offset by
non-cash items including the disposal of intangible fixed assets of £1.8
million, amortization of £4.0 million, and depreciation of £1.6 million. In fiscal 2003, an operating loss of £36.2 million resulted in a cash outflow
of £36.4 million. This was principally due to adverse working capital
movements, offset by depreciation and amortization. 41




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##### Table of Contents



In fiscal 2002 an operating loss of £35 million resulted in an operating cash
outflow of £30.3 million. This reduction was due principally to the receipts
from Elan that are being recognized in the profit and loss account in later
periods. In fiscal 2001 an operating loss of £48.4 million resulted in a cash outflow of
£40.6 million. This reduction was principally due to receipts from Elan of
£12.7 million, much of which was recognized in the profit and loss account in
later periods. During the transition period, capital expenditure was £180,000 on general
equipment, which was primarily offset by proceeds of £162,000 from the sale of
the investments held in CareScience. In fiscal 2003, capital expenditure was £1,310,000 on plant and machinery and
the laboratory and office refurbishment in Oxford, offset by proceeds from the
sale of assets of £238,000 following the transfer of certain employees and
equipment to Evotec OAI. In addition, the purchase of intangible fixed assets
amounted to £3,227,000 following a payment to GSK of $5 million. In fiscal 2002, capital expenditure was £0.8 million, comprising £2.6 million
on the laboratory and office refurbishment (mainly on the Oxford site), £1.4
million on the purchase of shares in MethylGene, and the purchase of
intangible fixed assets of £2.5 million included £1.4 million in
payments to MethylGene to acquire licenses to develop their intellectual
property and a milestone payment to BresaGen. Capital expenditure in fiscal
2002 was offset by proceeds from the sale of assets of £7.3 million, relating
to the sale of certain pre-clinical facilities to OSI. In fiscal 2001, capital expenditure was £6.6 million, comprising £1.8 million
on plant and machinery, £1.6 million on the purchase of investments in BresaGen
and CareScience and £1.3 million in payments to ImmunoGen and BresaGen. Capital
expenditure in fiscal 2001 was offset by proceeds from the sale of assets of
£11.3 million, relating to the sale and leaseback of the Oxford property. Cash received from the management of liquid resources reflects movements from
time to time in the composition of cash and liquid investments that are used to
finance future capital requirements of the business. Cash received from financing in the transition period was £6.5 million. This
principally relates to net proceeds of £14.4 million from the fundraising by
Vernalis in May 2003, offset by the repayment of loans to Roche totaling £7
million. Cash received from financing in fiscal 2003 of £6.2 million, consists
primarily of the receipt of a loan from Roche of £7 million, offset by capital
payments on the finance leases and mortgage on the Oxford property. Cash
received from financing in fiscal 2002 and fiscal 2001 (£4.8 million and £6.5
million respectively) relates principally to the receipt of loans from Elan of
$10 million, together with an equity purchase by Elan in December 2000. The table below shows the Groups net funds as at December 31, 2003. £000Cash
    
    
    1,885Short-term deposits and investments
    
    
    22,32924,214Secured loan due within one year
    
    
    (270
    )Secured loan due after one year
    
    
    (1,215
    )Finance leases
    
    
    (756
    )Net funds
    
    
    21,973
 As at April 30, 2004, cash and short-term deposits and investments amounted to
£12.0 million. The Group maintains a policy of conservative cash management by placing surplus
funds on deposit with a range of major international banks and building
societies. Short-term deposits are for fixed terms at fixed rates of interest
and the investment objective is to achieve market returns while protecting the
capital value. Short-term investments are investments in a money market managed
fund that is repayable within 48 hours. Cash equivalents and short-term
deposits are predominantly held in UK sterling. The Group does not have any
committed or uncommitted bank facilities. 42




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##### Table of Contents



Table of contractual cash obligations The table below shows the contractual obligations and commercial commitments as
at December 31, 2003. Payments due (£000)Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    one year
    
    2-3 years
    
    4-5 years
    
    five yearsSecured loan (i)
    
    
    1,485
    
    
    
    270
    
    
    
    540
    
    
    
    540
    
    
    
    135Obligations under finance leases
    
    
    756
    
    
    
    738
    
    
    
    18
    
    
    
    
    
    
    
    Operating lease commitments (ii)
    
    
    31,112
    
    
    
    2,294
    
    
    
    4,534
    
    
    
    4,502
    
    
    
    19,782Commitments under license agreements (iii)
    
    
    12,450
    
    
    
    
    
    
    
    1,250
    
    
    
    1,900
    
    
    
    9,300Capital commitments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    45,803
    
    
    
    3,302
    
    
    
    6,342
    
    
    
    6,942
    
    
    
    29,217
 Additionally, the Group is committed to make payments to GSK under the
agreement of December 2000 to buy out royalties due to GSK on sales of
frovatriptan. The Group is committed to total payments of $15 million,
comprising $2.5 million paid in March 2004, $7.5 million in September 2004 and
$5 million in September 2005. In addition, a further single payment of $5
million is due from September 2006 onwards, if cumulative global sales of
frovatriptan exceed $300 million. The full liability of $20 million has been
recognized in other creditors in the financial statements at December 31, 2003.  (i)
    
    The Group has a secured loan outstanding that is secured over the Groups
freehold properties. The total amount outstanding at December 31, 2003 was
£1,485,000. This is repayable quarterly in equal installments over the
remaining five years of the loan.(ii)
    
    Operating lease commitments relates primarily to leases on the Groups
properties at Cambridge and Winnersh.(iii)
    
    Commitments under license agreements are contingent upon successful
product development, registration and approval, primarily relating to
license agreement with Monash University and the Institute of Cancer
Research. See also Item 4D Information on the Company  Commercial
Collaborations and Note 19 to the consolidated financial statements. In
addition the Company has commitments relating to ongoing clinical trials
of its products under development. There was no expenditure that had been authorized but not contracted for at
December 31, 2003. 43




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##### Table of Contents



Comparative Results of Transition Period Ended December 31, 2003 and Fiscal
Years Ended April 30, 2003, 2002 and 2001 (US GAAP) The following table shows certain income statement data for the eight month
transition period ended December 31, 2003, and for the three year period ended
April 30, 2003. The results under US GAAP exclude all transactions of Vernalis
Group plc prior to August 31, 2003. The operating losses that were excluded
from the results under US GAAP were £4.6 million in the transition period,
£13.1 million in fiscal 2003, £9.9 million in
fiscal 2002, and £21.0 million
in fiscal 2001. Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Revenues:Product sales and royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,022Collaborations
    
    
    1,588
    
    
    
    1,450
    
    
    
    1,078
    
    
    
    2,987Total Revenues
    
    
    1,588
    
    
    
    1,450
    
    
    
    1,078
    
    
    
    5,009Costs and expenses:Cost of sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (179
    )Research and development
    
    
    (23,578
    )
    
    
    (20,782
    )
    
    
    (14,292
    )
    
    
    (22,084
    )Selling, general and administrative
    
    
    (4,124
    )
    
    
    (3,377
    )
    
    
    (6,658
    )
    
    
    (5,497
    )Acquired in-process research and
development
    
    
    (1,089
    )
    
    
    (898
    )
    
    
    (5,077
    )
    
    
    (4,091
    )Amortization of intangibles
    
    
    (146
    )
    
    
    (474
    )
    
    
    
    
    
    
    (2,739
    )Gain / (loss) on sale of property
    
    
    
    
    
    
    2,505
    
    
    
    
    
    
    
    (2,988
    )Total costs and expenses
    
    
    (28,937
    )
    
    
    (23,026
    )
    
    
    (26,027
    )
    
    
    (37,578
    )Loss from operations
    
    
    (27,349
    )
    
    
    (21,576
    )
    
    
    (24,949
    )
    
    
    (32,569
    )Other income (expense):Investment income
    
    
    3,449
    
    
    
    2,542
    
    
    
    1,435
    
    
    
    1,941Realized (loss / gain on
marketable securities, net
    
    
    (275
    )
    
    
    275
    
    
    
    80
    
    
    
    (40
    )Amounts written of investments
    
    
    (799
    )
    
    
    (324
    )
    
    
    (799
    )
    
    
    (862
    )Net loss before income taxes
    
    
    (24,974
    )
    
    
    (19,083
    )
    
    
    (24,233
    )
    
    
    (31,530
    )Research and development tax credit
    
    
    130
    
    
    
    1,608
    
    
    
    1,738
    
    
    
    2,249Net loss attributable to shareholders
    
    
    (24,844
    )
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )
 Cash Outflows and Cash and Cash Equivalents (US GAAP) The following table shows certain cash flow data for the eight month transition
period ended December 31, 2003, and for the three year period ended April 30,
2003. Year ended April 30,
    
    Eight months endedDecember 312001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Net cash used in operating activities
    
    
    (17,820
    )
    
    
    (18,209
    )
    
    
    (19,751
    )
    
    
    (26,691
    )Net cash provided by (used in) investing
activities
    
    
    15,587
    
    
    
    4,109
    
    
    
    40,990
    
    
    
    25,436Net cash provided by financing activities
    
    
    (513
    )
    
    
    (463
    )
    
    
    (845
    )
    
    
    (7,410
    )
 Year ended April 30,
    
    Eight months endedDecember 312002
    
    2003
    
    2003Reduction in cash, cash equivalents and marketable securities
under US GAAP
    
    
    14,322
    
    
    
    6,408
    
    
    
    19,752Reduction in cash, short-term deposits and investments under UK
GAAP
    
    
    20,040
    
    
    
    14,528
    
    
    
    24,240Additional reduction under UK GAAP
    
    
    5,718
    
    
    
    8,120
    
    
    
    4,488
 The Group had cash and cash equivalents and marketable securities of £24.3
million as at December 31, 2003. 44




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##### Table of Contents



Trend Information The integration of the Company, Vernalis Group and RiboTargets Holdings plc was
completed in the first quarter of 2004 to achieve anticipated full-year cost
savings of approximately £12.9 million. Further post-merger restructuring has
been implemented in the second quarter of 2004 to reduce headcount to 110.
Headcount may increase in the future as a result of the reacquisition of the
North American rights to frovatriptan. In the short term and no later than December 31, 2004, the Group will have to
secure additional funds either through an equity fund raising or a new
collaboration agreement with respect to the North American rights for
frovatriptan, in order to fund payments of approximately a further $25 million
due to Elan by December 31, 2004 in connection with the re-acquisition of the
North American rights to frovatriptan and the purchase of related inventory. A
downturn of the capital and/or debt markets and/or a deterioration in the
Groups business could delay an equity issue and lead to alternative but more
costly means of financing to the Company which, in turn, could adversely affect
the ability of the Group to implement its business strategy, including the
promotion of frovatriptan and product research and development. The Group had
£12.0 million of cash at April 30, 2004. The Group believes that the reacquisition of the North American rights to
frovatriptan will benefit it in the short term through enhanced cash flows from
full sales, net of related costs, of frovatriptan in the United States, and
will eventually lead to a considerable increase in the Groups revenue from
North American sales of frovatriptan. Sales of frovatriptan could, however,
suffer in the short term during the transition period following the termination
of the arrangement with Elan and until the Group finds a new commercial partner
or builds up its own sales force to support the promotion of frovatriptan in
the United States (in the first quarter of 2004, Elan reported sales of
frovatriptan of $7.6 million). Building up its own sales force could impose
significant additional cash requirements on the Group that are likely to
require external financing. The Group expects to announce Phase Ic results for V140 in the third quarter of
2004, and to provide a Phase I update for V2006 and initiate a confirmatory MAM
Phase III efficacy study in the second half of 2004. For information on
Vernalis current research and development expenses, see above under Principal
Factors Affecting Results of Operations and Financial Condition  Research and
Development Expenditure. The Groups management is considering a number of options to maintain the
Groups business beyond 2004, including entering into business combinations
with other biotechnology companies that could also enhance the Groups ability
to exploit its technologies and research and development capabilities, as well
as to further reduce costs. The Group may also seek to raise additional funds
through public equity offerings and/or offerings of debt securities or
preferred shares, the terms of which may impose restrictions on the Groups
operations and financial management. There can be no assurances that such
offering would be available, or, if available, that it would be on commercially
reasonable terms. If the Groups plans or assumptions are inaccurate, it might
need to seek capital sooner than currently anticipated. If the Group is unable
to secure additional funding the Group may be required to delay, reduce or
eliminate some or all of its programs or otherwise readjust its business plan
to reduce costs. 45




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##### Table of Contents



ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A  Directors and Senior Management The Memorandum and Articles of Association of the Company provide that there
shall be no more than 20 directors and no less than two directors serving on
the Board of Directors at any time. The Companys Articles of Association provide that at every annual general
meeting of shareholders of the Company (AGM), one-third, or the closest
approximation to one-third, of the Directors will retire by rotation and be
eligible for re-election by the shareholders. The Directors to retire will be
those who have been longest in office or, in the case of those who were
appointed or reappointed on the same day, will be (unless they otherwise agree)
determined by lot. Further, any Director who has been appointed since the date
of the last annual general meeting shall retire and be eligible for re-election
by the shareholders. Finally, any Director who is over the age of 70 at the
date of the annual general meeting shall retire and be eligible for re-election
by the shareholders. During the transition period the Companys annual general meeting was held on
October 1, 2003 at Barber-Surgeons Hall, Monkwell Square, London EC2Y 5BD. Dr
Fellner, Mr Sturge, Mr Kent, Mr Worrall, Dr Hutchison, Mr Kennedy, Ms Ferguson
and Dr Read who were appointed by the directors since the 2002 annual general
meeting, retired in accordance with Article 86 of the Companys Articles of
Association and were reappointed. Mr Weir retired by rotation and was
re-elected. At the forthcoming Annual General Meeting on June 24, 2004 Mr Kent, Mr
Merrifield and Mr Williams will retire by rotation. Mr Merrifield, being
eligible, will be proposed for re-election. None of the directors retiring by
rotation have a service contract with the Company. Mr Merrifield intends to
retire at the end of 2004. Dr Baxter, who has been appointed since the 2003
annual general meeting, will retire in accordance with the Companys Articles
of Association and, being eligible, will seek re-appointment Certain information concerning the current Directors of the Company is set
forth below. Non-executive Directors are not full-time employees of the
Company. Name
    
    Age
    
    Position/s Held
    
    Period during which Director has served in officePeter Fellner
    
    
    60
    
    
    Executive Chairman
    
    January 2003  date of filingSimon Sturge
    
    
    45
    
    
    Chief Executive Officer
    
    April 2003  date of filingJohn Hutchison
    
    
    48
    
    
    Development Director
    
    September 2003  date of filingAnthony Weir
    
    
    43
    
    
    Finance Director
    
    April 1999  date of filingPeter Worrall
    
    
    49
    
    
    Corporate Development Director
    
    September 2003  date of filingAllan Baxter
    
    
    54
    
    
    Non-executive Director
    
    May 2004  date of filingCarol Ferguson
    
    
    57
    
    
    Non-executive Director
    
    September 2003  date of filingGeorge Kennedy
    
    
    63
    
    
    Deputy Chairman, Senior Independent Director
    
    September 2003  date of filingIan Kent
    
    
    60
    
    
    Non-executive Director
    
    April 2003  date of filingKeith Merrifield
    
    
    62
    
    
    Non-executive Director
    
    December 1995  date of filingPeter Read
    
    
    65
    
    
    Non-executive Director
    
    September 2003  date of filingEugene Williams
    
    
    44
    
    
    Non-executive Director
    
    January 2001  date of filing
 No Director is related to any other. Biographical information with respect to
the Directors is as follows: Peter Fellner (60) Dr Fellner was appointed as Chairman in January 2003, and as Executive Chairman
in April 2003. He is also Chairman of Celltech Group plc, having previously
been Chief Executive since 1990. Before joining Celltech he was Chief Executive
of Roche UK from 1986 to 1990. Prior to this he was Director of the Roche UK
Research Centre, and previously Director of Research at Searle UK Research
Laboratories. Dr Fellner is also Chairman of two private biotechnology
companies, Astex Technology Ltd and Ionix Pharmaceuticals Ltd, and is a
director of Isis Innovation Ltd and a member of the Medical Research Council. Simon Sturge (45) Mr Sturge was appointed to the Board as Chief Executive Officer in April 2003.
He has more than 20 years experience in the pharmaceutical industry. After
graduating in biology from Sussex University in 1980 Mr Sturge became Product
Manager of Napp Laboratories, Head of Sales and Marketing at Smiths Industries
and Business Development Manager at Astra Pharmaceuticals. He joined Celltech
in 1988 and was appointed Chief Executive of Celltech Biologics plc (now Lonza
Biologics plc) in 1995 before joining RiboTargets Holdings plc as Chief
Executive. He founded RiboTargets in July 1997 when it was spun out from the
Medical Research Councils Laboratory of Molecular Biology with a £7 million
venture capital investment. 46




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##### Table of Contents



John Hutchison (48) Dr Hutchison was appointed as Development Director on September 1, 2003
following the merger with Vernalis Group. Prior to that he was Senior Vice
President Development and Chief Medical Officer of Vernalis Group. In February
2000, he was appointed a Director of Vernalis Group where he was responsible
for drug development, taking potential new therapies from early pre-clinical
testing through to registration and commercialization. He was previously a main
board director of Cerebrus where he was also responsible for drug development
since joining the company in 1997. He began his industrial career 15 years ago
as a clinical pharmacologist with Fisons, before moving to Experimental
Medicine with Astra Pharmaceuticals Ltd. In addition to being a UK registered
physician, Dr Hutchison has a first class Honors degree in human physiology and
a PhD in Neuroscience from the University of Liverpool. Dr Hutchison is a
Fellow of the Royal College of Physicians and a Fellow of the Faculty of
Pharmaceutical Medicine in London. Anthony Weir (43) Mr Weir has a degree in mathematics from Oxford University and is a Fellow of
the Institute of Chartered Accountants. Following qualification he advised a
variety of businesses as a financial consultant, joining the Company in 1990 as
Chief Accountant and Company Secretary. In April 1999 he was promoted to the
Board as Finance Director with responsibility for Finance, Corporate
Communications, Facilities and IT. Following the combination with RiboTargets
he continues as Finance Director. Peter Worrall (49) Mr Worrall was appointed as Corporate Development Director on September 1st,
2003 following the merger with Vernalis Group. Mr Worrall joined Vernalis Group
in 1993 and was appointed to the board of that company in February 1997 as
Finance Director. In March 2003, he became acting Chief Executive Officer of
Vernalis Group. Prior to joining Vernalis Group, Mr Worrall served as Finance
Director of Danby Medical, which was acquired by Baxter Healthcare Corporation
in 1993. He has over 22 years experience in the healthcare industry, including
seven years with Imed Corporation becoming general manager of its UK subsidiary
before founding his own company, Isys Medical, which he sold to Danby in 1991.
He received a Masters degree in economics from the University of St Andrews and
qualified as a chartered accountant with Arthur Andersen in 1980. Allan Baxter (54) Appointed to the Board as a Non-Executive Director in May 2004, Dr Baxter is
Senior Vice President, Drug Discovery at GlaxoSmithKline (GSK) with worldwide
responsibility for GSKs early stage portfolio of new chemical entities up to
the end of Phase II. Since the formation of GSK, he has led the drug discovery
activities within R&D, as well as organizational and process redesign of this
critical stage of the R&D process, with a resultant two-threefold increase in
drug discovery productivity. He graduated in Chemistry at the University of
Strathclyde and has a PhD in Biochemistry from the University of Glasgow. His
industry experience spans 24 years with Glaxo, Glaxo Wellcome and GSK, during
which time he has served on the Boards of Glaxo Wellcome Research and
Development Ltd, Affymax Technologies NV, Affymax Research Institute, the
Edward Jenner Institute for Vaccine Research, and Foundation Council of the
Swiss Institute for Bioinformatics. He is also currently a member of the
Scientific Advisory Board of ITI Life Sciences. Carol Ferguson (57) Carol Ferguson was appointed as a Non-Executive Director on September 1st,
2003. She joined the Board of Vernalis Group as a Non-Executive Director in May
2002. She began her investment career with Ivory and Sime, an Edinburgh fund
management group. Thereafter she moved to Wood Mackenzie then a stock broking
company, becoming a partner in 1984. Her most recent position was as Finance
Director for Timney Fowler, a textiles company. Her current appointments
include the Dental Practice Board, where she is a non-executive director and
chairs the Audit Committee, and the Chartered Accountants Compensation Scheme
where she is a non-executive director. She is also a non-executive director of
Gartmore Smaller Companies Investment Trust plc, Monks Investment Trust plc and
of the Association of Investment Trusts Companies. Ms Ferguson has a Masters
degree in Philosophy and Economics from St Andrews University and was admitted
as a member of the Institute of Chartered Accountants of Scotland in 1973. George Kennedy (63) Mr Kennedy was appointed as Deputy Chairman and Senior Independent Director on
September 1, 2003. He was Non-Executive Chairman of Vernalis Group from May
2000. He was previously with Smiths Industries PLC from 1973 to 2000, where he
was appointed to the board in 1983, becoming Executive Director and Chairman of
the Medical Division. His other current appointments include non-executive
chairman of Carclo PLC; Chairman of the Inprint Group, a privately held
specialist printing company; Chairman of Eschmann Holdings Limited, a
manufacturer of medical equipment and non-executive director of Isotron PLC. In
August 2000 he was appointed by the Department of Trade and Industry as
Chairman of the Trade Advisory Group for Africa and the Middle East. He was
awarded a CBE in 1997 for services to the healthcare industry and exports. Ian Kent (60) Appointed to the Board in April 2003 Mr Kent was Non-Executive Chairman of
RiboTargets. He is also a non-executive director of Biofocus plc and Chairman
of Ardana Bioscience Ltd, Intercytex Ltd, LGC Holdings Ltd and Etiologics Ltd. 47




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##### Table of Contents



Keith Merrifield (62) Appointed to the Board in 1995, Mr Merrifield was formerly a main Board
Director of Wellcome plc from 1990 until its acquisition in 1995 by Glaxo
Holdings plc, with responsibility for marketing and international operations.
Until May 2003, Mr Merrifield was also a non-executive director of Coats plc. Peter Read (65) Dr Read was appointed as a non-executive Director on September 1, 2003. He
joined the board of Vernalis Group as a Non-Executive Director in March 1998.
He is a former chairman of the Hoechst Group of Companies in the UK and a past
President of the Association of the British Pharmaceutical Industry. Current
appointments include Non-Executive Directorships of each of Celltech Group plc,
SSL International plc and Innogenetics Group. He is a Board Member of the South
East of England Development Agency and chairs its Business Board. He is a
Fellow of the Royal College of Physicians and of the Faculty of Pharmaceutical
Medicine. In January 2000 he was awarded a CBE for services to the
pharmaceutical industry. Eugene Williams (44) Appointed to the Board in January 2001, Mr Williams is also Senior Vice
President, Therapeutics and General Manager of immune mediated diseases at
Genzyme Corp. in the US. Mr Williams also sits on the Board of Directors of
Adheris, Inc. Board changes Mr Tim Edwards served as an Executive Director during the transition period
until he stepped down from the Board on September 10, 2003. B  Compensation The aggregate amount of compensation paid to all Directors of the Company as a
group by the Company and its subsidiaries for services in all capacities during
the transition period was £1,137,000. This amount includes directors fees,
salaries and bonus payments, but excludes amounts set aside or accrued to
provide pension, retirement or similar benefits. The aggregate amount set aside
or accrued to provide pension, retirement or similar benefits for Directors of
the Company by the Company and its subsidiaries during the transition period
was £104,000. The remuneration of each of the Directors who served during the transition
period in 2003 is set out below. For details regarding share options held by
directors, see Item 6F. Share Options. Performance-
    
    Compensation
    
    December
    
    April
    
    December
    
    Aprilrelated
    
    for loss
    
    2003
    
    2003
    
    2003
    
    2003Salary/fees
    
    Benefits
    
    bonus
    
    of office
    
    Total
    
    Total
    
    Pension
    
    Pension£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000ExecutiveDr P J Feller (Chairman)
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136
    
    
    37
    (iv)
    
    
    
    
    
    
    S J Sturge (CEO)
    
    
    200
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    209
    
    
    7
    (iv)
    
    
    38
    
    
    
    Dr J B Hutchison (ii), (v)
    
    
    59
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    11
    
    
    
    A J Weir
    
    
    120
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    225
    
    
    
    23
    
    
    
    31P B Worrall (ii), (v)
    
    
    75
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    14
    
    
    
    T P W Edwards (i)
    
    
    99
    
    
    
    5
    
    
    
    
    
    
    
    302
    
    
    
    406
    
    
    
    276
    
    
    
    18
    
    
    
    40Dr E P Goldstein (iii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    749
    
    
    
    
    
    
    
    40689
    
    
    
    31
    
    
    
    
    
    
    
    302
    
    
    
    1,022
    
    
    
    1,294
    
    
    
    104
    
    
    
    111
 48




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##### Table of Contents



Performance-
    
    Compensation
    
    December
    
    April
    
    December
    
    Aprilrelated
    
    for loss of
    
    2003
    
    2003
    
    2003
    
    2003Salary/fees
    
    Benefits
    
    bonus
    
    office
    
    Total
    
    Total
    
    Pension
    
    Pension£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000Non ExecutiveC C Ferguson (ii), (v)
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    I F Kent
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    2
    
    
    
    
    
    
    
    G M Kennedy (ii), (v)
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    K J Merrifield
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    23
    
    
    
    
    
    
    
    Dr P R Read (ii), (v)
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    E W Williams
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    23
    
    
    
    
    
    
    
    C Hampson (iii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    Dr P A Nicholson (iii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    P G Rogerson (iii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    146
    
    
    
    
    
    
    
    Total
    
    
    804
    
    
    
    31
    
    
    
    
    
    
    
    302
    
    
    
    1,137
    
    
    
    1,440
    
    
    
    104
    
    
    
    111
  (i)
    
    Remuneration from May 1, 2003 to September 26, 2003 (date of resignation
as director September 10, 2003). Compensation for loss of office was paid
in cash and was based on his 12-month notice period. In addition to the
compensation for loss of office, an amount of £150,000 was paid in respect
of consultancy provided by Mr Edwards following his resignation.(ii)
    
    Remuneration from date of appointment, September 1, 2003.(iii)
    
    Remuneration from May 1, 2002 to date of resignation.(iv)
    
    Remuneration from date of appointment to April 30, 2003.(v)
    
    During the period (and for the year ended April 30, 2003 the remuneration
paid by Vernalis Group to the Directors of Vernalis is set out below. Performance-
    
    Compensation
    
    December
    
    April
    
    December
    
    Aprilrelated
    
    for loss of
    
    2003
    
    2003
    
    2003
    
    2003Salary/fees
    
    Benefits
    
    bonus
    
    office
    
    Total
    
    Total
    
    Pension
    
    Pension£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000P B Worrall (vi)
    
    
    76
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    99
    
    
    
    226
    
    
    
    
    
    
    
    Dr J B Hutchison (vii)
    
    
    52
    
    
    
    5
    
    
    
    23
    
    
    
    
    
    
    
    80
    
    
    
    201
    
    
    
    8
    
    
    
    18G M Kennedy
    
    
    18
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    68
    
    
    
    55
    
    
    
    
    
    
    
    Dr P R Read
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    39
    
    
    
    
    
    
    
    C C Ferguson
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    39
    
    
    
    
    
    
    
    168
    
    
    
    5
    
    
    
    96
    
    
    
    
    
    
    
    269
    
    
    
    560
    
    
    
    8
    
    
    
    18
  (vi)
    
    On September 1, 2003 16,137 Ordinary shares of 10 pence each in Vernalis
Group awarded to Mr Worrall under that companys Restricted Share Scheme
vested and were transferred to him.(vii)
    
    Dr Hutchisons performance-related bonus includes £5,250 under-accrued
in the previous accounting period. Comparatives have not been restated for
this. During the transition period (and for the year ended April 30 2003), the
remuneration paid by Vernalis Group to other Directors of that company is set
out below. 49




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##### Table of Contents



Performance-
    
    Compensation
    
    December
    
    April
    
    December
    
    Aprilrelated
    
    for loss
    
    2003
    
    2003
    
    2003
    
    2003Salary/fees
    
    Benefits
    
    bonus
    
    of office
    
    Total
    
    Total
    
    Pension
    
    Pension£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000Dr C T Dourish (viii)
    
    
    57
    
    
    
    6
    
    
    
    12
    
    
    
    
    
    
    
    75
    
    
    
    223
    
    
    
    16
    
    
    
    14R G Mansfield (ix)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    Sir William Asscher
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    M E Jaffe
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    32
    
    
    
    
    
    
    
    85
    
    
    
    6
    
    
    
    12
    
    
    
    
    
    
    
    103
    
    
    
    1,018
    
    
    
    16
    
    
    
    14
  (viii)
    
    Dr Dourishs performance-related bonus includes an adjustment for £5,950
over-accrued in the previous accounting period. Comparatives have not been
restated for this.(ix)
    
    In September 2003, Mr Mansfield realized a gain of £9,687 on the exercise
of 101,964 share options in Vernalis Group plc with an exercise price of
59 pence per share. Total emoluments of the highest-paid Director, excluding pension contributions,
amounted to £406,000 (April 2003: £749,000). Pension contributions made during
the period for the highest-paid Director were £18,000 (April 2003: £40,000).
The Companys policy is not to pay an expense allowance to Directors. Total amounts set aside or accrued during fiscal 2003 to provide pension
contributions to directors amounted to £104,000. C  Service Contracts All Executive Directors hold service contracts with Vernalis. The Companys
policy in entering into service contracts with Executive Directors, including
the Chairman, is to enable the recruitment of high-quality executives and to
obtain protection from their sudden departure to competitor companies. In
addition, service contracts are an important element in maintaining maximum
protection for the Groups intellectual property rights and other commercially
sensitive information. All service contracts are approved by the Committee and
are one-year rolling contracts. Each service contract may be terminated by
mutual agreement or by either party giving 12 months notice to the other. If an
Executive Director is guilty of serious misconduct, serious breach (after due
warning) or persistent breach of failure to carry out his duties then the
Company is entitled summarily to terminate his service contract without notice
and without paying compensation in respect of that termination. Should an
Executive Director be dismissed he would receive a sum equal to 12 months pay
and benefits (unless for gross misconduct, or the like, where no payments would
be made). The service agreements of Dr Fellner and Mr Sturge were made on March 21, 2003
and came into effect on completion of the acquisition of RiboTargets Holdings
plc on April 23, 2003. The service agreement of Mr Weir was made on June 24,
1999. The service agreements of Dr Hutchison and Mr Worrall were made on July
2, 2003 and came into effect on the offer to acquire the entire issued share
capital of Vernalis Group plc becoming unconditional on September 1, 2003. Mr Edwards service agreement was made on June 24, 1999. Mr Edwards resigned
from the Board on September 10, 2003, and ceased employment on September 26,
2003. Mr Edwards received a compensation payment for loss of office. He has
subsequently provided consulting services to the Company for which he received
£150,000. Each executive director other than Dr Fellner is entitled to terminate his
employment at any time within the six months after a Change of Control of the
Company (as defined below for this purpose) by giving to the Company not less
than 30 days prior notice in writing. Upon such termination, or upon
termination without notice by the Company during the six month period, he shall
be entitled to receive a payment by way of liquidated damages equal to 12 times
his then monthly salary. Change of Control shall take place on the date on
which one person or a group of persons acting in concert holds, directly or
indirectly any shares in the Company which carry 50 per cent or more of the
then voting rights of the Company. Dr Fellners service agreement does not
contain any provisions relating to change of control of the Company. The
agreement with each executive director provides that if before the expiration
of the agreement his employment is terminated as part of any arrangements for
the amalgamation of the Company the executive director shall be offered
employment with the amalgamated company for a period of not less than the
unexpired term of his service agreement and in terms not less favorable than
the terms of his existing service agreement. D  Board Practices The Company is committed to practicing good corporate governance of its affairs
as part of its management of relationships with its shareholders and other
stakeholders. The Company seeks to uphold, and to report on compliance 50




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with, best practice in corporate governance. The Public Company Accounting
Reform and Investor Act of 2002, also known as the Sarbanes-Oxley Act of 2002,
was enacted on July 30, 2002 and contains significant new rules on corporate
governance for US and foreign companies reporting in the United States,
especially in the area of audit committee composition and authority. The Company is closely monitoring SEC rulemaking pursuant to the Sarbanes-Oxley
Act of 2002 to ensure its compliance with rules as they become applicable to
the Company as a foreign private issuer The Board The Board of the Company is responsible for the Groups system of corporate
governance. The Board currently comprises 12 Directors: an Executive Chairman,
Dr P J Fellner; a Chief Executive Officer, Mr S J Sturge, three other Executive
Directors and seven Non-Executive Directors. The role of Non-Executive
Directors is to ensure that independent judgment is brought to Board
deliberations and decisions. The Non-Executive Directors possess a wide range
of skills and experience, relevant to the development of the Company, which
complement those of the Executive Directors. All Non-Executive Directors are
considered by the Board to be independent under applicable UK corporate
governance standards. Mr G M Kennedy, Deputy Chairman, is currently the
Companys Senior Independent Director; Mr K J Merrifield was Senior Independent
Director until September 1, 2003 Companies are recommended to have a Senior
Independent Director by the guidance given by the Financial Services Authority
in the UK. The Senior Independent Director is available to shareholders if they
have concerns which contact through the normal channels of Chairman, Chief
Executive Officer, or Chief Financial Officer fails to resolve or for which
such contact is inappropriate. The Chairman was also Chairman of Celltech Group plc throughout the transition
period. All Directors are required to retire and submit themselves for re-election at
the first Annual General Meeting after appointment and at least every three
years. Subject to their re-election and Companies Act provisions, the
Non-Executive Directors are appointed for specified terms. The Board has agreed procedures for Directors to follow if they believe they
require independent professional advice in the furtherance of their duties and
these procedures allow the Directors to take such advice at the Companys
expense. In addition, all the Directors have direct access to the impartial
advice and services of the Company Secretary. The Company Secretary is
accountable to the Board through the Chairman on governance matters. It is the
responsibility of the Company Secretary to ensure that Board procedures are
followed and all rules and regulations are complied with. Under the direction
of the Chairman, the Company Secretarys responsibilities include facilitating
induction and professional development, and ensuring the smooth flow of
information within the Board and its committees, and between Non-Executive
Directors and senior management. Removal of the Company Secretary is a matter
that is specifically reserved for the Boards consideration. Any new Director
receives a comprehensive, formal and tailored induction into the Companys
operations. Appropriate training is provided to new Directors and is also
available to other Directors as required. The terms of reference of the Chairman and Chief Executive Officer have been
agreed with the Board and, in accordance with best practice, their roles remain
separate. These terms of reference were reviewed in light of the Chairman
assuming executive responsibilities on April 23, 2003, and were revised in
January 2004. As part of its leadership and control of the Company, the Board has agreed a
list of items that are specifically reserved for its consideration. This list
was revised in January 2004. These include business strategy, financing
arrangements, material acquisitions and divestments, approval of the annual
budget, major capital expenditure projects, risk management, treasury policies
and establishing and monitoring internal controls. At each meeting, the Board
reviews strategy and progress of the Group towards its objectives, particularly
in respect of research and development projects, and monitors financial
progress against budget. The Board meets on a regular basis approximately every two months, with
additional meetings when circumstances and urgent business dictate. In the
transition period, five meetings of the full Board were held and six of a Board
committee established in connection with the merger of British Biotech plc and
Vernalis Group plc to form Vernalis plc. There has been full attendance by
directors at each of these five full Board meetings. All Directors receive an
agenda and board papers in advance of meetings so that they can make an
effective contribution at the meeting. In addition, regular informal contact is
maintained with Non-Executive Directors. The Board makes full use of
appropriate technology as a means of updating and informing all its members. While the Board retains overall responsibility for, and control of, the
Company, day-to-day management of the business is conducted by the Executive
Directors. Review of the Groups principal projects is the responsibility of
the management team, which meets every week and comprises the Executive
Directors and certain senior employees. 51




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Board Committees In accordance with best practice, the Company has established Audit,
Nominations & Corporate Governance and Remuneration Committees with written
terms of reference for each that deal with their authorities and duties. The
Board has also established an independent Safety Review Board. Audit Committee The Audit Committee is made up entirely of Non-Executive Directors. During the
transition period it was chaired by Mr Kent with Mr Williams, Mr Merrifield
(until September 18, 2003), Ms Ferguson, Mr Kennedy and Dr Read (all from
September 18, 2003) as its other members. Ms Ferguson succeeded Mr Kent as
Chair as from January 21, 2004. The Audit Committee is responsible for
reviewing the Groups annual accounts and interim reports prior to their
submission for approval to the full Board. The Audit Committee also monitors
the Groups accounting policies, internal financial control systems and
financial reporting procedures. The Audit Committee provides a forum through
which the Groups external auditors report to the Board and meets at least once
a year with the auditors in the absence of executive management. The Audit
Committee also monitors the scope and the results of the audit, the
independence and objectivity of the auditors and their performance, confirms
their re-appointment, agrees the level of audit fees, and monitors the
provision by the auditors of non-audit services. The Audit Committee held five
meetings during the period under review. Mr Williams was unable to attend two
of these meetings but save for that all members attended all five meetings. Nominations and Corporate Governance Committee The Nominations and Corporate Governance Committee was chaired by Mr Merrifield
until September 18, 2003 and thereafter has been chaired by Mr Kennedy (who
also become a member from that date). The other current members are Dr Fellner,
Mr Sturge (from September 18, 2003) and Dr Read (from September 18, 2003). Mr
Williams was a member during the transition period until September 18, 2003.
The Committee is responsible to the full Board for determining the qualities
and experience required of the Companys Executive and Non-Executive Directors
and for identifying suitable candidates. In appropriate cases, recruitment
consultants assist in the process. The Committee is also responsible for
succession planning and for reviewing, and making recommendations in relation
to, the Companys corporate governance procedures. The Nominations and
Corporate Governance Committee met once during the period under review and all
members attended. Remuneration Committee The Remuneration Committee is made up entirely of Non-Executive Directors and
is chaired by Mr Merrifield with Mr Williams, Mr Kent and Mr Kennedy (from
September 18, 2003) and Dr Read (from September 18, 2003) as its other members.
The Remuneration Committee determines the terms of service and remuneration of
the Executive Directors and senior employees. It also determines overall
remuneration policy for all other employees and targets for performance-related
pay schemes operated by the Company. The Remuneration Committee held four
meetings during the period under review and all members attended all such
meetings. Exemptions from Corporate Governance Listing Requirements Under the NASDAQ
Marketplace Rules In connection with the listing of the Companys ordinary shares in the United
States in July 1992, the Company received an exemption with respect to the
quorum requirement under Rule 4350(f), which requires each issuer to provide
for a quorum as specified in its by-laws for any meeting of the holders of
common stock, which shall in no case be less than 33 1/3 per cent of the
outstanding shares of a companys common voting stock. The Companys articles
of association provide that a quorum for a general meeting of the Company is
constituted by two or more shareholders present in person and entitled to vote,
except in the case of adjourned meetings where the quorum is one member present
in person or by proxy. This quorum requirement is in accordance with U.K. law
and generally accepted business practices in the United Kingdom. The Company
also obtained an exemption from Rule 4350(g), which requires the solicitation
of proxies for all meetings of shareholders. The Company complies with the
requirements of UK law and the Listing Rules (Listing Rules) of the UK Listing
Authority (UKLA), which require the issue to all registered members of the
Company of proxy forms in respect of all resolutions to be proposed at a
general meeting of the Company. The proxy forms must be issued with notice of
the meeting and must be returned by the shareholder to be received at least 48
hours before the relevant meeting or 24 hours before a poll is taken, if the
poll is not taken on the same day as the meeting or adjourned meeting. The Company also filed with NASDAQ an application for exemption from the
recently adopted NASDAQ requirements relating to: (i) composition of the
remuneration and nominations committees entirely by independent directors under
Rule 4350(c) in conjunction with Rule 4200(15) (c); (ii) composition of the
audit committee entirely by independent directors under Rule 4350(d) in
conjunction with Rule 4200(15), but not with respect to the independence
criteria prescribed in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934;
(iii) a minimum of two executive meetings of the Board of Directors
independent directors under Rule 4350(c); (iv) audit committee approval of
related party transactions under Rule 4350(h); (vi) shareholder approval for
certain issuances of the Companys ordinary shares under Rule 4350(i). This
application was filed in accordance with Rule 4350(a). The application is
pending. 52




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With respect to independence of Directors, under UK law and practice, Mr
Kennedy, one of the Companys directors and a member of the Audit, Remuneration
and Nominations and Corporate Governance Committees, can be regarded by the
Board as an independent director despite the payment of £50,000 made to him in
connection with the merger between the Company and Vernalis Group that renders
him non-independent under Rules 4350(c) and 4350(d) in conjunction with Rule
4200(15). Consequently, under the Combined Code, both the Companys
Remuneration and Audit Committees are comprised entirely of independent
Non-Executive Directors, however, under NASDAQ requirements and Rules 4350(c)
and 4200(15) that would not be the case because of Mr Kennedys membership of
both committees. In addition, the membership in the Nominations and Corporate
Governance Committee of Mr Kennedy, as well as Dr Fellner and Mr Sturge, two
Executive Directors, is in accordance with the Combined Code requiring a
majority of non-executive directors. The Company believes that the current representation of Directors in the
Nominations and Corporate Governance Committee, the Audit Committee and the
Remuneration Committee permits the Board to have a thorough understanding of
executive matters while at the same time benefiting from the contribution of
independent insights into the Groups business and corporate governance. In
addition, the Board has agreed procedures for Directors to follow if they
believe they require independent professional advice in the furtherance of
their duties and these procedures allow directors to take such advice at the
Companys expense. Non-Executive Directors also maintain regular informal
contact (UK law does not currently require separate meetings of non-executive
directors). Under the Companys Articles of Association, a Director is not permitted
(subject to certain exceptions) to vote as a Director on any contract,
transaction, arrangement or other kind of proposal in which he has an interest
and which he knows is material. Under UK legislation, a director who is in any
way, whether directly or indirectly, interested in a contract or proposed
contract with the company must declare the nature of his interest at a meeting
of the directors. Under the U.K. Listing Authority Listing Rules, where a
transaction is proposed between a listed company or any of its subsidiary
undertakings and a related party, prior shareholder approval is generally
required, subject to certain exceptions. The related party is not permitted to
vote at the meeting. Under UK company law, certain substantial property
transactions (involving non-cash assets) between the Company and a director or
a person connected with him will, if of the requisite value, need prior
shareholder approval. Under the Listing Rules, equity compensation plans which involve or may involve
the issue of new shares or the transfer of treasury shares and certain material
amendments thereto must receive prior shareholder approval. Under UK law and
practice there are several circumstances where shareholder approval is required
before a listed company can issue new shares. Under the UK Takeover Code, which
regulates the takeover of companies listed on the London Stock Exchange, if a
person or persons acting in concert acquire shares in a listed company which
carry 30 per cent or more of the voting rights, that person is required to make
a takeover offer for all the shares of the listed company. However, where the
listed company issues new shares in itself as consideration for an acquisition
such that a person or persons acting in concert hold more that 30 per cent of
the voting rights, the UK Takeover Panel will normally waive the obligation
which would otherwise arise for such person to make a takeover offer if the
independent shareholders of the company approve the share issue. The Listing
Rules require the prior approval of shareholders for a reverse takeover
(which includes an acquisition by a listed company of a business, unlisted
company or assets which would result in a change in voting control of the
listed company). Under UK law, if a company needs to create additional
authorized share capital for a proposed new issue then the prior approval of
shareholders is required. Under UK law, any allotment of relevant securities
requires authority to be given to the companys directors either by the
companys articles of association or by the shareholders. For listed companies,
guidelines which are customarily and generally followed state that the amount
of share capital which can be allotted by the directors without going back for
a fresh shareholder approval is restricted to the lesser of one third of the
issued ordinary share capital and the unissued but authorized share capital. In
addition, under UK law, any issue of equity securities wholly for cash must be
made on a pre-emptive basis unless shareholders approve the disapplication of
the relevant provisions of UK company legislation. For listed companies,
guidelines which are customarily and generally followed state that a any
disapplication, without going back to shareholders for a specific authority, be
limited to five per cent of the equity share capital in issue at the date of
the last audited accounts and impose a cumulative limit, again without going
back to shareholders, of 7.5 per cent in any three year rolling period.
Furthermore, there are Listing Rules and institutional guidelines relating to
the price of a new issue, in certain circumstances. These are prohibitions and
guidelines, rather than a requirement for shareholder approval: (i) the Listing
Rules provide that the offer price on a vendor placing (a placing of new listed
equity shares of an existing class, issued as consideration for the sale to the
company of assets or stock by a vendor) should not be at a discount of more
than 10 per cent to the middle market price unless the UKLA permits otherwise;
(ii) there are institutional guidelines, customarily and generally followed,
that on a vendor placing, where more than 10 per cent of the issued equity
share capital is being placed or the shares are being placed at a discount of
more than five per cent to the market price, existing shareholders should have
a 100 per cent clawback arrangement (i.e. shares are placed, but subject to
clawback for existing shareholders on a pre-emptive basis); (iii) the Listing
Rules provide that on an open offer (an offer on a pre-emptive basis to
existing shareholders for cash, but with no nil paid trading) the offer price
should not be at a discount of more than 10 per cent to the middle market
price, unless the UKLA is satisfied that the issuer is in severe financial
difficulties or there are other exceptional circumstances; and (iv) the Listing
Rules provide that the placing price on a placing of listed equity securities
of an existing class may not be at a discount of more than 10 per cent to the
middle market price, unless the UKLA is satisfied that the issuer is in severe
financial difficulties or there are other exceptional circumstances. 53




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The Company does not currently have a code of conduct for directors and
employees in accordance with Rule 4350(n). The Company is in the process of
conducting a survey of the existing policies applicable to employees and
directors of the three entities, the Company (formerly British Biotech plc),
Vernalis Group and RiboTargets Holdings plc, that were combined during 2003 to
form the current Group, and intends to adopt a code of conduct for all
directors and employees in accordance with Rule 4350(n). Safety Review Board The Safety Review Board provides an independent technical review and monitoring
of the development programs of the Company to ensure that appropriate
risk-benefit analysis is carried out for clinical testing and trials. E  Employees At December 31, 2003, Vernalis employed 151 full-time employees. Of these, 44
were PhDs or held other post-graduate qualifications. Additional post-merger
restructuring is continuing to take place to reduce the cost base of the
business and plans are in hand to reduce headcount further to approximately 110
during H1 2004. The Company employs a number of temporary employees in Research and
Development, Facilities and Biometrics and IT divisions. During the last fiscal
year, the average number of temporary employees was seven. The following table summarizes the number of full-time employees employed by
the Group, including Executive Directors, as at the year end of the last three
fiscal years: Year ended April 30,
    
    
    Eight monthperiod endedDecember 31,Division
    
    2001
    
    2002
    
    2003
    
    2003Research and Preclinical
    
    
    164
    
    
    
    126
    
    
    
    148
    
    
    
    102Regulatory Affairs, Quality and Clinical Research
    
    
    25
    
    
    
    15
    
    
    
    15
    
    
    
    7Project Management
    
    
    14
    
    
    
    16
    
    
    
    14
    
    
    
    8Biometrics and IT
    
    
    23
    
    
    
    19
    
    
    
    22
    
    
    
    8Business Development
    
    
    7
    
    
    
    5
    
    
    
    5
    
    
    
    3Corporate Services
    
    
    27
    
    
    
    27
    
    
    
    38
    
    
    
    15Facilities Engineering
    
    
    15
    
    
    
    11
    
    
    
    11
    
    
    
    4Directorate
    
    
    12
    
    
    
    10
    
    
    
    9
    
    
    
    4Total
    
    
    285
    
    
    
    229
    
    
    
    262
    
    
    
    151
 From April 30, 2001 until April 23, 2003 all employees have been employed in
Oxford, UK and from April 23, 2003 also in Cambridge, UK. Following the merger
between the Company and Vernalis Group plc a number of employees are employed
in Winnersh, Reading while the Groups Oxford facilities are being wound up. The combined headcount is forecast to be approximately 120 by the end of fiscal
2004. The increase beyond 110 is as a result of the reacquisition of the North
American rights for frovatriptan. The retained employees possess the skills and
experience necessary for the business to focus on development of the product
portfolio and research programs. On September 28, 2001, as a result of the transfer of part of the Companys
pre-clinical research facilities to OSI Pharmaceuticals, Inc. (OSI), permanent
full-time headcount had been reduced to 87 employees, with 58 employees having
been transferred to OSI. On March 18, 2003, as a part of contractual
arrangements with Evotec OAI 17 permanent employees transferred to Evotec OAI
reducing the permanent headcount at that time to 73. A significant number of the Groups management and professional employees have
had prior experience with pharmaceutical, biotechnology or medical product
companies. Vernalis believes that it has been successful in attracting skilled
and experienced scientific personnel. However, competition for such personnel
is intense. None of the Groups employees are covered by collective bargaining
agreements and no employee is represented by a trade union. The Companys philosophy is to encourage open discussion of progress and to
communicate its corporate aims effectively. Employees are encouraged to
identify closely with the Company through participation in share option
schemes, regular departmental meetings and informal meetings with management
and formal employee representation forums. As a result, management considers
relations with its employees to be good. 54




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F  Share Options The Company currently operates two share option schemes, the Discretionary
Share Option Plan and New SAYE Plan, under which grants of options may be made.
Option incentive arrangements under the British Biotech Group 1992 share Option
Scheme (the 1992 Scheme), the Discretionary Executive Share Option Scheme
(the Executive Scheme); the British Biotech SAYE Share Option Scheme (the
SAYE Scheme) and the British Biotech Deferred Share Bonus Scheme (the Bonus
Scheme) remain in place but will not be operated again. The total number of
shares that have been, or may be issued in pursuance of rights granted after
September 18, 1996, under the Share Option Plan, SAYE Plan, Executive Scheme,
the SAYE Scheme and the Bonus Scheme may not exceed 10 per cent of the issued
share capital of the Company at any time. In addition, the Company has entered into an option deed in favor of the
Chairman (see section below). Following the Rights Issue in May 1994, the exercise price of all outstanding
options was multiplied by a factor of 5496/5864 with a corresponding increase
in the number of shares under option. Following the Rights Issue in June 1996,
the exercise price of all outstanding options was multiplied by a factor of
21,050/21,375 with a corresponding increase in the number of shares under
option. Following the capitalization issue in July 1996, the exercise price of
all outstanding options was reduced by a factor of 10 with a corresponding
increase in the number of shares under option. Following the Capitalization in
April 2003, the exercise price of all outstanding options was multiplied by a
factor of twenty with a corresponding decrease in the number of shares under
option. These adjustments were in accordance with Inland Revenue regulations,
confirmed as reasonable by the Companys auditors and approved by the Inland
Revenue. The 1992 Schemes The price payable by a participant on the exercise of an option under the
Original Schemes may not be less than the higher of the nominal value of an
Ordinary Share and its market value on the date on which an invitation to apply
was issued. Under the 1992 Scheme, two classes of options, Ordinary Options and Special
Options, could be granted to employees. Ordinary Options will normally be
exercisable in whole or in part not earlier than three years and not later than
10 years after grant. Prior to exercise, Ordinary Options are subject to the
satisfaction of a performance condition that the increase in the share price
has exceeded the corresponding increase in the retail price index over the same
period. Special Options were issued on the same terms as the Ordinary Options
save that they cannot be exercised until five years after their issue. In
addition, they are subject to the more stringent performance condition that the
increase in the Companys share price must outperform the return from the FT-SE
Actuaries Total Return Index for Pharmaceutical Companies over the same period. Under the 1992 Schemes, the early exercise of options is permitted in certain
circumstances. These are: (i) if the participants employment ends as a result
of death, ill health, injury, disability, redundancy or in any other case where
the Committee so decides; (ii) if the company by which the participant is
employed, or the business in which he works, is sold outside the Group; or
(iii) if the participant ceases employment by reason of retirement on or after
the date at which he is bound to retire in accordance with the terms of his
contract of employment. Except in these circumstances, options will normally
lapse if the participant ceases to be employed by the Group. The exercise of
options will also be permitted in the event of a change in control, a
reorganization, an amalgamation or a voluntary winding up of the Company. In
the event of a change in control of the Company, participants may surrender
their options in consideration of the grant of substitute options for shares in
the acquiring company. As of December 31, 2003, options, including Special Options, over a total of
36,745 Ordinary Shares were outstanding under the Original Schemes. Such
options have exercise prices between £7.19 and £16.39 and exercise periods
expiring between July 2004 and October 2005. Executive Scheme Participation in the Executive Scheme is limited to employees and full-time
Directors (that is, those required to devote not less than 25 hours a week to
the performance of duties) of the Company and its subsidiaries. Options are
non-transferable. Options may normally only be granted in the six weeks
following the announcement of the results of the Company for any period. No
options may be granted more than 10 years after the approval of the Executive
Scheme by shareholders on September 18, 1996. The exercise price may not be
less than the higher of: (i) the market value (determined in accordance with
the Taxation of Chargeable Gains Act 1992) of an Ordinary Share on the date of
grant; and (ii) the nominal amount of an Ordinary Share. Where the Ordinary
Shares are listed on the London Stock Exchange, the market value of an Ordinary
Share will be taken to be the middle market quotation of an Ordinary Share, as
derived from the London Stock Exchange Daily Official List, on the date of
grant. Participants may be granted both Ordinary Options and Special Options under the
Executive Scheme. Ordinary Options will normally be exercisable in whole or in
part not earlier than three years and not later than 10 years from the date of
grant. Ordinary Options are subject to satisfaction of a performance condition
prior to exercise. They will only become exercisable if the return to the
Companys shareholders over a three year period exceeds the total shareholder
return of 55




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the median FT-SE 100 company. The Special Options are issued on the same terms
as the Ordinary Options save that they are subject to a more stringent
performance target and, in addition, cannot be exercised until five years after
their issue. Special Options will only be exercisable if the return to the
Companys shareholders over a five-year period equals or exceeds the upper
quartile FTSE 100 performance. The maximum number of Ordinary Shares over which an employee may be granted a
Special Option on any date, when added to those in respect of which he has been
granted Special Options in the previous five years under the Executive Scheme
and any other executive share option scheme adopted by the Company, shall be
limited so that the aggregate cost does not exceed four times remuneration. The
maximum number of Ordinary Shares over which an employee may be granted an
Ordinary Option on any date, when added to those in respect of which he has
been granted options (excluding Special Options) in the previous five years
under the Executive Scheme and any other executive share option scheme adopted
by the Company, shall be limited so that the aggregate cost does not exceed
four times remuneration. Remuneration, for this purpose, is the higher of the
total remuneration (excluding benefits in kind) expressed as an annual rate
payable by the Group and the total remuneration (excluding benefits in kind)
received by the participant in any period of 12 months ending within the
preceding two years in respect of his or her employment with the Group. Shortly after joining the Group, a participant may be granted options that are
designated as Recruitment Options. Recruitment Options are disregarded when the
above individual limits are considered but are included in the limits on the
overall number of shares that may be placed under option. Options will normally be exercisable in whole or in part no earlier than three
years (five years in the case of Special Options) and not later than 10 years
after grant. The exercise of options will, however, be permitted (subject to
the satisfaction of the performance condition): (i) if the participants
employment ends as a result of death, ill-health, injury, disability or
redundancy or in any other case where the Committee so decides; (ii) if the
company by which the participant is employed, or the business in which he
works, is sold outside the Group; or (iii) if the participants employment ends
by reason of retirement on or after reaching the age at which he is bound to
retire in accordance with the terms of his contract of employment. Except in
these circumstances, options will normally lapse if the participant ceases to
be employed by the Group. The exercise of options will also be permitted in the
event of a change in control, a reorganization, an amalgamation or a voluntary
winding up of the Company. In the event of a change in control of the Company,
participants may surrender their options in consideration of the grant of
substitute options for shares in the acquiring company. As of December 31, 2003, options, including Special Options, over a total of
249,872 Ordinary Shares were outstanding under the Executive Scheme. Such
options have exercise prices between £4.40 and £42 and exercise periods expiring
between December 2006 and January 2010. Bonus Scheme Participation in the Bonus Scheme is limited to employees and full-time
directors (that is, those requested to devote not less than 25 hours a week to
the performance of their duties) of the Company and its subsidiaries. Awards
are non-transferable. Awards may normally only be granted in the six weeks
following the announcement of the results of the Company for any period. No
awards may be made more than 10 years after approval of the Bonus Scheme by
shareholders on September 18, 1996. Awards under the Bonus Scheme consist of an
option to purchase shares at not less than their nominal value. The principal purpose for the introduction of the Bonus Scheme was to replace
the previous cash bonus plan for senior managers. Under the arrangements, half
of each participants annual bonus consists of an award under the Bonus Scheme. The other half will be paid in cash unless the participant elects to take that
half (or a proportion thereof) in deferred share rights in which case a further
award will be made to him which matches (on a one-for-one basis before
taxation) the number of shares subject to those rights. Awards will normally be exercisable between two and seven years after they are
granted. The exercise of awards will, however, be permitted: (i) if the
participants employment ends as a result of death, ill health, injury,
disability or redundancy; (ii) if the company by which the participant is
employed, or the business in which he works, is sold outside the Group; or
(iii) if the participants employment ends by reason of retirement on or after
reaching the age at which he is bound to retire in accordance with the terms of
his contract of employment. The exercise of awards will also be permitted in
the event of a change of control, a reorganization, an amalgamation or a
voluntary winding up of the Company. In the event of a change in control of the
Company, participants may surrender their awards in consideration for the grant
of substitute awards for shares in the acquiring company. Other than in the
case of death, if the award is exercised prior to two years after the date of
grant then the award is exercisable as to the proportion of the time elapsed
from the date of grant to two years. Except in these circumstances, awards will
normally lapse if the participant ceases to be employed by the Group. Grants of options under the Bonus Scheme in fiscal 2003, fiscal 2002 and fiscal
2001 were made conditional upon the 56




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##### Table of Contents



meeting of certain performance criteria, with the performance criteria being
more demanding with increased seniority. Such conditions and performance
criteria for fiscal 2003, fiscal 2002 and fiscal 2001 were agreed by the
Committee and relate to the market value of an Ordinary Share reaching
specified levels in order that certain tranches of options become exercisable. As of December 31, 2003, awards over a total of 502,839 Ordinary Shares were
outstanding under the Bonus Scheme. All awards have an exercise price of £1 and
have exercise periods expiring between April 2004 and January 2010. Save As You Earn (SAYE) Scheme All UK resident employees (including full-time Directors) working 16 hours or
more per week who have one years (or such lesser period as the Directors may
decide) continuous service with the Company, or any subsidiary nominated to
join in the SAYE Scheme, are eligible to apply for options to acquire (whether
by purchase or subscription) Ordinary Shares under the SAYE Scheme. Other
employees may be invited to participate at the Directors discretion. Options are not transferable. The first invitation to apply for options was
issued following approval of the SAYE Scheme by the UK Inland Revenue.
Subsequent invitations to apply for options may normally only be issued in the
period beginning three weeks before, and ending six weeks after, the
announcement of the interim or final results of the Group. No payment will be
required for the grant of an option. No options may be granted more than 10
years after the first grant of options under the SAYE Scheme. The exercise
price may not be less than the higher of: (i) an amount equal to 80 per cent of
the market value (determined in accordance with the UK Taxation of Chargeable
Gains Act 1992) of an Ordinary Share; and (ii) in the case of options to
subscribe for shares, the nominal amount of an Ordinary Share. Where the
Ordinary Shares are listed on the London Stock Exchange, the market value of an
ordinary Share will be taken to be the arithmetic average of the middle market
quotations of an Ordinary Share, as derived from the London Stock Exchange
Daily Official List, for three consecutive dealing days selected by the
Directors in the thirty-day period immediately preceding the date of grant. The
first invitation to apply for options was made at a price of 345p per Ordinary
Share and the second invitation to apply for options was made at a price of
300p per Ordinary Share: these prices were subsequently adjusted to 323p per
share and 281p per share, respectively, to reflect the bonus element of the
1994 Rights Issue. The third invitation to apply for options was made at a
price of 290p per Ordinary Share and the fourth invitation at 370p per Ordinary
Share. The prices of the first four invitations were subsequently adjusted to
31.8p per share, 27.7p per share, 28.6p per share and 36.4p per share,
respectively, to reflect the bonus element of the 1996 Rights Issue and the
Capitalization Issue in 1996. The fifth invitation to apply for options was
made in July 1996 at a price of 186p per Ordinary Share. The sixth invitation
to apply for options was made in July 1997 at a price of 140p per Ordinary
Share. The seventh invitation to apply for options was made in July 1998 at a
price of 28p per Ordinary Share. The eighth invitation to apply for options was
made in July 1999 at a price of 20p per Ordinary Share. No invitations to apply
for options have been made since July 1999. The aggregate maximum monthly contribution payable by an employee under all
SAYE contracts linked to the SAYE Scheme may not exceed such sum as may from
time to time be permitted by the UK Income and Corporation Taxes Act 1988 and
approved by the Directors. The first invitation to apply for options was made
in August 1992 and was taken up in respect of 145,241 Ordinary Shares. The
second invitation was made in July 1993 and was taken up in respect of 70,178
Ordinary Shares. The third invitation was made in July 1994 and was taken up in
respect of 139,142 Ordinary Shares. The fourth invitation was made in July 1995
and was taken up in respect of 116,229 Ordinary Shares. Following the 1994
Rights Issue, the exercise price of all outstanding options was reduced by a
factor of 5496/5864 with a corresponding increase in the number of shares under
option. Following the 1996 Rights Issue, the exercise price of all outstanding options
was multiplied by a factor of 21,050/21,375 with a corresponding increase in
the number of Ordinary Shares under option. Following the Capitalization Issue
in July 1996, the exercise price of all outstanding options was reduced by a
factor of 10 with a corresponding increase in the number of Ordinary Shares
under option. These adjustments were in accordance with Inland Revenue
regulations, confirmed as reasonable by the Companys auditors and approved by
the Inland Revenue. The fifth invitation was made in July 1996 and was taken up
in respect of 431,777 Ordinary Shares. The sixth invitation was made in July
1997 and was taken up in respect of 755,984 Ordinary Shares. The seventh
invitation was made in July 1998 and was taken up in respect of 2,692,065
Ordinary Shares. The eighth invitation was made in July 1999 and was taken up
in respect of 1,313,010 Ordinary Shares. Following the Capitalization in April 2003, the exercise price of all
outstanding options was multiplied by a factor of twenty with a corresponding
decrease in the number of shares under option. In normal circumstances, an option may be exercised only during the period of
six months commencing on the date that the bonus under the related SAYE
contract is payable, that is, the third, the fifth or the seventh anniversary
of the commencement of the SAYE contract. Earlier exercise will be permitted:
(i) if the option-holders employment is terminated due to death, injury,
disability, redundancy or retirement at normal retirement age; (ii) if the
option-holders employment terminates by reason of early or late retirement and
the option has been held for at least three years; or (iii) if the company by
which the option-holder is employed leaves the Group or if the business in
which he works is sold outside the Group. If an employee ceases to be employed
for any other reason, his option will normally lapse. 57




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The exercise of options will also be permitted in the event of a change in
control, a reorganization, an amalgamation or a voluntary winding-up of the
Company. In the event of a change in control of the Company, option-holders may
surrender their options in consideration for the grant of substitute options
over shares in the acquiring company. In all cases, an option may be exercised
only to the extent of the amount then paid under the related SAYE contract and
any interest or bonus payable thereon. As of December 31, 2003, options over a total of 7,126 Ordinary Shares were
outstanding under the SAYE Scheme at exercise prices of £5.60p to £37.20 per
Ordinary Share and with exercise periods that expire in March 2004. Discretionary Share Option Plan The Option Plan is administered by the Remuneration Committee. There are two
parts to the Option Plan. There is an approved part for which the Inland
Revenue approval is being sought. There is also a part that is not designed for
Inland Revenue approval; this part is used primarily where the Company wishes
to grant to participants options over more than £30,000 worth of Shares. Except
to the extent required to comply with the legislation, the approved and the
unapproved parts of the Option Plan are essentially the same. Eligibility Selected employees and directors of Vernalis plc (or any participating
subsidiary of the Company) who are required to devote substantially the whole
of their working time to the business of the Merged Group (or any subsidiary of
the Company) other than those within two years of their normal retirement date
can participate in the Option Plan at the discretion of the Remuneration
Committee. Grant of Options Options may be granted within the period of 42 days following the announcement
of the Companys results for any period, the day after any general meeting of
the Company, or at such other exceptional times as determined by the
Remuneration Committee. In the case of options under the part of the Option
Plan approved by the Inland Revenue, it may also grant within the period of 42
days following the day on which it is approved by the Inland Revenue. Options may be granted over both newly issued Shares and over Shares purchased
in the market. However, it is anticipated that only new issue Shares will be
used. No payment will be required for the grant of an option. Options are not
pensionable benefits, are not transferable and may only be exercised by a
person to whom they were granted or their personal representatives. No options may be granted more than 10 years after the adoption of the Option
Plan. Option Exercise Price The price per New Ordinary share payable upon the exercise of an option will
not be less than the higher of:  
    
    the middle market quotation for a New Ordinary share as derived from
the Daily Official List for the dealing day immediately preceding the
date the option is to be granted or, if so determined by the
Remuneration Committee, the average of such quotations for the three
or five dealing days immediately preceding the day the option is to be
granted or at such other times as agreed with the Inland Revenue; and
    
    where shares are to be subscribed, their nominal value. Limits on the Issue of Shares The Option Plan is subject to the following overall limit on the number of
shares which may be acquired by subscription: that in any 10 year period not
more than 10 per cent of the issued ordinary share capital of the Company may
in aggregate be issued or issuable pursuant to rights acquired under the Option
Plan, the Executive Share Option Scheme, the Bonus Scheme (excluding qualifying
awards), the SAYE Scheme (excluding rights acquired before 18 September 1996)
or any other employees share scheme adopted by the Company since 1996. For the purposes of this limit, options granted to Peter Fellner on April 25,
2003 will not be included and options and rights acquired which lapse or have
been released will cease to count. Individual limit It is intended that the aggregate maximum value of approved and unapproved
options which may be granted each year will after the first year not normally
exceed one times an employees earnings (subject, in the case of approved
options, 58




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##### Table of Contents



to the statutory limit of £30,000) other than in exceptional circumstances at
the discretion of the Remuneration Committee. For these purposes, an employees
earnings will be his salary current at the date of grant together with any
bonus(es) paid in the previous year. In the first year of operation of the
Option Plan, the aggregate maximum value of options that may be granted may be
up to 2.75 times an employees base salary. Exercise of options Options will normally be exercisable between three and 10 years following grant
provided that any performance target set by the Committee has been satisfied.
Following shareholder consultation the performance conditions for options
granted on April 23, 2003 were harmonized with options granted during the
period and going forward. The performance condition is share price growth
against the FTSE Small Cap Index. No options will vest if performance is below
median; 50 per cent of the shares under options will vest at median and there
will only be full vesting if the Companys share price performance is in the
upper quartile (with options vesting pro rata between median and upper
quartile). These conditions are considered appropriate in that the focus on
delivering shareholder value is retained whilst being simple to measure and
communicate. Rights attaching to Shares Shares allotted or transferred under the Option Plan will rank equally with all
other Shares of the Company for the time being in issue. The Company will apply
for any new Shares allotted under the Option Plan to be admitted to the
Official List and to trading on the London Stock Exchanges market for listed
securities. Variation of Capital In the event of any rights or capitalization issue, subdivision, consolidation,
reduction or other variation of share capital, the Remuneration Committee may
make (in respect of the approved part subject to receiving prior approval of
the Inland Revenue) adjustments it considers appropriate to the number of
Shares subject to option and the price payable on the exercise of options. Alterations to the Option Plan The Option Plan may at any time be amended by the Company in any respect,
provided that the prior approval of the Company in a general meeting is
obtained for alterations and additions to the advantage of participants to the
rules governing eligibility, limits on participation, terms of exercise and
adjustment of options. The requirement to obtain the prior approval of shareholders does not, however,
apply in relation to any alteration or addition which is minor in nature and
made to benefit the administration of the Option Plan to comply with the
provisions of any existing or proposed legislation or to obtain or maintain
favorable tax, exchange control or regulatory treatment for participants or
Merged Group companies. Any amendments or additions to the Option Plan which
affects the terms on which approved options may be granted or exercised
requires the prior approval of the Inland Revenue. Following the merger with
Vernalis Group plc all share options in Vernalis Group plc have lapsed. At December 31, 2003, there were 6,558,876 shares outstanding under the Option
Plan. New SAYE Plan The SAYE Plan is a save-as-you-earn share option scheme designed to be approved
by the Inland Revenue. No Plan offer was made to employees or directors during
the year. Option Deed in respect of the Chairman A share option over 2,670,071 shares, representing four per cent of the issued
ordinary share capital of
Vernalis was granted on April 23, 2003 by the Company to the Chairman. The
grant was made under an option deed made by Vernalis in favor of the chairman.
The exercise price is 100 pence per share. The option will vest and become
exercisable as follows: Per cent of shares subject to the option vesting
    
    Vernalis share price equal to or greater than50
    
    100 pence25
    
    200 pence25
    
    300 pence
 For the option to vest in respect of any of the percentages of shares, the
Vernalis target share price must be met (using the mid-market closing price as
quoted in the daily official list of the London Stock Exchange) over 30
consecutive trading days. As at October 15, 2003 no options have vested. The
option will vest on a change of control of Vernalis to the extent that the
Vernalis share price has reached the target set out above. 59




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##### Table of Contents



As of December 31, 2003, awards over a total of 2,670,071 Ordinary Shares were
outstanding under the Option Deed. All awards have an exercise price of 100p
and exercise periods expiring between April 2003 and April 2013. Directors options Share options held by Executive Directors are set forth in the following table
as at December 31, 2003. At
    
    
    
    
    
    
    
    
    
    At
    
    
    
    
    
    Date fromMay 1,
    
    Granted
    
    Lapsed
    
    December 31,
    
    Exercise
    
    which
    
    Expiry
    
    Performance2003
    
    in the period
    
    in the period
    
    2003
    
    price
    
    exercisable
    
    date
    
    conditionsNumber
    
    Number
    
    Number
    
    Number
    
    £T P W EdwardsExecutive Scheme
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    47.00
    
    
    Apr 2000
    
    Sep 2004
    
    (iv)2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    47.00
    
    
    Apr 2002
    
    Sep 2004
    
    (v)3,540
    
    
    
    
    
    
    
    
    
    
    
    3,540
    
    
    
    20.30
    
    
    Dec 2000
    
    Sep 2004
    
    (iv)3,540
    
    
    
    
    
    
    
    
    
    
    
    3,540
    
    
    
    20.30
    
    
    Dec 2000
    
    Sep 2004
    
    (v)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2001
    
    Sep 2004
    
    (iv)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2003
    
    Sep 2004
    
    (v)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2002
    
    Sep 2004
    
    (iv)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2004
    
    Jan 2005
    
    (v)Option Plan
    
    
    717,940
    
    
    
    
    
    
    
    
    
    
    
    717,940
    
    
    
    0.585
    
    
    Sep 2003
    
    Sep 2004
    
    (viii)Bonus Scheme
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    1.00
    
    
    Apr 1999
    
    Apr 2004
    
    (i)1,850
    
    
    
    
    
    
    
    
    
    
    
    1,850
    
    
    
    1.00
    
    
    Jul 1998
    
    Sep 2004
    
    (i)3,700
    
    
    
    
    
    
    
    
    
    
    
    3,700
    
    
    
    1.00
    
    
    Jul 2000
    
    Sep 2004
    
    (i)62,500
    
    
    
    
    
    
    
    (62,500
    )
    
    
    
    
    
    
    1.00
    
    
    Jul 2002
    
    Jul 2003
    
    (vi)62,500
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    1.00
    
    
    Aug 2003
    
    Sep 2004
    
    (vii)899,570
    
    
    
    
    
    
    
    (62,500
    )
    
    
    837,070Dr P J FellnerOption Deed
    
    
    2,670,071
    
    
    
    
    
    
    
    
    
    
    
    2,670,071
    
    
    
    1.00
    
    
    Apr 2003
    
    Apr 2013
    
    (ix)2,670,071
    
    
    
    
    
    
    
    
    
    
    
    2,670,071Dr J B HutchisonShare Option Plan
    
    
    
    
    
    
    431,138
    
    
    
    
    
    
    
    431,138
    
    
    
    0.835
    
    
    Oct 2006
    
    Oct 2013
    
    (viii)
    
    
    
    431,138
    
    
    
    
    
    
    
    431,138S J SturgeShare Option Plan
    
    
    1,367,520
    
    
    
    
    
    
    
    
    
    
    
    1,367,520
    
    
    
    0.585
    
    
    Apr 2006
    
    Apr 2013
    
    (viii)1,367,520
    
    
    
    
    
    
    
    
    
    
    
    1,367,520A J Weir1992 Scheme
    
    
    2,708
    
    
    
    
    
    
    
    (2,708
    )
    
    
    
    
    
    
    6.52
    
    
    Jul 1996
    
    Jul 2003
    
    (i)5,077
    
    
    
    
    
    
    
    
    
    
    
    5,077
    
    
    
    7.19
    
    
    Jul 1997
    
    Jul 2004
    
    (ii)7,615
    
    
    
    
    
    
    
    
    
    
    
    7,615
    
    
    
    7.19
    
    
    Jul 1999
    
    Jul 2004
    
    (iii)Executive Scheme
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    42.00
    
    
    Dec 2000
    
    Dec 2006
    
    (iv)1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    42.00
    
    
    Dec 2001
    
    Dec 2006
    
    (v)3,078
    
    
    
    
    
    
    
    
    
    
    
    3,078
    
    
    
    20.30
    
    
    Dec 2000
    
    Dec 2007
    
    (iv)3,078
    
    
    
    
    
    
    
    
    
    
    
    3,078
    
    
    
    20.30
    
    
    Dec 2002
    
    Dec 2007
    
    (v)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2001
    
    Sep 2008
    
    (iv)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2003
    
    Sep 2008
    
    (v)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2002
    
    Jul 2009
    
    (iv)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2004
    
    Jul 2009
    
    (v)Share Option Plan
    
    
    615,380
    
    
    
    
    
    
    
    
    
    
    
    615,380
    
    
    
    0.585
    
    
    Apr 2006
    
    Apr 2013
    
    (viii)SAYE Scheme
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    5.60
    
    
    Oct 2003
    
    Mar 2004
    
    (i)Bonus Scheme
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    1.00
    
    
    Jul 1997
    
    Jul 2004
    
    (i)196
    
    
    
    
    
    
    
    
    
    
    
    196
    
    
    
    1.00
    
    
    Jul 1999
    
    Jul 2004
    
    (i)1,608
    
    
    
    
    
    
    
    
    
    
    
    1,608
    
    
    
    1.00
    
    
    Jul 1998
    
    Jul 2005
    
    (i)3,217
    
    
    
    
    
    
    
    
    
    
    
    3,217
    
    
    
    1.00
    
    
    Jul 2000
    
    Jul 2005
    
    (i)62,500
    
    
    
    
    
    
    
    (62,500
    )
    
    
    
    
    
    
    1.00
    
    
    Jul 2002
    
    Jul 2007
    
    (vi)62,500
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    1.00
    
    
    Aug 2003
    
    Aug 2008
    
    (vii)807,329
    
    
    
    
    
    
    
    (65,208
    )
    
    
    742,121P B WorrallShare Option Plan
    
    
    
    
    
    
    550,898
    
    
    
    
    
    
    
    550,898
    
    
    
    0.835
    
    
    Oct 2006
    
    Oct 2013
    
    (viii)Total
    
    
    5,744,490
    
    
    
    982,036
    
    
    
    (127,708
    )
    
    
    6,598,818
 None of the Non-Executive Directors who served during the financial period (Ms
Ferguson, Mr Kent, Mr Kennedy, Mr Merrifield, Dr Read or Mr Williams) held
share options at any time during the period. 60




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##### Table of Contents



Performance conditionsOption awards are subject to share price growth
performance conditions as compared with the following various comparators:  i)
    
    No performance conditions apply to the bonus scheme optionsii)
    
    RPIiii)
    
    Pharmaceuticals Indexiv)
    
    Median FTSE 100v)
    
    Upper quartile FTSE 100vi)
    
    Progressively as share price increases from £9.00 to £18.00 by July 2003. These options have now lapsed.vii)
    
    Progressively as share price increases from £5.00 to £8.00 by July 2004.viii)
    
    See Share Option Plan description belowix)
    
    See Option Deed in respect of the Chairman below No price was paid for the grant of options, nor were any options exercised by
Directors during the year. The market price of the Companys shares at December 31, 2003, the last working
day of the financial year, was 66 pence. During the transition period, the
market price of the Companys shares ranged from 57 pence to 84 pence (year
ended April 30, 2003: 44 pence to 250 pence). 
 ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A  Major Shareholders As at April 30, 2004 the Company was aware of the following substantial
interests in its ordinary shares, held directly: As at April 30, 2004
    
    As at October 15, 2003
    
    As at October 29, 2002
    
    As at September 30, 2001Number of
    
    % issued
    
    Number of
    
    % issued
    
    Number of
    
    % issued
    
    Number of
    
    % issuedshares held
    
    shares
    
    shares held
    
    shares
    
    shares held
    
    shares
    
    shares held
    
    sharesAmvescap plc
    
    
    41,909,773
    
    
    
    29.49
    
    
    
    38,097,713
    
    
    
    28.06
    
    
    
    137,468,526
    
    
    
    20.59
    
    
    
    99,575,742
    
    
    
    14.93Apax (OCS) Nominees Ltd
    
    
    12,143,679
    
    
    
    8.54
    
    
    
    12,143,679
    
    
    
    8.54Jupiter Asset Management Ltd
    
    
    8,529,960
    
    
    
    6.00
    
    
    
    8,531,682
    
    
    
    6.28HBOS plc and subsidiary
companies
    
    
    7,060,123
    
    
    
    4.97
    
    
    
    6,800,274
    
    
    
    5.01Fidelity Investment Services Ltd
    
    
    5,257,295
    
    
    
    3.70
    
    
    
    7,365,230
    
    
    
    5.42JP Morgan Partners (BHCA)
Limited
    
    
    5,294,086
    
    
    
    3.73
    
    
    
    4,919,674
    
    
    
    3.62Advent
    
    
    4,873,605
    
    
    
    3.43
    
    
    
    4,873,605
    
    
    
    3.59Legal & General Investment
Management Limited
    
    
    4,335,781
    
    
    
    3.05
    
    
    
    
    
    
    
    
    
    
    
    26,836,870
    
    
    
    4.02
    
    
    
    20,447,778
    
    
    
    3.07Gartmore
    
    
    
    
    
    
    
    
    
    
    5,256,442
    
    
    
    3.87BVF Partners LP and BVF Inv
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,467,536
    
    
    
    7.41
    
    
    
    20,200,000
    
    
    
    3.03UBS Asset Management (Phillips
& Drew Holding Limited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,703,347
    
    
    
    3.85M&G Prudential plc
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,608,885
    
    
    
    3.38
    
    
    
    22,608,885
    
    
    
    3.39Phillips & Drew Holding Limited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,500,298
    
    
    
    5.02National Provident Institution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,125,900
    
    
    
    3.47
 At such date of calculation of major shareholders, the issued share capital of
the Company was 142,126,883 ordinary shares. The major shareholders do not have
different voting rights. At such date, the Directors of the Company owned 409,893 Ordinary Shares
representing approximately 0.3 per cent (i) of the Companys outstanding share
capital, as follows: Director
    
    Number ofshares heldDr P J Fellner (i)
    
    
    50,000Ms C C Ferguson
    
    
    27,810J Hutchison (ii)
    
    
    35,811G M Kennedy
    
    
    29,274K J Merrifield
    
    
    1,500Peter Read
    
    
    2,583S J Sturge (iii)
    
    
    56,435A J Weir (iv)
    
    
    51,728P Worrall (v)
    
    
    94,349Total
    
    
    349,490
 61




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(i)
    
    Dr P J Fellner holds share options over 2,670,071 shares, which together
with his holding of 50,000 shares, represents two per cent of the issued
share capital.(ii)
    
    J Hutchison holds share options over 431,138 shares, which together with
his holding of 35,811 shares, represents 0.3 per cent of the issued share
capital.(iii)
    
    S J Sturge holds share options over 1,367,520 shares, which together
with his holding of 56,435 shares, represents one per cent of the issued
share capital.(iv)
    
    A J Weir holds share options over 742,121 shares, which together with his
holding of 51,728 shares, represents 0.6 per cent of the issued share
capital. In addition, Mr Weir is the holder of 33,375,891 deferred shares
of 95 pence each that result from the capital reorganization in April
2003. The deferred shares are only of negligible monetary value (see note
16 of the Financial statement).(v)
    
    P Worrall holds share options over 550, 898 shares, which together with
his holding of 94,349 shares, represents 0.5 per cent of the issued share
capital. As far as is known to the Company and subject to the disclosure provided under
Item 8D. Financial information  Significant Changes, it is not directly or
indirectly owned or controlled by another corporation or by any government, and
there are no arrangements the operation of which may result in a change of its
control. B  Related Party Transactions There have been no material transactions during the last three years to which
any Director or officer, any relative or spouse thereof or any five per cent
shareholder, was a party, or had a direct or indirect interest, and no such
transactions are presently proposed. No Director or officer of the Company, or
any associate thereof, was indebted to the Company or any of its subsidiaries
at any time during the last three years. Each of Dr P J Fellner, Mr S J Sturge,
Mr Weir, Mr Worrall and Dr Hutchison has a service agreement with Vernalis plc,
as did Mr Edwards during his term of office. Following Mr Edwards resignation
from the Board on September 10, 2003, he was paid £150,000 in respect of
consultancy provided to the Company. See also item 6F Directors, Senior
Management and Employees  Share Options  Option Deed in respect of the
Chairman. C  Interests of Experts and Counsel Not applicable. 
 ITEM 8.  FINANCIAL INFORMATION The information provided under Item 8A relates to Vernalis plc and its
subsidiaries for the transition period and the three fiscal years ended April
30, 2001, April 30, 2002, and April 30, 2003, respectively. Under UK GAAP, the
merger of British Biotech plc and Vernalis Group plc has been accounted for as
a merger of equals (pooling of interests). In accordance with this treatment
the prior year comparatives have been restated to include the results and
balances of Vernalis Group plc. Under US GAAP, the transaction has been
accounted as an acquisition of Vernalis Group by the Company under purchase
accounting. A  Consolidated Statements and Other Financial Information Reference is made to Item 18 Financial Statements for a list of all financial
statements, including the notes thereto, and exhibits. B  Dividends The Company does not currently pay dividends. At present, it is intended that
no dividends will be paid by the Company. Even if future operations lead to
significant levels of distributable profits, of which there can be no
assurance, any earnings will be reinvested in the Groups business and no
dividends are expected to be paid in the foreseeable future. C  Legal matters There are no legal or arbitration proceedings (including any such proceedings
which are pending or threatened of which Vernalis is aware) which may have or
have had during the 12 months preceding the date of filing, a significant
effect on the financial position of Vernalis and the Group as a whole. 62




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D  Significant Changes See item 4A, Information on the Company  History and Development of the
Company  Important Events Since April 30, 2002. 
 ITEM 9.  THE OFFER AND LISTING The market data presented under this Item relate in part to the Company prior
to the acquisition of Vernalis Group. Certain data is provided as of the date
of the filing to reflect recent market data and ordinary share and ADR record
ownership after the merger with Vernalis Group (under UK merger accounting) and
change of name to Vernalis plc. A  Offer and Listing Details Trading Market for Ordinary Shares and ADSs The principal trading market for the Shares is the London Stock Exchange (the
Exchange), on which the Ordinary Shares have been listed since July 1992 (now
under symbol VER). With effect from October 20, 1997, the Exchange introduced a
new trading system based on an electronic order book, known as the Stock
Exchange Electronic Trading Service (SETS). This replaced the Stock Exchange
Automated Quotation system (SEAQ), the old quote-driven system of share trading
under which market makers were required to quote two-way prices in the Ordinary
Shares and buying and selling was conducted largely by telephone. SETS is based
on the automated matching of orders placed electronically by prospective buyers
and sellers. All trades resulting from orders executed on the order book generate automatic
trade reports and, regardless of size, information is published immediately and
buy and sell orders are matched in SETS. Trading may still take place outside
the order book and there are certain circumstances in which the reporting of
large trades (deemed to be at least eight times the normal market size (NMS))
may be delayed until the earlier of the risk being unwound or the market close. The Company also has a sponsored ADR facility with The Bank of New York as
Depositary. The Companys ADSs, each representing two Ordinary shares (prior to
April 23, 2003, each ADS represented 40 Ordinary shares; prior to December 16,
2002, each ADS represented 10 Ordinary shares, and prior to August 5, 1996 each
ADS represented two Ordinary shares) have been quoted on the NASDAQ National
Market System since July 1992 (now under symbol VNLS). At April 30, 2004, there were a total of 23,537 record holders of the Companys
Ordinary Shares, including those represented by ADRs, of which 59 had
registered addresses in the US and held a total of 8,356,856 Ordinary Shares
(5.88 per cent of the total outstanding shares of the Company). At April 30,
there were 1,267,630 ADRs equivalent to 2,535,260 Ordinary Shares held of
record by 23 ADR holders. Since certain of the Companys Ordinary Shares and
ADRs are held by nominees, the number of holders of record may not be
representative of the number of beneficial owners. The following table shows, for the years and months indicated, the reported
high and low sales prices (in pence) for the Ordinary Shares on the Exchange,
based on its Daily Official List, and the highest and lowest sales prices (in
dollars) for ADSs as reported by NASDAQ. On June 1, 2004, the last sales price on the London Stock Exchange was 52.5p
per Ordinary Share and $1.90 per ADR on NASDAQ. 63




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Pence per Ordinary Share
    
    US$ per ADSHigh
    
    Low
    
    High
    
    LowFinancial year end April 30,1999
    
    
    1440
    
    
    
    315
    
    
    
    13.50
    
    
    
    2.632000
    
    
    945
    
    
    
    300
    
    
    
    8.31
    
    
    
    2.382001
    
    
    605
    
    
    
    365
    
    
    
    4.31
    
    
    
    2.502002
    
    
    605
    
    
    
    210
    
    
    
    4.31
    
    
    
    1.482003
    
    
    250
    
    
    
    44
    
    
    
    7.16
    
    
    
    1.50Financial year ended April 30, 2002First quarter
    
    
    460
    
    
    
    360
    
    
    
    3.60
    
    
    
    2.50Second quarter
    
    
    425
    
    
    
    270
    
    
    
    3.00
    
    
    
    1.85Third quarter
    
    
    375
    
    
    
    315
    
    
    
    2.76Fourth quarter
    
    
    605
    
    
    
    210
    
    
    
    4.31
    
    
    
    1.48Financial year ended April 30, 2003First quarter
    
    
    250
    
    
    
    210
    
    
    
    7.16
    
    
    
    3.00Second quarter
    
    
    138
    
    
    
    44
    
    
    
    4.15
    
    
    
    1.60Third quarter
    
    
    105
    
    
    
    50
    
    
    
    3.32
    
    
    
    1.50Fourth quarter
    
    
    87.5
    
    
    
    59
    
    
    
    2.79
    
    
    
    1.67Eight months ended December 31, 2003First half (to August 31, 2003)
    
    
    80.5
    
    
    
    57
    
    
    
    2.58
    
    
    
    1.86Second half (to December 31, 2003)
    
    
    84
    
    
    
    70
    
    
    
    3.00
    
    
    
    2.05Financial year ending December 31, 2004First quarter
    
    
    69
    
    
    
    55
    
    
    
    2.90
    
    
    
    2.10Last six monthsDecember 2003
    
    
    79
    
    
    
    73
    
    
    
    2.70
    
    
    
    2.28January 2004
    
    
    67
    
    
    
    60
    
    
    
    2.90
    
    
    
    2.12February 2004
    
    
    66
    
    
    
    55
    
    
    
    2.39
    
    
    
    2.10March 2004
    
    
    69
    
    
    
    56
    
    
    
    2.70
    
    
    
    2.19April 2004
    
    
    76.5
    
    
    
    64
    
    
    
    3.05
    
    
    
    2.30May 2004
    
    
    63.5
    
    
    
    48.5
    
    
    
    2.18
    
    
    
    1.78
 
 ITEM 10.  ADDITIONAL INFORMATION Information provided under this Item reflects the Group as of the date of the
filing, other than information under Item B describing the development of share
capital of British Biotech plc prior to the merger with Vernalis Group (under
UK merger accounting) and certain historical tax analysis also relating to
British Biotech plc. A  Memorandum and Articles of Association Memorandum of Association and Articles of Association The following is a summary of the rights under the Companys Memorandum of
Association and Articles of Association relating to voting, dividends,
transfers and rights upon a liquidation, which attach to the Vernalis shares. Memorandum The Memorandum of Association of the Company provides that the Companys
principal objects are, inter alia, to act as or carry on the business of a
holding company and to carry on activities ancillary thereto. The objects of
the Company are set out in full in clause 4 of its Memorandum of Association
which is attached as an exhibit. Articles of Association The Articles of Association contain, inter alia, provisions to the following
effect. Transfer The issued and unissued ordinary shares of 5 pence each in the capital of the
Company were made eligible for settlement in CREST by means of a resolution of
the board dated 9 July 1996, as contemplated by the Uncertificated Securities
Regulations 1995 and effective under the CREST Regulations. Vernalis Shares can
therefore be held in registered (certificated or uncertificated) form. 64




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Any shareholder may effect the transfer of some or all his certificated shares
by an instrument of transfer in writing in the usual form or in any other form
approved by the directors or, in the case of uncertificated shares, in
accordance with the CREST Regulations. The share transfer form must be signed by or on behalf of the transferor and,
in the case of a partly paid shares, also on behalf of the transferee. The
transferor will continue to be treated as a shareholder until the name of the
transferee is entered in the register of members for the relevant share or
shares. The directors may, without giving any reason, refuse to register any transfer
of shares which are:  (a)
    
    not fully paid provided that, if any of these shares have been admitted
to the Official List of the London Stock Exchange, this does not stop
dealings in the shares from taking place on an open and proper basis;(b)
    
    in respect of more than one class of share;(c)
    
    for certificated and uncertificated shares, if to joint transferees, in
favor of more than four such transferees; and(d)
    
    for certificated shares, not delivered to the office, or any other place
decided on by the directors and accompanied by the relevant share
certificate and such other evidence as to the transferors right to
transfer as the directors may reasonably require. The Board may also refuse to register a transfer of uncertificated shares in
accordance with the CREST Regulations. If the directors decide not to register a share transfer, they must no later
than two months after the transfer or the relevant operator-instruction was
received, in each case by the Company, send notice of the refusal to the
transferee. Voting rights Subject to any special rights or restrictions as to voting which are given to
any shares (as to which there are none at present), on a show of hands every
shareholder who is present in person has one vote, and on a poll every
shareholder present in person or by proxy has one vote for every five pence in
nominal value of the shares he holds. In the case of joint holders, the vote of
the person whose name stands first in the register of members is accepted to
the exclusion of any vote tendered by any other joint holder. Unless the
directors decide otherwise, a shareholder may not vote at any general or class
meeting or exercise any other right in relation to meetings while any amount of
money relating to his shares remains outstanding. Dividends Subject to the Companies Act, the Company may, by ordinary resolution, declare
dividends in accordance with the respective rights of the shareholders, but no
dividend shall exceed the amount recommended by the board. Subject to the
Companies Act, the directors may pay such interim dividends as appear to them
to be justified by the financial position of the Company on shares of any
class, of any amount, on any date and for any period. The directors may also
pay fixed dividends on any class of share carrying a fixed dividend on the
dates prescribed for the payment of such dividends. Except as otherwise
provided by the rights attached to the shares, all dividends shall be divided
and paid proportionately to the amounts paid up on the shares on which the
dividend is paid during any period in respect of which the dividend is paid. Except as otherwise provided by the Articles of Association or the rights
attached to any shares, a dividend or any other money payable in respect of a
share can be paid in whatever currency the directors decide. Directors may deduct any amount relating to shares which remains outstanding
from any dividend or other money payable to the shareholder on or in respect of
any share held by him. The Company may stop sending dividend payments through the post, or cease using
any other method of payment (including payment through CREST) if, for two
consecutive dividends, the dividend payments have been returned undelivered or
remain uncashed during the period for which they are valid or the payments by
any other method have failed and, in the case of any one dividend, reasonable
enquiries have failed to establish any new address or account of the registered
shareholder. Any dividend which remains unclaimed for 12 years from the date when it was
declared or became due for payment, shall be forfeited and be returned to the
Company. The board may, if authorized by an ordinary resolution of the Company, offer
ordinary shareholders the right to elect to receive ordinary shares instead of
some or all of their cash; a scrip dividend. Upon the recommendation of the directors, the Company may by ordinary
resolution direct that a dividend be satisfied 65




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wholly or partly by the distribution of specific assets (in particular, paid up
shares or debentures of any other company). Where any difficulty arises with
regard to the distribution, the directors may resolve it as they think fit and
in particular (but without limitation) may authorize any person to sell and
transfer any fraction (or ignore fractions) and fix the value for distribution
of any assets, and may determine that cash shall be paid to any shareholder
upon the basis of that value in order to adjust the rights of shareholders, and
may vest any assets in trustees. Distribution of assets on a winding up If the Company is wound up, the liquidator may, with the sanction of a
resolution, divide among the shareholders (the division among shareholders to
be decided upon by the liquidator) in kind the whole or any part of the assets
of the Company whether the assets consist of property of one or different kinds
and at such property value as the liquidator deems fair. With the like sanction
the liquidator may vest the whole or any part of the assets in trustees upon
such trusts for the benefit of the shareholders as he may determine, but no
shareholder shall be compelled to accept any assets upon which there is a
liability. Alteration of share capital The Company may, by ordinary resolution, increase its capital, consolidate (or
consolidate and then divide) all or any of its share capital into shares of a
larger nominal amount than its existing shares and cancel any shares which, at
the date of the passing of the ordinary resolution have not been taken, or
agreed to be taken and reduce the amount of the Companys share capital by the
amount of the cancelled shares. Subject to the Companies Act, the Company may
also divide some or all of its existing shares into shares of a smaller nominal
value by ordinary resolution and provide that as between the holders of the
divided shares different rights and restrictions apply. The directors have the power to deal with any fractions of shares resulting
from a consolidation, including selling any shares representing fractions for
the best price reasonably obtainable and distributing the net proceeds of sale
among shareholders in proportion to their fractional entitlements. The Company may by special resolution reduce its share capital, any capital
redemption reserve, any share premium account or any other undistributable
reserve in any way. The Company may, subject to the Companies Act, the rules of
the London Stock Exchange (if applicable) and to any special rights previously
given to holders of existing shares, purchase any of its own shares (including
redeemable shares). If recommended by the directors, the Company can by ordinary resolution
capitalize any sum which is part of the Companys reserves or which the Company
is holding as net profit. Subject to the Companies Act and any resolution of
the company, the directors may decide how to deal with any unissued shares.
They may, for instance, offer the shares for sale, grant options to acquire
them, allot them or otherwise dispose of them. Restrictions on shareholders If any shareholder or any other person who the Company has reasonable cause to
believe has an interest in the Companys shares has been duly served with a
statutory notice and has not, within 14 days, provided details of those who
have an interest and the extent of their interest in that particular
shareholding, the Company may send out a further notice to the shareholder (a
Restriction Notice) to direct that in respect of the shares in relation to
which the default occurred (the Identified Shares) (which expression shall
include any further shares which are issued in respect of such shares) the
shareholder shall not be entitled to attend or vote either personally or by
proxy at a general meeting of the Company or a meeting of the holders of any
class of shares or to exercise any other right in relation to general meetings
of the Company or meeting of the holders of any class of shares. Where the Identified Shares represent 0.25 per cent or more (in nominal value
or number) of the issued shares of a class then the Restriction Notice may
additionally direct that any dividend (or part thereof) or other money which
would otherwise be payable in respect of the Identified Shares shall be
withheld without any liability to pay interest thereon when such money is
finally paid to the shareholder and/or that a transfer of any of the Identified
Shares in certified form and, as far as permitted by the CREST Regulations, any
of the identified shares in uncertified form shall be refused, unless the
directors are satisfied that they have been sold outright to an independent
third party. Any sale through the London Stock Exchange or other stock exchange
or acceptance of a takeover offer will be treated as an outright sale to an
independent third party. Variation of rights Subject to the Companies Act and to special rights previously given to holders
of existing shares, the Company may issue shares with rights or restrictions
attached to them. Rights or restrictions can be decided upon by either an
ordinary resolution or, as long as there is no conflict with any resolution, by
the directors. Subject to the Companies Act, the rights attached to any class of shares may be
changed or abrogated, with the written approval of shareholders holding at
least three quarters in nominal value of the issued shares of that class or
with the sanction of an extraordinary resolution passed at a separate meeting
of the holders of the relevant class of shares. The provisions of the Articles of Association relating to general meetings will
apply to any such separate class meeting 66




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except that:  (a)
    
    the necessary quorum is two shareholders present in person or by proxy
who own at least one third in nominal value of the issued shares of the
class;(b)
    
    if at an adjourned meeting, a quorum as defined at (a) above is not
present, one person who holds shares of the class, or his proxy, will be a
quorum; and(c)
    
    any shareholder who is present in person or by proxy can demand a poll at
which every shareholder who is present in person or by proxy is entitled
to one vote for every share he has of the class (but this is subject to
any special rights or restrictions which are attached to any class of shares). Directors NumberSubject to the passing of an ordinary resolution changing the provisions
in the Articles of Association, there must be at least two directors and not
more than 20 (disregarding alternative directors). AgeNo person will be appointed a director or be required to stop being a
director because he has reached a particular age. However, any person who is
age 70 or over must retire in accordance with the Articles of Association.
Notice of a meeting at which a resolution will be proposed to reappoint or
appoint a director who is age 70 or more must state the fact that the relevant
director is aged 70 or more. AppointmentDirectors may be appointed by ordinary resolution or by the board
of the Company and a director need not be a shareholder of the Company. A
director appointed by the board of the Company holds office only until the next
following annual general meeting and is not taken into account in determining
the directors who are to retire by rotation at that meeting. RemovalIn addition to any power to remove directors under the Companies Act,
the Company may pass a special resolution to remove a director from office even
though his time in office has not ended and may (subject to the Articles of
Association) elect a person to replace a director who has been removed in this
way by passing an ordinary resolution. Retirement by rotationAt every annual general meeting, one third of the
directors will retire by rotation and be eligible for re-election. If one-third
is not a whole number, the number of directors to retire is the number nearest
to and less than one third. If there are less than three directors, they will
all retire. The directors to retire will be those who have been directors
longest since they were last elected. If there are directors who were last
elected on the same date, and they cannot agree who is to retire, they must
draw lots to decide. In addition, any director who would not otherwise be
required to retire by rotation must retire by rotation at the third annual
general meeting since his last appointment or re-appointment. Any director age
70 or more must retire by rotation. EligibilityOnly the following may be elected as directors at a general
meeting:  (a)
    
    directors retiring at that meeting;(b)
    
    anyone recommenced by the directors; and(c)
    
    anyone nominated by a shareholder (not being the person nominated)
entitled to vote at the meeting who has delivered to the office of the
Company between seven and 42 days before the meeting a letter stating that
he intends to nominate another person for election as director and written
confirmation from the nominee that he is willing to be elected. RemunerationThe total such fees paid to all of the directors must not exceed
£400,000 per annum or such other higher amount as may from time to time be
decided by ordinary resolution. Any director who performs any special or extra
services for the Company is entitled to receive special pay (whether by way of
salary, lump sum or a combination or in any other way, paid as well as or
instead of his ordinary pay as a director) as the board of the Company or a
committee thereof may decide. Each director may be paid reasonable expenses
incurred in attending and returning from board meetings, committee meetings,
general meetings or otherwise properly and reasonably incurred in connection
with the Companys business or in the performance of his duties as a director. Pensions and gratuities for directorsThe board of the Company or any committee
thereof may provide pensions or other benefits to any director or former
director of the Company, or any relation or dependent of such person. However,
if the directors want to provide a benefit to a director or former director who
has not held an executive post or place of profit in the Company or in a
subsidiary undertaking of the Company or in any former owner of the business of
the Company or any subsidiary undertaking of the Company, the Company must also
pass an ordinary resolution to approve such payment. Permitted interestsSubject to the provisions of the Companies Act and provided
that a director discloses the nature 67




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and extent of his interest to the board, a director can do any one or more of
the following:  (a)
    
    have any kind of interest in any existing or proposed contract,
transaction or arrangement with or involving the Company or another
company in which the Company has some interest;(b)
    
    alone or through some firm with which he is associated, do paid
professional work for the Company(other than as auditor);(c)
    
    hold any other position (other than auditor) in the Company as well as
being a director; and(d)
    
    hold any position within, or be a shareholder of, any other company in
which the Company has an interest. Any director who is so interested does not have to account to the Company for
any benefit he receives as a result of any of the above. Subject to the Articles of Association, a director cannot vote, and be counted
in a quorum, on any resolution relating to any contract, transaction,
arrangement or other proposal in which he (or a person connected with him)
knowingly has a material interest unless the only material interest falls
within one of the following:  (a)
    
    a resolution about giving him (the director concerned), or any other
person, any security or any indemnity for any money which he, or that other
person, has lent at the request, or for the benefit of, the Company, any
of its holding companies or any of its subsidiary undertakings;(b)
    
    a resolution about giving him (the director concerned), or any other
person, any security or any indemnity for any liability which he, or that
other person, has incurred at the request, or for the benefit of, the
Company, any of its holding companies or any of its subsidiary
undertakings;(c)
    
    a resolution about giving any security or any indemnity to any other
person for a debt or obligation which is owed by the Company, any of its
holding companies or any of its subsidiary undertakings, to that other
person, if the director has taken responsibility for some or all of that
debt or obligation. The director can take this responsibility by giving
a guarantee, indemnity or security;(d)
    
    a resolution about any proposal relating to an offer of any shares or
debentures or other securities for subscriptionor purchase by the Company,
any of its holding companies or any of its subsidiary undertakings, if the
director takes part because he is a holder of shares, debentures or other
securities, or if he takes part in the underwriting or subunderwriting of
the offer;(e)
    
    a resolution about any proposal involving any other company if the
director (together with any person connected with the director), has a
direct or indirect interest of any kind (including an interest by holding
any position in that company, or by being a shareholder of that company).
This does not apply if he knows that he and any persons connected with him
hold an interest in shares representing one per cent or more of:  (i)
    
    any class of equity share capital of that company; or(ii)
    
    the voting rights in that company. Any of these interests of one per cent or more are treated as being a material interest;  (f)
    
    any arrangement for the benefit of employees of the Company, any of its
holding companies or any of its subsidiary undertakings which only gives
him benefits which are also generally given to the employees to whom the
arrangement relates; or(g)
    
    a resolution about any proposal relating to any insurance which the
Company can buy and renew for the benefit of directors or of a group of
people which includes directors. Benefit of employeesThe directors may exercise powers to make provision for
the benefit of employees or former employees of the Company or any of its
subsidiaries in connection with the cessation or transfer of the whole or part
of the business of the Company or that subsidiary. Borrowings The directors may exercise all the Companys powers to borrow money; to
mortgage or charge all or any of the Companys undertaking, property and assets
(present and future) and uncalled capital, to issue debentures and other
securities; and to give security for any debt, liability or obligation of the
Company or of any third party. The directors will limit the total borrowings of the Company and, so far as
they are able, its subsidiary undertakings to 68




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ensure the total amount of the Groups borrowing does not exceed the greater of
£50,000,000 and 1.5 times the Companys adjusted capital and reserves unless
the Company by ordinary resolution allows borrowings to exceed such limit. Any
borrowings owed by one member of the Group to another will not be taken into
account for the purposes of the calculation of the Groups total borrowings. Shareholders meetings Subject to the provisions of the Companies Act, the annual general meeting is
held at such time as the board of the Company may determine. The board of the
Company may call extraordinary general meetings at any time. At general
meetings of the Company two members present in person and entitled to vote is a
quorum, except in the case of adjourned meetings where a quorum is one member
present in person or by proxy. Notice periods and the majorities required for
the passing of resolutions are those provided for under the Companies Act. Untraced shareholders The Company may sell any certificated shares by instructing a member of the
London Stock Exchange to sell them at the best price reasonably obtainable at
the time of sale, if:  (a)
    
    during the 12 years before the earliest of the notices referred to in (b)
below, at least three dividends have become payable on the shares and no
dividend has been claimed during that period;(b)
    
    after the 12 year period, the Company has published a notice, stating
that it intends to sell the shares, in a national newspaper in the United
Kingdom and in a local newspaper appearing in the area in the United
Kingdom which includes the address held by the Company for serving notices
relating to those shares;(c)
    
    during the 12 year period and for three months after the last of the
notices referred to in (b) above appear, the Company has not heard from
the shareholder or any person entitled to the shares by law; and(d)
    
    the Company has notified the London Stock Exchange that it intends to
sell the shares. To sell any shares in this way, the directors may appoint anyone to transfer
the shares. This transfer will be just as effective as if it had been signed by
the holder, or by a person who is entitled to the shares by law. The person to
whom the shares are transferred will not be bound to concern himself as to what
is done with the purchase monies nor will his ownership be affected even if the
sale is irregular or invalid in any way. The proceeds of sale will belong to the Company, but it must pay an amount
equal to the sale proceeds less the costs of the sale to the shareholder who
could not be traced, or to the person who is entitled to his shares by law, if
that shareholder, or person, asks for it. After the sale, the Company must record the name of the shareholder, or (if
known) the person who would have been entitled to the shares by law, as a
creditor for the money in its accounts. The Company will not be a trustee of
the money and will not be liable to pay interest on it. The Company can use the
money, and any money earned by using the money, for its business or in any
other way that the directors decide, but the money cannot be invested in the
Companys shares or in the shares of any holding company of the Company. Rights attaching to the Deferred shares The following is a summary of the rights under the Articles which attach to the
Deferred Shares: Income  The Deferred shares carry no rights to participate in the profits of
the Company. Capital On a return of capital in a winding up or dissolution (but not
otherwise) the holders of the Deferred shares shall be entitled to participate
in the distribution of the assets of the Company pari passu with the holders of
the Ordinary shares but only in respect of any excess of those assets above
£1,000,000,000,000. The holders of the Deferred shares shall not be entitled to
any further right of participation in the assets of the Company. Attendance and voting at general meetings The holders of the Deferred Shares
shall not be entitled, in their capacity as holders of such shares, to receive
notice of any general meeting of the Company or to attend, speak or vote at any
such meeting. Form The Deferred Shares shall not be listed on any stock exchange nor shall
any share certificates be issued in respect of such shares. The Deferred Shares
shall not be transferable, save as referred to below or with the written
consent of the directors. Class rights The Company may from time to time create, allot and issue
further shares, whether ranking pari passu with or in priority to the Deferred
shares, and on such creation, allotment or issue any such further shares
(whether or not ranking in any respect in priority to the Deferred shares)
shall be treated as being in accordance with the rights attaching to the
Deferred shares and shall not involve a variation of such rights for any
purpose. A reduction by the 69




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Company of the capital paid up on the Deferred shares shall be in accordance
with the rights attaching to the Deferred shares and shall not involve a
variation of such rights for any purpose and the Company shall be authorized at
any time to reduce its capital (subject to and in accordance with the Companies
Act) and without obtaining the consent of the holders of the Deferred shares. Companys rights The Company has the irrevocable authority at any time to do
all or any of the following without obtaining the sanction of the holder or
holders of the Deferred shares: (i) to appoint any person to execute on behalf
of any holder of Deferred shares a transfer of all or any part thereof and/or
an agreement to transfer the same (without making any payment therefor) to such
person as the directors may determine (whether or not an officer of the
Company) and who is willing to accept the same; (ii) to purchase all or any of
the same in accordance with the Companies Act without obtaining the consent of
the holders thereof and in consideration of the payment to each of the holders
whose shares are purchased an amount equal to one pence in respect of all the
Deferred shares then being purchased from him; (iii) for the purposes of any
such purchase under (ii) above, to appoint any person to execute on behalf of
any holder of Deferred shares a contract for the sale to the Company of any
such Deferred shares held by him; and (iv) to cancel all or any of the same so
purchased under (ii) above in accordance with the Companies Act. Upon or after the purchase of any Deferred shares in accordance with this
paragraph the Board may consolidate and/or sub-divide and/or convert and/or
reclassify the authorized Deferred share capital of the Company existing
following such purchase: (i) into shares of any other class of share capital
into which the authorized share capital is or may at that time be divided of a
like nominal amount as the shares of such other class; and/or (ii) into
unclassified shares. B  Share Capital The Company raised funds through venture capital in 1986 and 1988, two private
placements of its equity securities, an initial public offering in July 1992, a
rights issue in May 1994 (the 1994 Rights Issue), the conversion of warrants
between December 1995 and January 1996 and a rights issue in July 1996 (the
1996 Rights Issue). Between December 11, 1995 and January 31, 1996, all
9,052,770 issued warrants were converted into Ordinary Shares on a one-for-one
basis for a total consideration of £47,527,000 before expenses. In July 1996,
7,246,524 Ordinary Shares were issued by way of rights to shareholders on a
one-for- eight basis for a total consideration before expenses of £148,554,000.
In August 1996, 587,036,718 Ordinary Shares were issued by way of the
nine-for-one capitalization issue, which had the effect of reducing the
Companys Ordinary Share price to approximately one tenth of its previous
level. In April 2003 the Company undertook a capital reorganization. 20 Old
Ordinary shares of 5 pence were consolidated into one Intermediate Ordinary
share of £1. The consolidation of Old ordinary Shares into intermediate
Ordinary shares was immediately followed by a share capital subdivision as
follows. Each Intermediate Ordinary share was subdivided into one New
Ordinary share of 5 pence and one Deferred share of 95 pence. The following is a summary of the rights under the Articles which attach to the
Deferred shares: IncomeThe Deferred shares carry no rights to participate in the profits of the
Company. CapitalOn a return of capital in a winding up or dissolution (but not
otherwise) the holders of the Deferred shares shall be entitled to participate
in the distribution of the assets of the Company pari passuwith the holders of
the Ordinary shares but only in respect of any excess of those assets above
£1,000,000,000,000. The holders of the Deferred shares shall not be entitled to
any further right of participation in the assets of the Company. Attendance and voting at general meetingsThe holders of the Deferred shares
shall not be entitled, in their capacity as holders of such shares, to receive
notice of any general meeting of the Company or to attend, speak or vote at any
such meeting. The Deferred shares are not listed, do not confer any rights to dividend and
have extremely limited other rights which render them of negligible monetary
value. The Company has appointed a director of the Company, Mr A J Weir, to
execute on behalf of each holder of a Deferred share a transfer of such
Deferred shares, for no payment, from Vernalis shareholders to Mr Weir pursuant
to restrictions attaching to the Deferred shares. On April 23, 2003 the company issued 33,375,889 New Ordinary shares of 5p
each in respect of the acquisition of RiboTargets Holdings plc. Between
September 1 and November 4, 2003 the Company issued 75,375,103 new Ordinary 5p
shares with a nominal value of £3,768,755 to Vernalis Group plc shareholders in
consideration for their shares in Vernalis Group plc under the terms of the
merger, which was approved by shareholders on September 1 2003. C  Material Contracts The following contracts are the only contracts not entered into in the ordinary
course of business which have been entered into by the Group within two years
immediately preceding the date of this document and are or may be material to
the Group; 70




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(a)  Sale proposal relating to the acquisition by the Company of RiboTargets
Holdings plc On March 21, 2003, the Company made an offer (the RiboTargets Offer) to
RiboTargets shareholders to acquire the entire issued share capital of
RiboTargets. The RiboTargets Offer comprised the following:  
    
    for every RiboTargets B ordinary share approximately 2.79 of the Companys shares;
    
    for every RiboTargets A ordinary share approximately 0.85 of the Companys shares; and
    
    396,198 of the Companys shares allocated amongst RiboTargets
shareholders pro rata to their holdings of RiboTargets ordinary shares
immediately prior to April 23, 2003. The Companys acquisition of RiboTargets was completed on April 23, 2003. Based
on the Companys share price of 3.875 pence on March 19, 2003, the last
practicable business day prior to announcement of the RiboTargets Offer, the
aggregate value of the RiboTargets Offer amounted to approximately £26 million. (b)  Deed of covenant In connection with the RiboTargets Offer, the Company entered into a deed of
covenant dated March 17, 2003 in favor of RiboTargets whereby the Company
agreed to carry on the business of the Group (then the British Biotech Group)
in the ordinary course pending completion of its acquisition of RiboTargets. (c)  Undertaking  (i)
    
    On March 21, 2003, in consideration for the Company agreeing to make the
RiboTargets Offer, certain RiboTargets shareholders holding in aggregate
100 per cent of the issued. RiboTargets B ordinary shares, 99.9 per cent
of the issued RiboTargets A ordinary shares, and 100 per cent of the
issued RiboTargets ordinary shares, entered into an undertaking (the
Undertaking) to accept the RiboTargets Offer and granted warranties in
favor of the Company in respect of their ownership of the RiboTargets shares. The Undertaking imposes restrictions on the ability of the (now,
former) RiboTargets shareholders who are party to it to sell the shares in
the Company which they received in connection with the RiboTargets Offer
(Lock-up Shares) without the Companys prior approval. Each (now, former)
RiboTargets shareholder that entered into the Undertaking:(a)
    
    may not dispose of any its Lock-up Shares at any time during the period
of six calendar months following April 23, 2003 (the Initial Lock-up
Period);(b)
    
    subject as described in (ii) below, during the period of eight calendar
months after the Initial Lock-up Period has expired (the Interim Lock-up
Period) must:  (x)
    
    notify the Company or its nominated broker (currently Cazenove) in
writing prior to the disposal of any Lock-up Shares; and(y)
    
    must not dispose of any Lock-up Shares other than through the
Companys nominated broker. However, if a (now former) RiboTargets shareholder who has entered into the
Undertaking receives an unsolicited offer to acquire Lock-up Shares then
sub-paragraph (y) above will not apply and such RiboTargets shareholder shall
only be obliged to notify the Companys nominated broker in writing prior to
such disposal.  (ii)
    
    During the Interim Lock-up Period the Qualifying Shareholders (as defined
below) are together entitled to dispose of Lock-up Shares up to a maximum
aggregate of Lock-up Shares equal to three per cent of the issued ordinary
share capital of the Company immediately following April 23, 2003 without
using the Companys nominated broker to effect such disposal. Qualifying
Shareholder means a RiboTargets shareholder who has entered into the
Undertaking whose beneficial holding of Lock-up Shares immediately
following April 23, 2003 amounted to less than one per cent of the
aggregate issued ordinary share capital of the Company immediately
following April 23, 2003.(iii)
    
    A (now, former) RiboTargets shareholder wishing to dispose of any
Lock-up Shares in the six months after the Interim Lock-up Period has
expired must consult with the Companys nominated broker about such
disposal for a reasonable period of time prior to the proposed disposal,
including, without limitation, with respect to the method and timing of
the disposal.(iv)
    
    In addition, each (now, former) RiboTargets shareholder who has entered
into the Undertaking agreed, prior to the end of the Initial Lock-up
Period, not to acquire or offer to acquire, directly or indirectly, any of
the Companys shares if the effect would be to oblige any person to make a
mandatory offer for the Company under Rule 9 of the Code.(v)
    
    The Undertaking contains exemptions which allow the (now, former)
RiboTargets shareholders that entered into the undertaking to dispose of
Lock-up Shares, regardless of the restrictions listed above, in the
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situations:  (a)
    
    a disposal pursuant to a court order;(b)
    
    a renunciation of a right to subscribe for shares where such right
is derived from the Lock-up Shares or a failure to take up any such
right;(c)
    
    if the Company makes an offer to its shareholders to purchase its
own shares or proposes a scheme of arrangement, a disposal or agreement
to dispose of any Lock-up Shares to the Company pursuant to that offer
or scheme; or(d)
    
    by acceptance of a general offer made for all the issued share
capital of the Company, provided such offer is recommended by the board
of directors of the Company. (d)  Placing and Open Offer Agreement The Placing and Open Offer Agreement dated May 1, 2003 between Vernalis Group
plc and Cazenove, pursuant to which Cazenove agreed: (1) as agent for Vernalis
and subject to the terms and conditions of the Placing and Open Offer
Agreement, to invite qualifying shareholders to subscribe for 30,098,086 new
ordinary shares in Vernalis; (2) subject to the terms and conditions of the
Placing and Open Offer Agreement, to procure subscribers for, or itself
subscribe for, all the new ordinary shares available under the open offer other
than the committed open offer shares (the Clawback Shares) on the basis that
such shares are subject to recall to satisfy valid applications by qualifying
shareholders under the open offer; (3) subject to the terms and conditions of
the Placing and Open Offer Agreement, to procure subscribers for, or itself
subscribe for, 14,346,359 new ordinary shares in Vernalis Group plc pursuant to
the firm placing; and (4) to act as sponsor to Vernalis Group plc in connection
with admission of its new ordinary shares. The Placing and Open Offer Agreement
contains certain warranties, undertakings and indemnities given by Vernalis
Group plc in favor of Cazenove. Vernalis agreed to pay Cazenove (together with any applicable value added tax):
(1) whether or not admission of the new ordinary shares in Vernalis Group plc
became effective, a commitment commission of 0.5 per cent of the value at the
offer price of the clawback shares and (2) subject to admission of the new
ordinary shares in Vernalis Group plc a commission of £750,000 plus a placing
commission of 0.75 per cent of the value at the offer price of the clawback
shares. Out of the commissions, Cazenove paid placing commissions to such
persons (if any) as it procured to subscribe for Clawback Shares. Vernalis Group plc paid the incidental costs and expenses of and relating to
the Placing and Open Offer. (e)  Roche Convertible Loan On May 13, 2002 Vernalis Group plc entered into a convertible loan agreement
with Roche Finance Limited pursuant to which Roche Finance Limited made a loan
to Vernalis Group plc of £7 million, convertible at any time by Roche into
ordinary shares in Vernalis Group plc at a conversion price of 329 pence per
share. Vernalis Group plc also had rights to convert the Roche Convertible Loan
in specified circumstances. If not converted the Roche Convertible Loan was
repayable after five years. Interest was payable semi-annually in arrears on
May 13 and November 13 in each year. The terms of the Roche Convertible Loan
included an anti-dilution provision that was triggered by the issue of new
ordinary shares in the Placing and Open Offer, the effect of which was to
reduce the conversion price. This would result in Roche Finance Limited
receiving an additional 1,576,044 new ordinary shares in Vernalis Group plc on
conversion of the full amount of the Roche Convertible Loan. In accordance with the terms of the Roche Convertible Loan, the Company
notified Roche Finance Limited on Vernalis becoming aware that the right to
cast more than 50 per cent of the votes at a general meeting of Vernalis Group
plc had become unconditionally vested in the Company. The Roche Convertible
Loan was repaid in full by the Company in November 2003. (f)  Summary of offer document On July 25, 2003 J.P. Morgan plc made an offer (the Offer) on behalf of
Vernalis plc (then British Biotech plc) for all the issued and to be issued
ordinary shares of 10 pence each in Vernalis Group plc, now Vernalis Group
Limited (the Vernalis Group Shares). The terms of the Offer were 0.861 shares in the Company for each Vernalis Group
share. The Offer became wholly unconditional on September 1, 2003 and closed on
September 23, 2003. Vernalis Group Limited is now a subsidiary of the Company.
The procedure for the compulsory acquisition of the final outstanding minority
interests in Vernalis Group plc has been completed and Vernalis Group Limited
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subsidiary of the Company. Based upon the Companys mid-market closing price of
64.5 pence on July 24,2003 (the last business day prior to the Offer being
posted), the total value of the Offer was approximately £48.6 million.  (g)
    
    Lease between Allied Dunbar Assurance plc (successor to Marion Merrel
Limited) and Vernalis Research Limited (successor to Cerebrus Limited),
dated May 13, 1997 The property is approximately 44,000 sq. ft. in size and Vernalis has a 20 year
leasehold interest in the property, which commenced on May 9, 1997 and expires
in 2017. Vernalis may terminate the Lease in 2012 if it wishes. Current annual
rent is £730,000. The rent is reviewed every 5 years, next due in 2007.  (h)
    
    Sub-License Agreement between Menarini International Operations
Luxembourg SA and Vernalis Development Limited (formerly known as Vanguard
Medica Limited), dated as of September 10, 1999; and Supply Agreement
between Vernalis Development Limited (formerly known as Vanguard Medica
Limited) and Menarini International Operations Luxembourg SA, dated as of
September 10, 1999 Vernalis have also signed a license agreement with Menarini granting Menarini
exclusive marketing rights for frovatriptan in the European Union, Eastern
Europe and specified countries in Central America. Under this agreement
Vernalis will supply Menarini with the finished packed product ready for sale.
Vernalis receives revenue on supply of product and also from royalties. For
additional information, see above Item 4D Information on the
CompanyCommercial Collaborations under Menarini (Frovatriptan).  (i)
    
    Second Amending Agreement dated November 27, 2000, and Third Amending
Agreement dated March 1, 2004, both amending the Frovatriptan Development
and Sublicense Agreement between SmithKline Beecham plc and Vernalis
Development Limited (formerly known as Vanguard Medica Limited). In December 2000, SmithKline Beecham waived all of its rights to royalties on
sales of frovatriptan in return for a series of five $5 million cash payments
by Vernalis. For additional information, see above Item 4D Information on the
CompanyCommercial Collaborations under SmithKline Beecham (Frovatriptan).
By an amendment of March 1, 2004, the agreement was varied in respect of the
payment of the second $5 million milestone payment originally payable in
September 2003. This amount was deferred, with $2.5 million paid in March 2004
and $2.5 million payable in September 2004.  (j)
    
    Second Amended and Restated License Agreement between Elan Pharma
International Limited and Vernalis Limited, dated March 15, 2002, amending
and restating the Amended and Restated Sub-License Agreement between the
parties, dated as of December 12, 2000. Vernalis signed a license agreement with Elan in 1998 granting Elan exclusive
marketing rights for frovatriptan in the United States, Canada and Mexico. On
signing, Elan paid Vernalis a fee of $7.5 million and made a $10 million
investment in Vernalis Group ordinary shares at a negotiated price of £6.25 per
share. Elan subsequently paid Vernalis a further $7.5 million in 1999 when the
FDA formally accepted Vernalis New Drug Application (NDA) for frovatriptan for
review, and a further $15 million in the fourth quarter of 2001 following FDA
marketing approval. Under the terms of the 1998 license agreement, Vernalis
could have potentially received three additional milestone payments exceeding
$30 million in total on achievement by Elan of agreed sales targets for
frovatriptan. In addition, Elan would pay Vernalis a royalty based on its net
sales of frovatriptan. In December 2000, Vernalis entered into a new financing
agreement with Elan under which Elan made a $10 million loan to Vernalis and a
further equity investment of £4.96 million. Following that investment, Elan
held 2,943,396 Ordinary Shares, representing approximately 6.7 per cent of
Vernalis Groups issued share capital, which was subsequently sold in July
2002. Elan no longer holds shares in Vernalis Group (or Vernalis). For
additional information, see above Item 4D Information on the Company 
Commercial Collaborations under Elan (frovatriptan).  (k)
    
    Agreement for the Sale and Purchase of Elans rights to frovatriptan in
North America by Vernalis, dated March 30, 2004 Purchase of Frovatriptan Rights and termination of License Agreement/Development Agreement Under the Agreement, Vernalis Development Limited has agreed to buy from the
Elan group companies (Sellers) all of the Sellers rights and assets relating
to frovatriptan in North America. Also, under the terms of the Agreement, the
License Agreement and Development Agreement between the parties are terminated. Consideration The aggregate consideration payable by Vernalis Development Limited in respect
of the acquisition of rights and assets is $50 million in cash (of which $5
million has already been paid) plus a further amount for the frovatriptan
inventory held by Elan on May 18, 2004. Such inventory is to be audited and
valued by Vernalis Accountants and paid for at or below cost, depending on its
shelf life. There is no cap on the value of such inventory. Payment for this
inventory is estimated by Vernalis to amount to $5.4 million and will be due on
the earlier of December 31, 2004 or the completion of an equity funding by
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The remainder of the consideration (other than that already paid and that for
inventory) is to be paid in accordance with the following timescale:  (a)
    
    $20 million on December 31, 2004; and(b)
    
    $25 million on December 31, 2005. Warranties and indemnities The Sellers have made certain warranties about the assets and contracts to be
acquired by Vernalis as part of the transaction. The Sellers liability under
the warranties is limited to $25 million and no liability arises until total
claims exceed $500,000. The Sellers liability under the warranties expires on
December 31, 2005. Vernalis has the benefit of an indemnity from the Sellers for certain legal
costs of Vernalis arising from a claim arising from termination of the
agreement between UCB (Elans co-promotion partner for frovatriptan in the US)
and Elan. Vernalis also has the benefit of an indemnity from the Sellers for any claim
arising in connection with the Sellers development, testing, manufacture, use
or sale of frovatriptan. In return Vernalis, which is responsible for all
liabilities incurred in connection with the sale, marketing, distribution or
supply of the frovatriptan after May 18, 2004, has given an indemnity to the
Sellers in relation to claims arising in relation to frovatriptan other than
arising from the Sellers development, testing, manufacture, use or sale of
frovatriptan. Guarantee and security Vernalis has guaranteed Vernalis Development Limiteds obligations to the
Sellers under the Agreement (the principal of which is the obligation to pay
the consideration) and will guarantee Vernalis Development Limiteds
obligations under the Transitional Services Agreement. Transfer of Product Registrations The current FDA approval for frovatriptan will be transferred to Vernalis
Development Limited by the Sellers. The Sellers will also transfer the
Investigational New Drug Application encompassing, amongst other things, the
identification of the intention to study the use of frovatriptan for the
proposed MAM indication, and the application for approval of frovatriptan in
Canada. Governing law and jurisdiction The Agreement is subject to the laws of England and Wales and the jurisdiction
of the courts of England.  (l)
    
    Transitional Services Agreement between Elan Corporation PLC, Elan
Pharmaceuticals Inc, Elan Pharma Limited and Vernalis Development Limited,
dated May 18, 2004 Elan has agreed to provide certain transitional services for up to 12 months
and certain other services for up to six months to Vernalis Development Limited
in relation to frovatriptan. The services to be provided for a period of 12
months include: adverse drug experience data management; medical enquiries;
medical monitoring; returns, rebates and chargebacks; and financial accounting.
The services to be provided for six months include: quality assurance; product
quality complaints; supply chain management; assistance with the FDA and Health
Canada interactions; and management of contracts with managed care
organisations. At Vernalis Development Limiteds request, any services provided
for a period of six months may be extended for a further period of up to six
months. No fee is payable by Vernalis Development Limited for any service provided by
Elan during the first six months following May 18, 2004. Thereafter, Vernalis
Development Limited will reimburse Elan for the costs of providing the
services, based on the number of staff providing the service on typical
pharmaceutical industry rates for providing such services. The services provided under the agreement are intended to be transitional in
nature to assist Vernalis Development Limited prior to it establishing
long-term arrangements and may be terminated in whole or in part by Vernalis
Development Limited at any time.  (m)
    
    Floating Charge between Vernalis Development Limited and Elan Pharma
International Limited, dated May 18, 2004 Charge In respect of Vernalis Development Limiteds payment obligations under the
Agreement (the Secured Obligations) it has granted Elan a first floating charge
over monetary claims relating to frovatriptan from or in relation to North
America (the Charged Property). Crystallisation The floating charge will automatically be converted into a fixed charge over
the Charged Property on a default by Vernalis Development Limited of the
Secured Obligations or on the insolvency of Vernalis. 74




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Termination/Discharge The floating charge will be released and cancelled upon the Secured Obligations
being discharged in full. D  Exchange Controls and other Limitations Affecting Security Holders There are currently no UK foreign exchange control restrictions. There are no restrictions under the Companys Memorandum and Articles of
Association or under English law that limit the right of non-resident or
foreign owners to hold or vote on the Groups Ordinary Shares. E  Taxation The following discussion summarizes certain US Federal income tax and UK tax
consequences generally applicable to ownership by a US holder (as defined
below) of ADSs or Ordinary Shares not in ADS form that is not resident in the
UK, for the purposes of the Old Treaty and the New Treaty (as defined below).
It applies to a US holder only if the US holder holds the ADSs or Ordinary
Shares as capital assets for tax purposes. This section does not apply to a US
holder that is a member of a special class of holders subject to special rules,
including a dealer in securities, a trader in securities that elects to use a
mark-to-market method of accounting for his securities holdings, a tax-exempt
organization, a life insurance company, a person liable for alternative minimum
tax, a person that actually or constructively owns 10 per cent or more of the
stock of the Company, a person that holds ADSs or Ordinary Shares as part of a
straddle or a hedging or conversion transaction, a person whose functional
currency is not the US dollar and holders who acquired the stock units or ADSs
as compensation. This summary is based on the US Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations, published rulings and
court decisions, and on the UK tax law and practice all as in effect of the
date of this document, as well as on the Convention between the United States
of America and the United Kingdom for the avoidance of Double Taxation as
entered into force in 1980 (the Old Treaty) and the Convention between the
United States of America and the United Kingdom for the Avoidance of Double
Taxation entered in force March 31, 2003 (the New Treaty). These laws are
subject to changes, possibly on a retroactive basis. The New Treaty generally is effective in respect of taxes withheld at source
for amounts paid or credited on or after May 1, 2003. Other provisions of the
New Treaty, however, took effect on January 1, 2004. The rules of the Old
Treaty remain applicable until these effective dates. A US holder, however,
that is eligible for the benefits of the Old Treaty and the New Treaty may
elect to have the Old Treaty apply in its entirety for a period of 12 months
after the applicable effective dates of the New Treaty. This summary is also based in part on representations of the US Depositary and
assumes that each obligation provided for in, or otherwise contemplated by, the
Deposit Agreement between Vernalis, the Bank of New York as Depositary and all
owners from time to time of ADRs issued thereunder dated July 7, 1992 and
amended and restated as of August 5, 1996 and any related agreement, will be
performed in accordance with its terms. A US holder is a beneficial owner of ADSs or Ordinary Shares that is for US
Federal income tax purposes:  
    
    a citizen or resident of the United Sates;  
    
    a domestic corporation;  
    
    an estate whose income is subject to US Federal income tax regardless of its source; or  
    
    a trust if a US court can exercise primary supervision over the trusts administration and one or more US persons are
authorized to control all substantial decisions of the trust. US holders should consult their own tax advisers regarding the US Federal,
state and local and the UK and other tax consequences of owning and disposing
of the ADSs or Ordinary Shares in their particular circumstances and in
particular whether they are eligible for the benefits of the Old Treaty and the
New Treaty. In general and taking into account earlier assumptions, for US Federal income
tax and United Kingdom tax purposes, if a US holder holds ADRs evidencing ADSs,
the holder will be treated as the owner of the Ordinary Shares represented by
those ADSs. Accordingly, except as noted below, the tax consequences discussed
below apply equally to US holders of ADSs and to US holders of Ordinary Shares
not in ADS form, and exchanges of Ordinary Shares for ADRs, and ADRs for
Ordinary Shares, generally will not be subject to US Federal income tax or to
UK tax. Taxation of Dividends United Kingdom Income Tax For the purposes of this summary, the term Eligible US holder means a
beneficial owner of an ADS or Ordinary Share that derives and beneficially owns
the cash dividend paid thereon and that is a resident of the United States for
the purposes of the Convention relating to income and capital gains taxes (the
Income Tax Convention). 75




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An Eligible US holder will generally be entitled under the current Income Tax
Convention to receive, in addition to any dividend paid by the Company, an
amount equal to the tax credit available to UK resident shareholders in respect
of such dividend, currently equal to one-ninth of the dividend paid, but
subject to a notional withholding tax equal to 15 per cent of the sum of the
dividend paid and the tax credit. The withholding tax will exceed the tax
credit and therefore no additional payment will result. The amount of withholding tax is restricted to the amount of the tax credit and
no additional withholding tax is due in situations where the withholding tax is
more than the credit. For example, a dividend of £80.00 to an individual Eligible US holder would
generally entitle the individual Eligible US holder to receive a tax credit of
approximately £8.89 (i.e. one-ninth of 80) and the amount of withholding tax
will be limited to £8.89 (even though 15 per cent of the gross dividend would
be £13.33). The result is the refund to which the individual Eligible US holder
would otherwise be entitled is eliminated and no withholding tax is due. Such
an Eligible US holder would, therefore, only receive the net amount of the
dividend, i.e. £80.00. It is anticipated that almost all ADS holders will be subject to the above
arrangements. US shareholders who own less than 10 per cent of the voting stock as portfolio
investors, and who are entitled to a tax credit under the Income Tax Convention
may elect to be treated as receiving an amount equal to the credit without
affirmatively making a claim to the United Kingdom or obtaining a receipt
therefrom. This election is made on Line 5 of Form 8833, which is to be filed
with the portfolio investors income tax return. Such an investor making this
election will be treated as having received an additional dividend equal to the
gross tax credit payment and as having paid the UK withholding tax on such tax
credit payment. United States Federal Income Tax Subject to the passive foreign investment company, rules discussed below, a US
holder is subject to US Federal income taxation on the gross amount of any
dividend paid by Vernalis out of its current or accumulated earnings and
profits (as determined for US Federal income tax purposes). The PFIC rules,
however, materially alter this treatment. A US holder that is eligible for the
benefits of the Old Treaty may include in the gross amount the UK tax withheld
from the dividend payment pursuant to the Old Treaty, as described above in
United Kingdom Taxation. Subject to certain limitations, the UK tax withheld
in accordance with the Old Treaty and effectively paid over to the UK Inland
Revenue will be creditable against the US holders US Federal income tax
liability, if the US holder is eligible for the benefits of the Old Treaty and
has appropriately filed Internal Revenue Form 8833. Under the New Treaty, a US
holder will not be entitled to a UK tax refund, but also not be subject to UK
withholding tax. In that case, the US holder therefore will include in income
for US Federal income tax purposes only the amount of the dividend actually
received from Vernalis, and the receipt of a dividend will not entitle the US
holder to a foreign tax credit. Dividends will be income from sources outside
the United States, and generally will be passive income or financial
services income which is treated separately from other types of income for
purposes of computing the allowable foreign tax credit. Dividends paid to a non-corporate US holder in taxable years beginning after
December 31, 2002 and before January 1, 2009 that constitute qualified dividend
income will be taxable to the holder at a maximum rate of 15 per cent if
certain holding period requirements are met. Dividends paid by Vernalis,
however, likely will not be qualified dividend income as described below in
Passive Foreign Investment Company Considerations. The amount of the dividend distribution that the US holder must include in his
income is the US dollar value of the pound payment made, determined at the spot
pound/US dollar rate on the date the dividend distribution is includible in the
US holders income, regardless of whether the payment is in fact converted into
US dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the US holder includes the
dividend payment in income to the date the US holder converts the payment into
US dollars will be treated as ordinary income or loss. The gain or loss
generally will be income or loss from sources within the United States for
foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as
determined for US Federal income tax purposes, will be treated as a non-taxable
return of capital to the extent of the US holders basis in the Ordinary Shares
or ADRs, and thereafter as capital gain. No dividends received deduction will
be allowed to US corporations with respect to dividends paid by the Company. Special rules described below apply with respect to dividends distributed to a
US holder during periods in which Ordinary Shares or ADSs are treated as stock
of a passive foreign investment company, as described above. Taxation of Capital Gains United Kingdom Capital Gains Tax A US holder who is not resident or ordinarily resident in the UK for UK tax
purposes will not normally be liable for UK 76




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tax on capital gains realized or
accrued on the sale or other disposal of Ordinary Shares or ADSs unless such
Ordinary Shares or ADSs are held in connection with a trade, profession or
vocation carried on by such US holder in the UK through a branch or agency and
the Ordinary Shares or the ADSs are, or have been used, held or acquired for
the purposes of such trade, profession or vocation or such branch or agency. United States Federal Income Tax Subject to the passive foreign investment company rules discussed below, if a
US holder sells or otherwise disposes of his Ordinary Shares or ADSs, he will
recognize capital gain or loss for US Federal income tax purposes equal to the
difference between the US dollar value of the amount that the US holder
realizes and his tax basis, determined in US dollars, in his Ordinary Shares or
ADSs. Capital gain of a noncorporate US holder that is recognized after May 5,
2003 and before January 1, 2009 is generally taxed at a maximum rate of 15 per
cent where the holder has a holding period greater than one year. The gain or
loss will generally be income or loss from sources within the United States for
foreign tax credit limitation purposes. The PFIC rules, however, materially
alter the United States federal income tax treatment described here. Passive Foreign Investment Company Considerations The Company believes that for the taxable period ending December 31, 2003,
Ordinary Shares and ADSs will be treated as stock of a passive foreign
investment company (PFIC) for US Federal income tax purposes. Although it is
possible that the Company will not be a PFIC in future years, US holders who
held the Companys Ordinary Shares or ADSs during the companys taxable period
ending December 31, 2003 will be subject to the PFIC rules for all subsequent
taxable years, unless the US holder makes a QEF election as described below.
The conclusion that the Company is properly classified as a PFIC is a factual
determination made annually and thus is subject to change. The Company will
monitor its status and will, promptly following the end of each taxable year,
notify shareholders, if it believes that it is properly classified as a PFIC
for that taxable year. The following is a general discussion of the PFIC rules applicable to US
holders who hold Ordinary Shares or ADSs during any taxable year of the Company
in which the Company is treated as a PFIC. Under PFIC rules, a US holder that does not make a QEF election or
mark-to-market election, each as described below, is subject to special rules
with respect to: (a) any gain realized on the sale or other disposition of
Ordinary Shares or ADSs; and (b) any excess distribution by the Company to
the US holder (generally, any distributions to the US holder in respect of the
Ordinary Shares or ADSs during a single taxable year that are greater than 125
per cent of the average annual distributions received by the US holder in
respect of the Ordinary Shares or ADSs during the three preceding taxable years
or, if shorter, the US holders holding period for the Ordinary Shares or
ADSs). Under these rules: (i) the gain or excess distribution would be
allocated ratably over the US holders holding period for the Ordinary Shares
or ADSs; (ii) the amount allocated to the taxable year in which the gain or
excess distribution was realized would be taxable as ordinary income; (iii) the
amount allocated to each prior year for which the Company is treated as a PFIC,
with certain exceptions, would be subject to tax at the highest tax rate in
effect for that year; and (iv) the interest charge generally applicable to
underpayments of tax would be imposed in respect of tax attributable to each
such year. The special PFIC tax rules described above will not apply to a US holder if the
US holder makes an election to have the Company treated as a qualified
electing fund (a QEF election) for the first taxable year in which the US
holder owns Ordinary Shares or ADSs and for which the Company is treated as a
PFIC, and the Company provides certain required information to holders. The
election generally must be made with the US holders US Federal income tax
return for the taxable year of the US holder that includes the last day of the
first taxable year of the Company for which the Company is treated as a PFIC. Once a US holder makes a QEF election, the election will apply to all
subsequent taxable years of the US holder with respect to the Company, unless
the US holder revokes the election with the consent of the Internal Revenue
Service. The Company intends to provide registered shareholders, on request,
with such information as may be required to make a QEF election effective. A US holder that makes a QEF election will be currently taxable on its pro rata
share of the Companys ordinary earnings and net capital gain (at ordinary
income and capital gain rates, respectively) for each taxable year of the
Company, regardless of whether or not distributions were received. The US
holders basis in the Ordinary Shares or ADSs will be increased to reflect
taxed but undistributed income. Distributions of income that had previously
been taxed will result in a corresponding reduction of basis in the Ordinary
Shares or ADSs and will not be taxed again as a distribution to the US holder.
If the Company ceases to be a PFIC, a US holder that has made a valid QEF
election will no longer be currently taxable on its pro rata share of the
Companys ordinary earnings and net capital gain. The special PFIC tax rules described above will also not apply to a US holder
of marketable stock, if the U.S. holder makes an election to mark to market
such stock (a mark-to-market election). The ADSs will be considered marketable
stock for these purposes. However, there is no certainty that the Ordinary
Shares will be considered marketable stock for these purposes unless and
until the Internal Revenue Service designates the London Stock Exchange as
having rules adequate to carry out the purposes of the PFIC rules. There can be
no assurance that the Internal Revenue Service will make such a designation. 77




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A US holder that makes a mark-to-market election must include in each year for
which the election applies, as ordinary income, an amount equal to the excess
of the fair market value of the Ordinary Shares or ADSs at the close of the
taxable year over the US holders adjusted basis in the Ordinary Shares or
ADSs, and is allowed a deduction for any excess of the adjusted basis over the
fair market value of the Ordinary Shares or ADSs, but only to the extent of
previously included mark-to-market inclusions. A US holders adjusted basis in
the Ordinary Shares or ADSs will be adjusted to reflect the amounts included or
deducted with respect to the mark-to-market election, and any gain or loss on
the disposition of Ordinary Shares or ADSs would generally be ordinary income
or, to the extent of previously included mark-to-market inclusions, ordinary
loss. An election to mark-to-market will apply to the taxable year for which
made and for all subsequent taxable years unless the Ordinary Shares or ADSs
cease to be marketable stock or the Secretary of the Treasury consents to the
revocation of such election. It is not certain, if the Company ceases to be a
PFIC, whether a US holder that has made a valid mark-to-market election will be
required to continue to include in income amounts determined under the
mark-to-market regime. A US holder that has not made a QEF election with respect to the Company will
continue to be subject to the PFIC rules unless it makes a deemed sale
election under Section 1298(b)(1) of the Code. A US holder that makes a deemed
sale election will be treated as if it had sold its Ordinary Shares or ADSs on
the last day of the last taxable year of the Company in which the Company was a
PFIC and will be required to recognize for Federal income tax purposes any gain
(but not loss) realized on the deemed sale. A US holder that makes a deemed
sale election will no longer be subject to the PFIC rules, unless the Company
again becomes a PFIC. US holders that have not already made a QEF election with
respect to the Company are advised to consult with their tax adviser as to the
desirability of making a deemed sale election. A deemed sale election may be made by filing an amended tax return for the
taxable year that includes the last day of the last taxable year of the Company
in which the Company was a PFIC, together with Form 8621 or a statement,
prepared in accordance with Temporary US Treasury Regulation Section 1.1297-3T,
reporting any gain or loss recognized on the deemed sale. Gain recognized on
the deemed sale will be allocated pro rata to each day in the US holders
holding period for its Ordinary Shares or ADSs as of the last day of the last
taxable year of the Company in which the Company was a PFIC and will be taxed
as ordinary income. Any gain allocated to a prior taxable year will be taxed at
the highest marginal rate in effect for such year. In addition, the US holder
will be required to pay interest on the tax due, based on the rates applicable
to underpayments of tax in effect for the relevant taxable years. Loss on the
deemed sale must be reported on Form 8621, but will not be recognized for
Federal income tax purposes. A US holder that recognizes gain pursuant to a
deemed sale election will increase its basis in its Ordinary Shares or ADSs by
the amount of the gain recognized. A deemed sale election must be made within 3
years of the due date, including extensions, of the US holders tax return for
the taxable year that included the last day of the last taxable year of the
Company in which the Company was a PFIC. Special rules apply with respect to the calculation of the amount of the
foreign tax credit with respect to excess distributions by a PFIC or, in
certain cases, QEF inclusions. In general, these rules allocate creditable
foreign taxes over the US holders holding period for the Ordinary Shares or
ADSs and otherwise coordinate the foreign tax credit limitation rules with the
PFIC rules. In addition, notwithstanding any election a US holder makes with regard to the
Ordinary Shares or ADS, dividends received from Vernalis by the US holder will
not constitute qualified dividend income to the holder if we are a PFIC either
in the taxable year of the distribution or the preceding taxable year.
Dividends received by the US holder that do not constitute qualified dividend
income are not eligible for the 15 per cent maximum rate applicable to
qualified dividend income. Instead, the US holder must include the gross amount
of any such dividend paid by Vernalis out of its accumulated earnings and
profits (as determined for US Federal income tax purposes) in its gross income,
and it will be subject to tax at rates applicable to ordinary income. A US holder that owns Ordinary Shares or ADSs during any year that the Company
is a PFIC must file Internal Revenue Service Form 8621. Inheritance Tax An ADS or Ordinary Share owned by an individual US holder who, for the purposes
of the convention relating to estate and gift taxes between the US and the UK
(the Estate and Gift Tax Convention), is domiciled in the US and is not a
national of the UK is not generally subject to UK inheritance tax in respect of
the ADSs or Ordinary Shares on the individuals death or on a gift made by the
individual during his lifetime except where the ADS or Ordinary Share is part
of the business property of a UK permanent establishment or pertains to a UK
fixed base used for the performance of independent personal services. The
Estate and Gift Tax Convention generally provides for inheritance tax paid in
the UK to be credited against US Federal gift or estate tax payable in the US
and for US Federal gift or estate tax paid in the US to be credited against any
inheritance tax payable in the UK, based on priority rules set forth in that
Convention, in a case where an ADS or Ordinary Share is subject both to UK
inheritance tax and to US Federal gift or estate tax. There are special rules
applying to ADSs or Ordinary Shares held in trust. 78




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Stamp Duty and Stamp Duty Reserve Tax (SDRT) Stamp duty or SDRT at 1.5 per cent arises upon the deposit with the Depositary
of the Ordinary Shares. The rate is applied to the amount or value of the
consideration for the sale, or, if the transaction is not a transfer on sale,
the value of the Ordinary Shares at the date on which the instrument of
transfer transferring the Ordinary Shares is executed. The duty is then rounded
up to the nearest 1p in the case of SDRT or £5 in the case of stamp duty. On
the transfer of Ordinary Shares to the Depositary, stamp duty or SDRT will be
payable by the Depositary. Under the Deposit Agreement, holders of ADRs must
pay an amount in respect of such duty or tax to the Depositary. Provided that any agreement to transfer or instrument of transfer is not
executed in the UK and remains at all subsequent times outside the UK, no UK
stamp duty will be payable on the acquisition or transfer of ADSs evidenced by
ADRs. An agreement to transfer ADSs evidenced by ADRs should not give rise to a
liability to SDRT. A transfer of Ordinary Shares by the Depositary or its nominee to the relative
ADR holder when the ADR holder is not transferring beneficial ownership should
not give rise to any SDRT and should only give rise to UK stamp duty at the
rate of £5 per transfer. Purchases of Ordinary Shares, as opposed to ADSs, will normally give rise to a
charge to UK stamp duty or SDRT at the rate of 0.5 per cent (rounded up to the
nearest 1p in the case of SDRT or £5 in the case of stamp duty) of the price
payable for the Ordinary Shares at the time of the transfer. SDRT is the
liability of the purchaser and stamp duty is also usually paid by the
purchaser. Where such Ordinary Shares are later transferred to the Depositarys
nominee, further stamp duty or SDRT at the 1.5 per cent rate will normally be
payable. Where Ordinary Shares being acquired are transferred directly to the
Depositarys nominee, the charge will generally be the higher charge of 1.5 per
cent of the price payable for the Ordinary Shares so acquired. F  Documents on Display This Form 20-F and any related documents may be inspected by investors at the
Companys registered office at Oakdene Court, 613 Reading Road, Winnersh,
Berkshire, RG41 5UA or at the public reference room of the SEC located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington DC 20549, at
prescribed rates. More information concerning the public reference room of the
SEC can be obtained by calling the SEC at 1-800-SEC-0330. The SEC filings of
the Company are also available to the public from commercial document retrieval
services and, for filings made on or after November 4, 2002, at the website
maintained by the SEC at www.sec.gov. 
 ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information presented under this Item relates to Vernalis plc and its
consolidated subsidiaries for the fiscal period reported. Details of Vernaliss exposure to market risk and its management of risk are
provided in Item 3. Risk Factors and Note 24 of the Consolidated Financial
Statements which are incorporated herein by reference. 
 ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 79




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PART II 
 ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS None. 
 ITEM 15.  CONTROLS AND PROCEDURES The management of Vernalis, including its Chief Executive Officer and Chief
Financial Officer has evaluated, the effectiveness of the design and operation
of the Companys disclosure controls and procedures (as defined under
Securities and Exchange Commission rules) as at December 31, 2003. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective as of December 31, 2003. During the period covered by
this transition report there were no changes in connection with the Companys
internal controls over financial reporting, nor were any changes identified
that had, or may reasonably have been expected to have, a material effect on
internal controls over financial reporting. 
 ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT The Board has determined that Ms C C Ferguson qualifies as an audit committee
financial expert, as such term is defined for purposes of this Item 16A. In
order to further supplement her skills specific advisers and experts will
continue to be engaged to provide independent advice to her as well as to the
management and other members of the committee. 
 ITEM 16B.  CODE OF ETHICS The Company does not currently have a code of ethics as defined for purposes of
this Item 16B. The Company is in the process of conducting a survey of the
existing policies applicable to employees and directors of the three entities,
the Company (formerly British Biotech plc), Vernalis Group and RiboTargets
Holdings plc, that were combined during 2003 to form the current Group, and
intends to adopt a code of ethics as defined for purposes of this Item in the
near future. 
 ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES The Companys principal independent auditor is PricewaterhouseCoopers LLP,
London, UK. In accordance with the Sarbanes-Oxley Act of 2002, the auditors
will not be engaged on any non-audit work which may compromise their
independence. Fees billed to the Company for professional services by PricewaterhouseCoopers
in fiscal 2002, and by PricewaterhouseCoopers LLP in fiscal 2003 and in the
eight month transition to December 31, 2003, were as follows: Year ended April 30,
    
    Eight months endedDecember 31,2002
    
    2003
    
    2003£000
    
    £000
    
    £000Audit fees
    
    
    65
    
    
    
    110
    
    
    
    96Audit-related fees
    
    
    133
    
    
    
    148
    
    
    
    170Taxation
    
    
    84
    
    
    
    134
    
    
    
    76All other fees
    
    
    162
    
    
    
    513
    
    
    
    390444
    
    
    
    905
    
    
    
    732
 Audit-related fees relates principally to SEC and UK Listing Authority
compliance work in relation to the Company and to Vernalis Group plc. Tax fees relates to tax compliance work, together with advice on the tax
treatment of completed and proposed collaborations. All other fees for the eight month transitional period ended December 31,
2003, of £390,000 relates to reporting accounting work in respect of the
Placing and Open Offer by Vernalis Group in May 2003 and the merger between 80




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British Biotech and Vernalis Group. All other fees for fiscal 2003 of
£513,000 relates to the acqisition of RiboTargets and the
proposed merger with
MorphoSys. All other fees for fiscal 2002 of £162,000 relates to the proposed
fundraising by Vernalis Group in that year. See also Note 4d to the Consolidated Financial Statements. Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors All engagements of the independent auditors by the Company or any of its
subsidiaries to provide audit or non-audit services are approved by the Audit
Committee through one or two methods. The Audit Committee may approve the
service before the independent auditor is engaged to provide such service or
the Audit Committee may designate one or more of its members who are
independent to pre-approve audit and non-audit services. The Audit Committee may from time to time designate one or more of its members,
who are independent, to pre-approve any audit service or permissible non-audit
service to be provided by the independent auditor. The member(s) exercising
such delegated authority must report at the next scheduled meeting of the Audit
Committee any services that were pre-approved under this delegated authority
since the date of the last scheduled meeting. The scope of the engagements being pre-approved is designed to (1) detail the
particular service for which the independent auditor is approved to be engaged,
(2) ensure that the Audit Committee is promptly informed of each service
performed under the pre-approved engagement and (3) ensure that the Audit
Committees responsibilities under the Securities Exchange Act of 1934, as
amended, are not delegated to management. If the Audit Committee pre-approves a service provided by the Independent
Auditor, the amount of time between the time of pre-approval and the time at
which the independent auditor is engaged as well as the time at which the
Independent Auditor commences work on the engagement is considered carefully by
the Audit Committee. Generally, the Audit Committee will not pre-approve a
service more than one year prior to the time at which it is anticipated that
the independent auditor will commence work. The Company provides a report to the Audit Committee of each service performed
pursuant to the pre-approved engagement at the first meeting of the Audit
Committee held following the commencement of such service. The report to the
Audit Committee may take the form of an oral report and includes a description
of each particular service and the fees and expenses therefore. All engagement
letters entered into pursuant to pre-approved engagements are made available to
the Audit Committee. 
 ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES Not applicable until the Companys annual report for the fiscal year ending
December 31, 2005 
 ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable until the Companys annual report on Form 20-F for the fiscal
year ending December 31, 2004. 81




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PART III 
 ITEM 17.  FINANCIAL STATEMENTS Not applicable. 
 ITEM 18.  FINANCIAL STATEMENTS The financial statements presented under this Item are the financial statements
of Vernalis plc and its consolidated subsidiaries for the reported periods
other than post balance sheet events described in Note 26 to the Notes to the
Consolidated Financial Statements. The following Consolidated Financial Statements and related Notes thereto,
together with the report of PricewaterhouseCoopers LLP thereon, are filed as
part of this Transition Report on Form 20-F. PageReport of Independent Accountants
    
    
    F-1Consolidated Statements of Income
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Cash Flow Statements
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity
    

    F-5Notes to Consolidated Financial Statements
    

    F-6 to F-37
 Financial statements schedules have been omitted because the required
information is shown in the Consolidated Financial Statements or the related
Notes thereto. 
 ITEM 19.  EXHIBITS The following documents are filed as exhibits to this Transition Report on Form
20-F: 1.
    
    Memorandum and Articles of Association of the Company(1)4.
    
    Material Contracts:4.1
    
    Service Contracts of Directors(a)
    
    Service Agreement, dated March 21, 2003 between the Company and Peter
Fellner(1)(b)
    
    Service Agreement dated March 21, 2003, between the Company and Simon
Sturge including Letter of Amendment between the Company and Simon Sturge,
dated July 17, 2003.(1)(c)
    
    Service Agreement, dated June 24, 1999, between the Company and Tony Weir(2) including Letter of Amendment dated March 31, 2003, between the
Company and Tony Weir and Letter of Amendment dated July 17, 2003 between
the Company and Tony Weir.(1)(d)
    
    Service Agreement, dated July 2, 2003, between the Company and Peter Worrall(1)(e)
    
    Service Agreement dated July 2, 2003, between the Company and John
Hutchison(1)(f)
    
    Engagement Letter between the Company and Peter Read, dated July 18, 2003(1)(g)
    
    Engagement Letter between the Company and George Kennedy, dated July 17,
2003(1)(h)
    
    Engagement Letter between the Company and Carol Ferguson, dated July 17,
2003(1)(i)
    
    Engagement Letter between the Company and Keith Merrifield, dated
December 1, 1999(2), Engagement Letter between the Company and Keith
Merrifield, dated March 21, 2003 including Letter of Amendment between the
Company and Keith Merrifield, dated July 17, 2003.(1)(j)
    
    Engagement Letter between the Company and Ian Kent, dated March 21, 2003
including Letter of Amendment between the Company and Ian Kent, dated July
17, 2003.(1)(k)
    
    Engagement Letter between the Company and Eugene Williams, dated December
12, 2000(2). Engagement letter between the Company and Eugene Williams,
dated March 21, 2003 including Letter of Amendment
 82




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##### Table of Contents



between the Company and
Eugene Williams dated July 17, 2003.(1)(l)
    
    Engagement Letter between the Company and Timothy Edwards, dated June 24,
1999(2)(3)(m)
    
    Engagement Letter between the Company and Elliot Goldstein, dated October
6, 1998(2)(3)(n)
    
    Engagement Letter between the Company and Alan Baxter, dated May 19, 20044.2
    
    Acquisition of Ribo Targets(a)
    
    Offer for the acquisition by the Company of RiboTargets dated March 21,
2003(1)(b)
    
    Deed of covenant dated March 17, 2003 entered into by the Company in
favour of RiboTargets(1)(c)
    
    Undertaking dated March 21, 2003 entered into by certain (now former)
RiboTargets shareholders(1)4.3
    
    Merger with Vernalis Group plc(a)
    
    Offer for the acquisition by the Company of Vernalis Group plc dated July
25, 2003(1)4.4
    
    Agreements originally entered into by Vernalis Group plc(a)
    
    Lease between Allied Dunbar Assurance plc (successor to Marion Merrel
Limited) and Vernalis Research Limited (successor to Cerebrus Limited)
dated May 13, 1997(1)(b)
    
    Sub-License Agreement between Menarini International Operations
Luxembourg SA and Vernalis Development Limited (formerly known as Vanguard
Medica Limited) dated as of September 10, 1999(4)(c)
    
    Supply Agreement between Vernalis Development Limited (formerly known as
Vanguard Medica Limited) and Menarini International Operations Luxembourg
SA, dated as of September 10, 1999(1)(d)
    
    Second Amending Agreement dated
November 27, 2000(1), and Third Amending
Agreement dated March 1, 2004, both amending the Frovatriptan Development
and Sublicense Agreement between SmithKline Beecham plc and Vernalis
Development Limited (formerly known as Vanguard Medica Limited).(e)
    
    Second Amended and Restated License Agreement between Elan Pharma
International Limited and Vernalis Limited, dated March 15, 2002, amending
and restating the Amended and Restated Sub-License Agreement between the
parties, dated as of December 12, 2000(4).(f)
    
    £7,000,000 Convertible Loan Agreement between Vernalis Group plc and
Roche Finance Ltd, dated May 13, 2002(4)(g)
    
    Placing and Open Offer Agreement, dated May 1, 2003, between Vernalis Group
plc and Cazenove(1)4.5
    
    Reacquisition of North American Rights to Frovatriptan(a)
    
    Agreement for the Sale and Purchase of the North American Frova Assets of
Elan, among Elan Pharma International Limited, Elan Pharmaceuticals, Inc.,
Elan Pharma Limited and Vernalis plc, dated March 29, 2003.(b)
    
    Transitional Services Agreement between Elan Corporation plc, Elan
Pharmaceuticals Inc, Elan Pharma Ltd and Vernalis Development Ltd dated
May 18, 2004.(c)
    
    Floating Charge between Vernalis Development Ltd and Elan Pharma
International Ltd dated May 18, 2004.4.6
    
    Other contracts(a)
    
    The Company Discretionary Share Option Plan(1)(b)
    
    Deed of Grant of Option, dated April 23, 2003, between the Company and
Peter Fellner(1)8.
    
    List of subsidiaries of the Group(5)12.
    
    CEO and Finance Director Certifications pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
 83




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##### Table of Contents



13.
    
    CEO and Finance Director Certifications pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934(6)(1)
    
    Incorporated by reference to the Annual Report of Vernalis plc on Form
20-F for the year ended April 30, 2003.(2)
    
    Incorporated by reference to the Annual Report of British Biotech plc on
Form 20-F for the year ended April 30, 2001.(3)
    
    Timothy Edwards and Elliot Goldstein have stepped down from the Board of
the Company.(4)
    
    Confidential treatment was requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission by Vernalis Group plc (File
No: 0-31200) in connection with its registration statement on Form 20-F filed
with the SEC on September 17, 2001 and the Annual Report on Form 20-F
filed with the SEC July 1, 2002.(5)
    
    Incorporated by reference to Item 4L Organizational Structure of this
Transition Report on Form 20-F.(6)
    
    Furnished but not filed.
 
 SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this transition report on its behalf. Vernalis plc
(Registrant)By:
    /s/ A J WeirName:
    Anthony J WeirTitle:
    Chief Financial Officer Date:
June 15, 2004 84




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VERNALIS PLC
 
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Vernalis plc In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in
shareholders equity present fairly, in all material respects, the financial
position of Vernalis plc and its subsidiaries at December 31, 2003 and April
30, 2003 and 2002, and the results of their operations and their cash flows for
each of the three years in the period ended April 30, 2003, and the eight
months ended December 31, 2003 in conformity with accounting principles
generally accepted in the United Kingdom. These financial statements are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). These standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has entered into transactions which will require it to seek additional
funds during the next 12 months that raise substantial doubt about its ability
to continue as a going concern. Managements plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of such
differences is presented in Note 3 to the consolidated financial statements. PricewaterhouseCoopers LLP
London, UK
June 11, 2004 F-1




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##### Table of Contents



VERNALIS PLCCONSOLIDATED STATEMENTS OF INCOME Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Revenue (Note 4a)
    
    
    4,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631Costs and expensesCost of goods sold
    
    
    
    
    
    
    
    
    
    
    (418
    )
    
    
    (228
    )Research and development expenditure
    
    
    (43,291
    )
    
    
    (38,152
    )
    
    
    (30,512
    )
    
    
    (26,890
    )Selling, general & administration expenses
    
    
    (9,485
    )
    
    
    (11,732
    )
    
    
    (14,276
    )
    
    
    (10,901
    )Other operating (expenses) / income
    
    
    (276
    )
    
    
    164
    
    
    
    (186
    )
    
    
    Total operating costs & expenses (Note 4d)
    
    
    (53,052
    )
    
    
    (49,720
    )
    
    
    (45,392
    )
    
    
    (38,019
    )Operating loss (Note 4)
    
    
    (48,436
    )
    
    
    (34,954
    )
    
    
    (36,249
    )
    
    
    (29,388
    )Profit / (provision for loss) on disposal of
fixed assets
    
    
    
    
    
    
    2,505
    
    
    
    
    
    
    
    (2,988
    )Merger transaction expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,396
    )Amount written off investments
    
    
    (799
    )
    
    
    (324
    )
    
    
    (799
    )
    
    
    (862
    )Costs of restructuring
    
    
    (1,182
    )
    
    
    
    
    
    
    
    
    
    
    Net Interest (Note 6)
    
    
    4,199
    
    
    
    2,783
    
    
    
    2,803
    
    
    
    1,770Loss before provision for income taxes
    
    
    (46,218
    )
    
    
    (29,990
    )
    
    
    (34,245
    )
    
    
    (36,864
    )Provision for income taxes (Note 7)
    
    
    1,849
    
    
    
    2,899
    
    
    
    3,659
    
    
    
    2,645Net loss
    
    
    (44,369
    )
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )Net loss per share (basic and diluted)  restated
    
    
    (64.3
    )p
    
    
    (38.6
    )p
    
    
    (43.1
    )p
    
    
    (24.9
    )pOrdinary Shares used in computingNet loss per share (000s)  restated
    
    
    69,021
    
    
    
    70,175
    
    
    
    71,010
    
    
    
    137,219
 All potential ordinary shares, including options and deferred shares, are
anti-dilutive. STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES Year ended April 30,
    
    Eight monthsendedDecember 312001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Net loss for the financial year / period
    
    
    (44,369
    )
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )Translation of overseas subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total losses recognized during the year / period
    
    
    (44,369
    )
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
 The notes on pages F-6 to F-37 are an integral part of these Consolidated
Financial Statements. F-2




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##### Table of Contents



VERNALIS PLCCONSOLIDATED BALANCE SHEETS April 30,
    
    April 30,
    
    December 31,2002
    
    2003
    
    2003£000
    
    £000
    
    £000Fixed assetsIntangible assets (Note 9)
    
    
    23,791
    
    
    
    28,687
    
    
    
    22,925Tangible
assets (Note 10)
    
    
    10,245
    
    
    
    11,564
    
    
    
    7,508Investments (Note 11)
    
    
    1,961
    
    
    
    1,107
    
    
    
    8335,997
    
    
    
    41,358
    
    
    
    30,516Current assetsStock
    
    
    
    
    
    
    57
    
    
    
    49Debtors (Note 12)
    
    
    5,757
    
    
    
    11,984
    
    
    
    10,991Short term deposits and investments
    
    
    62,709
    
    
    
    48,115
    
    
    
    22,329Cash
    
    
    273
    
    
    
    339
    
    
    
    1,88568,739
    
    
    
    60,495
    
    
    
    35,254Current liabilitiesCreditors: amounts falling due within one year (Note 13)
    
    
    (18,957
    )
    
    
    (20,987
    )
    
    
    (19,773
    )Net current assets
    
    
    49,782
    
    
    
    39,508
    
    
    
    15,481Total assets less current liabilities
    
    
    85,779
    
    
    
    80,866
    
    
    
    45,997Creditors: amounts falling due after more than one year
(Note 14)
    
    
    (22,227
    )
    
    
    (24,773
    )
    
    
    (8,119
    )Provisions for liabilities and charges (Note 15)
    
    
    (250
    )
    
    
    (2,517
    )
    
    
    (4,089
    )Net assets
    
    
    63,302
    
    
    
    53,576
    
    
    
    33,789Capital and reservesShare capital (note 16)
    
    
    35,221
    
    
    
    36,895
    
    
    
    38,813Share premium account
    
    
    298,615
    
    
    
    298,252
    
    
    
    298,226Merger reserve
    
    
    89,328
    
    
    
    89,445
    
    
    
    101,985Other reserve
    
    
    30,733
    
    
    
    50,776
    
    
    
    50,776Profit and loss account
    
    
    (390,595
    )
    
    
    (421,792
    )
    
    
    (456,011
    )Total shareholders funds
    
    
    63,302
    
    
    
    53,576
    
    
    
    33,789ANALYSIS OF SHAREHOLDERS FUNDSEquity
    
    
    31,595
    
    
    
    21,869
    
    
    
    2,082Non-Equity
    
    
    31,707
    
    
    
    31,707
    
    
    
    31,70763,302
    
    
    
    53,576
    
    
    
    33,789
 The notes on pages F-6 to F-37 are an integral part of these Consolidated
Financial Statements. F-3




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##### Table of Contents



VERNALIS PLCCONSOLIDATED CASH FLOW STATEMENTS Year ended April 30,
    
    Eight monthsendedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Net cash outflow from operating activities (Note 20)
    
    
    (40,644
    )
    
    
    (30,302
    )
    
    
    (36,448
    )
    
    
    (34,089
    )Returns on investments and servicing of finance (Note 21)
    
    
    5,042
    
    
    
    3,026
    
    
    
    1,952
    
    
    
    659Taxation
    
    
    1,703
    
    
    
    1,618
    
    
    
    3,169
    
    
    
    2,783Capital expenditure (Note 22)
    
    
    6,569
    
    
    
    799
    
    
    
    (4,299
    )
    
    
    (16
    )Cash utilized by operations
    
    
    (27,330
    )
    
    
    (24,859
    )
    
    
    (35,626
    )
    
    
    (30,663
    )Acquisitions  purchase of subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    1,967
    
    
    
    Management of liquid resources
    
    
    21,260
    
    
    
    19,453
    
    
    
    27,443
    
    
    
    25,786Financing (Note 23)
    
    
    6,531
    
    
    
    4,757
    
    
    
    6,215
    
    
    
    6,478Increase / (decrease) in cash in the period
    
    
    461
    
    
    
    (649
    )
    
    
    (1
    )
    
    
    1,601
 Reconciliation of net cash flow to movement in net funds Year ended April 30,
    
    Eight monthsendedDecember 312001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Increase / (decrease) in cash in the period
    
    
    461
    
    
    
    (649
    )
    
    
    (1
    )
    
    
    1,601Cash used to decrease (provided by) debt and lease financing
    
    
    (3,086
    )
    
    
    4,300
    
    
    
    (6,291
    )
    
    
    7,955Cash used to decrease liquid resources
    
    
    (21,260
    )
    
    
    (19,453
    )
    
    
    (27,443
    )
    
    
    (25,786
    )Exchange adjustment
    
    
    35
    
    
    
    62
    
    
    
    29
    
    
    
    (55
    )Finance leases acquired with subsidiary
    
    
    
    
    
    
    
    
    
    
    (1,269
    )
    
    
    Liquid resources acquired with subsidiary
    
    
    
    
    
    
    
    
    
    
    12,903
    
    
    
    Movement in net funds in the period
    
    
    (23,850
    )
    
    
    (15,740
    )
    
    
    (22,072
    )
    
    
    (16,285
    )Net funds at May 01
    
    
    99,920
    
    
    
    76,070
    
    
    
    60,330
    
    
    
    38,258Net funds at April 30 / December 31 (Note 24)
    
    
    76,070
    
    
    
    60,330
    
    
    
    38,258
    
    
    
    21,973
 The notes on page F-6 to F-37 are an integral part of these Consolidated
Financial Statements. F-4




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##### Table of Contents



VERNALIS PLCCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the period from
April 30, 2001 to December 31, 2003Share
    
    
    
    
    
    
    
    
    
    Profit
    
    TotalShare
    
    premium
    
    Other
    
    Merger
    
    and loss
    
    shareholderscapital
    
    account
    
    reserve
    
    reserve
    
    account
    
    equity£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000April 30, 2001
    
    
    35,161
    
    
    
    298,615
    
    
    
    30,668
    
    
    
    89,190
    
    
    
    363,695
    
    
    
    89,939Loss for year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,091
    )
    
    
    (27,091
    )Allotment of shares
    
    
    60
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    125Debit for bonus share award
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    191Adjustment to merger reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    138April 30, 2002
    
    
    35,221
    
    
    
    298,615
    
    
    
    30,733
    
    
    
    89,328
    
    
    
    (390,595
    )
    
    
    63,302Loss for year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,586
    )
    
    
    (30,586
    )Allotment of shares
    
    
    1,674
    
    
    
    
    
    
    
    20,043
    
    
    
    117
    
    
    
    
    
    
    
    21,834Credit for bonus share award
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (611
    )
    
    
    (611
    )Expense on issue of shares
    
    
    
    
    
    
    (363
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (363
    )April 30, 2003
    
    
    36,895
    
    
    
    298,252
    
    
    
    50,776
    
    
    
    89,445
    
    
    
    (421,792
    )
    
    
    53,576Loss for period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,219
    )
    
    
    (34,219
    )Allotment of shares
    
    
    1,918
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,918Expense on issue of shares
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )Adjustment to merger reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,540
    
    
    
    
    
    
    
    12,540December 31, 2003
    
    
    38,813
    
    
    
    298,226
    
    
    
    50,776
    
    
    
    101,985
    
    
    
    (456,011
    )
    
    
    33,789
 The notes on pages F-6 to F-37 are an integral part of these Consolidated
Financial Statements. F-5




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##### Table of Contents



VERNALIS PLCNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1.  History and operations The Group (as defined below) was founded in 1986 and, since foundation, its
principal business has been pharmaceutical research and development with the
objective of developing a portfolio of patented pharmaceuticals. This research
has been conducted both on its own behalf and in connection with a number of
collaborative research agreements with other companies. 2.  Summary of significant accounting policies The consolidated financial statements have been prepared in accordance with
applicable Accounting Standards in the United Kingdom. The significant
accounting policies adopted in arriving at the consolidated financial
statements are as follows: (a)  Accounting convention The financial statements have been prepared under the historical cost
convention, and in accordance with applicable Accounting Standards in the
United Kingdom. A summary of the principal Group accounting policies, which
have been applied consistently, is set out below. Vernalis is a research and development based pharmaceutical business which
expects to incur further losses until revenues from royalty income and
milestone receipts exceed expenditure on the product portfolio. As a result,
the directors believe that the Group is likely to need additional sources of
finance in due course. The Directors have prepared projections which confirm
that, excluding the effects of the transaction set out below, the Group expects
to have sufficient cash resources of the foreseeable future. By their nature,
the projections are inherently subject to some uncertainty, particularly in
respect of revenues. Vernalis has reacquired the North American rights for frovatriptan from Elan
for a total of US $50 million, payable in instalments over the period to
December 31 2005. Vernalis will also purchase certain inventory from Elan at an
expected approximate cost of $5.4 million payable no later than December 31
2004. As a result of this transaction, Vernalis has exchanged its royalty income and
potential milestone payments for enhanced cash flows arising from the full
sales of frovatriptan in North America and is seeking a new commercialization
partner or partners for frovatriptan which may include upfront and milestone
payments. However, in order to meet its obligations to Elan, the Directors
believe that the Group does not have sufficient cash resources for the
foreseeable future, and therefore Vernalis will require additional funds during
the next 12 months, in particular to meet the payment of $20 million which
Vernalis is required to make to Elan on December 31 2004. The Directors believe
such funding can be obtained through the completion of an additional equity
fundraising or through securing a pharmaceutical partner for frovatriptan.
Accordingly, the Directors have prepared the financial information on a going
concern basis. As a result of the transaction, the auditors report on the
financial statements for the eight months ended December 31, 2003 contains
reference to the substantial doubt regarding going concern. (b)  Basis of preparation The consolidated financial statements of the Group include the accounts of
Vernalis plc (formerly British Biotech plc) (the Company) and all its
subsidiary undertakings (together, the Group), made up to December 31 2003.
Intercompany transactions are eliminated on consolidation and the consolidated
accounts reflect external transactions only. The identifiable assets and liabilities of subsidiary undertakings accounted
for under acquisition accounting principles are included in the consolidated
balance sheet at their fair values at the date of acquisition. The results and
cash flows of such subsidiaries are brought into the Group accounts only from
the date of acquisition. As permitted by FRS 3 (Reporting Financial
Performance), the acquisition of RiboTargets Holdings plc, which took place
seven days before the end of the previous financial period end on 23 April
2003, has been presented separately as if it was an acquisition in the current
period. The
merger basis of accounting, as set out in FRS 6 (Acquisitions and Mergers),
has been adopted by the Group in respect of the merger of Vernalis Group plc
and the Company. Under merger accounting principles, the results, assets and
liabilities and cashflows of Vernalis Group plc and British Biotech plc have
been combined from the beginning of the period in which the merger took place. The consolidated profit and loss account, balance sheet and cashflow
comparatives are stated on the combined basis, and adjustments have been made
as required to achieve consistency of accounting policies. The merger became F-6




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##### Table of Contents



effective on 1 September 2003, following which, the Company changed its name to
Vernalis plc. Prior to the merger, the Company and Vernalis Group plc had
accounting reference dates of April 30 and December 31 respectively. These
statutory accounts are for the eight month period ended December 31 2003, with
comparative amounts for the year ended April 30, 2003. Further details relating
to the merger of the Company and Vernalis Group plc are given in note 5. (c)  Accounting estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates. (d)  Accounting policies Turnover Turnover, which excludes value added tax, represents the value of goods and
services supplied. Non-refundable access fees, options fees and milestone
payments received for participation by a third party in commercialization of a
compound are recognized when they become contractually binding provided there
are no related commitments of the Group. Where there are related commitments,
revenue is recognized on a percentage of completion basis in line with the
actual levels of expenditure incurred in fulfilling these commitments. All
other license income and contract research fees are recognized over the
accounting period to which the relevant services relate. Product sales are
recognized on despatch to the customer. Revenues derived from grants received
are recognized in line with the related expenditure. Royalty income is
recognized in relation to sales to which the royalty relates. Research and development Research and development expenditure is written off as incurred, except where
assets are acquired or constructed in order to provide facilities for research
and development over a number of years. These assets are capitalized and
depreciated over their useful lives. Expenditure relating to clinical trials is
accrued on a percentage of completion basis with reference to fee estimates
with third parties. Joint arrangements The Group has certain contractual research agreements with other participants.
These joint activities do not create an entity carrying on a trade or business
of its own and, as such, each is accounted for as a joint arrangement that is
not an entity. That is, the Group accounts for its own assets, liabilities and
cash flows measured in accordance with the terms of the agreement governing the
arrangement. Goodwill Goodwill arising from the purchase of subsidiary undertakings represents the
excess of the value of the purchase consideration over the fair value of the
underlying net assets acquired. The goodwill arising is capitalized and
amortized in equal instalments over its estimated useful economic life.
Provision is made for any impairment in value if events or
Goodwill in respect of the acquisition of RiboTargets and Cerebrus
Pharmaceuticals Limited is being amortized over three years and five years
respectively Goodwill previously written off to reserves has not been reinstated on the
balance sheet as permitted by FRS10. Other intangible assets Other intangible assets, which principally comprise payments made to third
parties to acquire licenses to develop their intellectual property, are
amortized on a straight line basis over their estimated useful economic life.
Provision is made for any impairment in value if events or changes in
circumstances indicate that the carrying value may not be recoverable in full. Tangible fixed assets Tangible fixed assets are stated at historic cost less depreciation, with the
exception of freehold land and assets in the course of construction that are
not depreciated. Historic cost comprises the purchase price together with any
incidental costs of acquisition. Depreciation is calculated to write off the
cost, less residual value, of tangible fixed assets in equal annual instalments
over their estimated useful lives as follows: Freehold buildings
    
    50 yearsBuildings  internal works
    
    5 to 50 yearsLeasehold buildings
    
    Period of leasePlant and machinery
    
    2 to 5 yearsFixtures and fittings
    
    3 to 10 years
 F-7




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The profit arising on the sale of owned assets that are subsequently leased
back under an operating lease is recognized at the time of disposal. Finance and operating leases Costs in respect of operating leases are charged to the profit and loss account
on a straight line basis over the terms of the leases. Leasing agreements which
transfer to the Company substantially all the benefits and risks of ownership
of an asset are treated as if the asset had been purchased outright. The assets
are included in fixed assets and the capital element of the leasing commitments
is shown as obligations under finance leases. The lease rentals are treated as
consisting of both a capital and interest element. The capital element is
applied to reduce the outstanding obligations under the leasing commitments and
the interest element is charged against profit in proportion to the reducing
capital element outstanding. Assets held under finance leases are depreciated
over the shorter of the relevant lease term and the useful economic life of the
equivalent owned assets. Fixed asset investments Investments in subsidiary and other undertakings are carried at cost less any
impairment provision. Such investments are subject to review, and any
impairment is charged to the profit and loss account. Impairments in listed
undertakings are determined having regard to the evolution of the market price
of shares. Impairment in unlisted investments are determined using Directors
estimates of changes in the underlying investment and market movements. Current asset investments Current asset investments are stated at the lower of cost and net realisable
value at the balance sheet date. Stock Stocks are carried at the lower of cost and net realisable value. Deferred taxation Provision is made for deferred tax liabilities and assets, using full provision
accounting, otherwise known as the incremental liability method, when an event
has taken place by the balance sheet date which gives rise to an increased or
reduced tax liability in the future in accordance with FRS 19. Deferred tax is
measured at the average tax rates that are expected to apply in the periods in
which the timing differences are expected to reverse, based on tax rates and
laws that have been enacted or substantially enacted by the balance sheet date.
Deferred tax assets are only recognized to the extent that it is considered
probable that they will be recoverable. Deferred tax is measured on a
non-discounted basis. Pension costs The Group operates several defined contribution pension schemes. The assets of
the schemes are held separately from those of the Group in independently
administered funds. In addition, the Group makes defined contributions to
employees approved personal pension plans. Pension contributions are charged
to the profit and loss account in the period in which the costs are incurred.
The Group does not offer any other post-retirement benefits. Foreign currencies Transactions in foreign currencies are translated into sterling at the rate of
exchange ruling at the transaction date. Assets and liabilities in foreign
currencies are retranslated into sterling at the rate of exchange ruling at the
balance sheet date. Differences arising due to exchange rate fluctuations are
taken to the profit and loss account in the period in which they arise. The financial statements of overseas subsidiaries are translated using the net
investment method; the amounts in the balance sheet are translated at the
closing rate and the amounts in the profit and loss account are translated at
an average rate. Exchange differences arising on translation are taken directly
to reserves. Employee benefits The charge for the shares awarded under the Deferred Share Bonus Scheme is
recognized in the consolidated profit and loss account as the difference
between the market value of the shares at the date of grant and any
consideration to be received on the exercise of the deferred shares. The charge
is based on estimates of staff turnover and share price growth and is accrued
in the profit and loss account reserve. Shares held for the continuing benefit of the Groups business under employee
share option plan (ESOP) arrangements are included in the financial statements
of the Group, in accordance with generally accepted accounting practices, and
are classified as fixed assets and carried at cost less provision for
impairment in value. Where the shares are conditionally gifted or put under
option to employees at below their book value, the difference between book
value and residual value (nil in the case of a gift, or the option price) is
charged as an operating cost on a straight line basis over a period ending on
the date that the gift becomes unconditional or the option can be exercised. If
the performance criteria are not met, then the title of the shares will not
pass. The Company takes advantage of the exemption under UITF 17 in respect of SAYE
schemes. F-8




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##### Table of Contents



Financial instruments The Group does not enter into derivative financial instruments and has no
financial liabilities other than finance leases, loans and trade creditors.
Financial assets and liabilities are recognized and cease to be recognized on
the basis of when the related legal title or obligations pass to or from the
Group. Financial assets and liabilities are shown at the lower of cost to the
Group and fair value, as determined by reference to the market value of the
asset or liability. Related party transactions In accordance with FRS 8 (Related Party Disclosures), the Company discloses
details of material transactions between the reporting entity and related
parties. However, transactions between the Company and other Group companies
have not been disclosed, in accordance with the exemption in FRS 8 paragraph
3(a). 3.  Summary of differences between UK and US Generally Accepted Accounting
Principles The financial statements of the Group are prepared in accordance with UK GAAP
which differs in certain respects from US GAAP. The tables below summarize the
material adjustments to the loss for the period and shareholders funds which
would be required if US GAAP had been applied instead of UK GAAP. Reconciliation of loss for the period to US GAAP Year ended April 30,
    
    
    Eight months endedDecember 31,Notes
    
    2001(as restated)
    
    2002(as restated)
    
    2003(as restated)
    
    2003(as restated)£000
    
    £000
    
    £000
    
    £000Loss under UK GAAP
    
    
    
    
    
    
    (44,369
    )
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )Adjustments in respect of purchase accounting for Vernalis
Group plc:
    
    
    iAdd back pre-acquisition losses
    
    
    
    
    
    
    21,016
    
    
    
    9,857
    
    
    
    13,098
    
    
    
    4,634Add back expensed merger costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,289Write-off: in-process research and development capitalized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,091
    )Expense acquired: fair value less book value of inventory
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64
    )Redundancy provision included in acquisition balance sheet
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    560Amortization in respect of pre-acquisition goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    596Amortization of acquired developed product
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,451
    )21,016
    
    
    
    9,857
    
    
    
    13,098
    
    
    
    3,473Adjustments in respect of purchase accounting for RiboTargets
Holdings plc:Write-off: in-process research and development capitalized
    
    viii
    
    
    
    
    
    
    
    
    
    
    (5,077
    )
    
    
    Redundancy provision included in acquisition balance sheet
    
    viii
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    Amortization charge on reduced goodwill asset
    
    viii
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    1,837Amortization of acquired developed product
    
    viii
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (2,406
    )
    
    
    
    
    
    
    
    (4,933
    )
    
    
    (569
    )Other US GAAP adjustments:Payroll taxes payable on shared options
    
    ii
    
    
    121
    
    
    
    (14
    )
    
    
    (107
    )
    
    
    Permanent diminution in value of marketable securities
    
    iii
    
    
    (275
    )
    
    
    275
    
    
    
    17
    
    
    
    23Intangible asset amortization
    
    iv
    
    
    (1,089
    )
    
    
    (898
    )
    
    
    210
    
    
    
    2,253Share compensation charges
    
    
    v
    
    
    
    
    
    
    
    148
    
    
    
    (257
    )
    
    
    Embedded option
    
    vi
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    (63
    )Revenue recognition
    
    vii
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (179
    )Profit on lease back transaction
    
    
    
    
    
    
    (248
    )
    
    
    248
    
    
    
    
    
    
    
    Net loss under US GAAP
    
    
    
    
    
    
    (24,844
    )
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )Loss per share under US GAAP
    
    
    
    
    
    
    (74.6)p
    
    
    
    (52.4)p
    
    
    
    (66.0)p
    
    
    
    (28.0)p
 F-9




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##### Table of Contents



Reconciliation of shareholders funds to US GAAP April 30,
    
    April 30,
    
    December 31,2002
    
    2003
    
    2003Notes
    
    (as restated)
    
    (as restated)£000
    
    £000
    
    £000Shareholders funds under UK GAAP
    
    
    
    
    
    
    63,302
    
    
    
    53,575
    
    
    
    33,788Adjustments in respect of purchase accounting for
Vernalis Group plc:
    
    
    iImpact on loss for period
    
    
    
    
    
    
    9,857
    
    
    
    13,098
    
    
    
    3,473Less pre acquisition losses
    
    
    
    
    
    
    93,622
    
    
    
    103,479
    
    
    
    116,577Less other pre acquisition reserves
    
    
    
    
    
    
    (111,512
    )
    
    
    (112,036
    )
    
    
    (126,496
    )Fair value of shares issued in consideration
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,302Share issue costs on acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,164
    )(8,033
    )
    
    
    4,541
    
    
    
    38,692Adjustments in respect of purchase accounting for
RiboTargets Holdings plc:Impact on loss for period
    
    viii
    
    
    
    
    
    
    (4,933
    )
    
    
    (569
    )Increase in fair value of consideration
    
    viii
    
    
    
    
    
    
    4,005
    
    
    
    
    
    
    
    (928
    )
    
    
    (569
    )Other US GAAP adjustments:Payroll taxes payable on share options
    
    ii
    
    
    107
    
    
    
    
    
    
    
    Unrealized loss on investment
    
    iii
    
    
    
    
    
    
    17
    
    
    
    40In-process research and development
    
    iv
    
    
    (1,987
    )
    
    
    (1,777
    )
    
    
    (452
    )Share compensation charges
    
    
    v
    
    
    
    
    
    
    
    
    
    
    
    Embedded option
    
    vi
    
    
    
    
    
    
    63
    
    
    
    Revenue recognition
    
    vii
    
    
    
    
    
    
    
    
    
    
    (179
    )Shareholders funds under US GAAP
    
    
    
    
    
    
    53,389
    
    
    
    55,491
    
    
    
    71,320
 (i)  Purchase accounting Under UK GAAP, the merger of British Biotech plc and Vernalis Group plc was
accounted for as a merger of equals (pooling of interests). Under US GAAP the
merger was accounted for as the acquisition of Vernalis Group plc by British
Biotech plc using purchase accounting. Under purchase accounting, the costs
of the investment is calculated at the market value of the shares issued
together with incidental costs and the assets and liabilities of the acquired
entity are recorded at fair value. Details of the book value and fair value of the assets and liabilities of
Vernalis Group plc as at 29 August 2003 are as set out below: Book values
    
    Adjustments
    
    Fair values£000
    
    £000
    
    £000Tangible fixed assets
    
    
    1,104
    
    
    
    (351
    )
    
    
    753Intangible fixed assets
    
    
    17,627
    
    
    
    42,924
    
    
    
    60,551Stock
    
    
    37
    
    
    
    64
    
    
    
    101Debtors
    
    
    2,340
    
    
    
    
    
    
    
    2,340Cash and liquid investments
    
    
    15,969
    
    
    
    
    
    
    
    15,969Creditors falling due within one year
    
    
    (15,310
    )
    
    
    (335
    )
    
    
    (15,645
    )Creditors falling due after more than one year
    
    
    (16,482
    )
    
    
    1,399
    
    
    
    (15,083
    )Provisions
    
    
    
    
    
    
    (560
    )
    
    
    (560
    )Net assets acquired
    
    
    5,285
    
    
    
    43,141
    
    
    
    48,426Satisfied by:Shares issued and to be issued
    
    
    
    
    
    
    
    
    
    
    46,302Expenses of acquisition
    
    
    
    
    
    
    
    
    
    
    2,124Total consideration
    
    
    
    
    
    
    
    
    
    
    48,426
 F-10




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##### Table of Contents



Summary of material differences between UK and US GAAP On August 29, 2003, the Group announced the successful acquisition of Vernalis
Group plc. Under the terms of the offer made to Vernalis Group plc
shareholders, 0.861 shares in British Biotech plc have been issued in exchange
for one share held in Vernalis Group plc. Based upon a British Biotech plc
average closing share price two days either side of the date of announcement of
July 3, 2003 of 61.5 pence this valued Vernalis Group plc at
£46.3 million. In accordance with FAS 141, the acquired in-process research and development
and developed technology (frovatriptan) assets have been identified and valued.
Following this valuation, the initial negative goodwill arising of £28,600,000
has been allocated on a pro rata basis against all non current assets such that
the value of the net assets acquired is equal to the value of the consideration
and expenses paid. The net asset values included in the US GAAP balance sheet
were £56,460,000 in respect of the developed existing product and £4,091,000 in
respect of the in-process research and development programs. In accordance with
US GAAP, the amount allocated to in-process research and development was
expensed in the eight month period ended December 31 2003. The developed
existing product asset is being amortized over the 12 year remaining life of
the underlying patents. An accounting policy adjustment has been made to the balance sheet values
stated at August 29, 2003, in respect of upfront payments received and
recognized as revenue, which under the Group policy have been deferred. Stock, other creditors and market investments have been fair valued at the date
of acquisition. A provision of £560,000 has been recognized at the date of
acquisition in respect of redundancy payments. Intangible fixed assets acquired
comprised goodwill in respect of the acquisition by Vernalis Group plc of
Cerebrus in 2001, which has not been capitalized separately from the assets
recognized on the acquisition of Vernalis Group plc by British Biotech plc. In
addition to the £2,124,000 of acquisition expenses, share issue costs of
£1,164,000 were incurred. (ii)  Payroll taxes payable on share options In accordance with the Urgent Issues Task Force Abstract 25, National
Insurance Contributions on Share Options Gains, the Group has provided for the
employers National Insurance payable on unapproved options granted after 5
April, 1999. In accordance with US GAAP, taxation is only charged upon exercise
of the option. (iii)  Permanent diminution in value of marketable securities Under UK GAAP, an investment is written down where a permanent impairment has
occurred. Under US GAAP, marketable securities are valued at market value, with
temporary diminution in value being taken to other comprehensive income and
permanent diminutions taken to the statement of operations. The definition of
permanent is more prescriptive under US GAAP. At December 31, 2003 there was an
increase in the value of securities between UK and US GAAP of £23,000. The
market value of securities at April 30, 2003 resulted in an increase to the
realisable value of the securities of £17,000. (iv)  In-process research and development Under UK GAAP, certain payments to acquire licenses to products are capitalized
as intangible fixed assets under FRS10. Under US GAAP these payments are
written off as in-process research and development in so far as these products
are to be used in research and development activities and have no future
alternative use. (v)  Share compensation charges Under UK GAAP, the cost of providing share options with performance criteria is
recognized over the period of the performance criteria using as measurement
date the date of issue. Under US GAAP, the measurement date remains open until
it is known how many options will be available. (vi)  Embedded option Under US GAAP, FAS133, as amended, requires that all derivative financial
instruments including embedded derivative financial instruments be fair valued
while any change in that fair value is taken to the profit and loss account. (vii)  Revenue recognition In previous years under UK GAAP, revenue related to non-refundable up-front
fees and non-refundable fees received in connection with the achievement of
milestones in an effort to obtain regulatory approval of new drugs is
recognized upon receipt provided there are no related commitments of the Group.
Under US GAAP non-refundable up-front fees are deferred and recognized as
revenue over the estimated period of the project and fees earned for the
achievement of substantive milestones are recognized when the milestone is
achieved and the payment is due and payable. (viii)  Goodwill and other intangible assets Under UK GAAP the shares issued to acquire RiboTarget Holdings were valued at
the market price at the date of acquisition on April 23, 2003. Under US GAAP
the shares issued were valued at the average market price for three days before
and after the announcement of the acquisition on March 21, 2003. The movement
of the British Biotech share price between these dates and methods increases
the value of the purchase price by £4.0 million. In accordance with US F-11




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GAAP (EITF 95-3) an adjustment was made to the opening net assets position
under UK GAAP to reflect the redundancy costs arising following a
reorganization of the Group after acquisition. In accordance with UK GAAP,
these costs were expensed in 2003. Under US GAAP, purchase price is allocated to all tangible and identifiable
intangible assets based upon estimated fair value at the date of acquisition.
For the US GAAP purposes, fair values have been assigned to intangible assets
which included in-process research and development (£5.0 million) and
technology platform (£2.5 million). The specifically identifiable intangible
assets have not been recognized under UK GAAP as they do not meet the criteria
for recognition required by FRS 10, Goodwill and intangible assets. Under US GAAP the amount of purchase consideration allocated to in-process
research and development is immediately written off to the profit and loss
account. The portion of the purchase price allocated to the technology platform
under US GAAP is amortized over the estimated useful life. Under UK GAAP these
amounts are include in goodwill. The net impact on shareholders funds at April 30, 2003 and December 31, 2003
under US GAAP was: April 30,2003
    
    December 31,2003£000
    
    £000Difference in consideration issued under US GAAP
    
    
    4,005
    
    
    
    Less profit and loss impact under US GAAP
    
    
    (4,933
    )
    
    
    (569
    )(928
    )
    
    
    (569
    )
 The movement in goodwill represents the fair value of intangible assets under
US GAAP less the difference in consideration issued and the restructuring
provision. Stock Compensation Plans British Biotech adopted the disclosure requirements of SFAS 123 in fiscal 1997
but has elected to continue the recognition principles of APB No. 25 and
therefore, the effect of the adoption of SFAS 123 has had no effect on the
Groups results or financial position. Under US GAAP, the Group is required to disclose the compensation expense for
the Share Option Schemes. The compensation expense represents the difference
between the exercise price of the share options granted in the periods and the
fair market value of the underlying Ordinary Shares at the date of grant. The following assumptions were used under the Black-Scholes option pricing
model to estimate the fair values of the options granted in the period to: April 30,
    
    April 30,
    
    April 30,
    
    December 31,2001
    
    2002
    
    2003
    
    2003Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    77.6
    %
    
    
    77.7
    %
    
    
    65% - 68.5
    %
    
    
    79
    %Risk free investment rate
    
    
    5.6
    %
    
    
    5.11
    %
    
    
    3.7% - 4.25
    %
    
    
    4.6
    %Forfeiture rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life
    
    5 years
    
    5 years
    
    2 - 6 years
    
    6 years
 The impact of the compensation expense would have been to increase the net loss
by £874,000 in 2001, £1,616,700 in 2002 and by
£1,577,711 in the year ended
April 2003 and by £2,290,919 in the eight months to December 31, 2003. The
impact on net loss per share would have been an increase of 2.6p, 4.8p, in the
year, 4.6p and 2.2p respectively. The following table presents certain financial information for the eight months
ended December 31, 2003 and 2002, respectively. (Amounts in thousands except
per share amounts). F-12




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##### Table of Contents



Transition period comparative data under US GAAP Eight months ended December 31,2002 (unaudited)
    
    2003£000
    
    £000Revenues
    
    
    719
    
    
    
    5,009Gross profit
    
    
    719
    
    
    
    4,830Loss before income taxes
    
    
    (12,817
    )
    
    
    (31,530
    )Research and development tax credit
    
    
    1,159
    
    
    
    2,249Loss
    
    
    (11,658
    )
    
    
    (29,281
    )Earning per common share (basic and diluted)
    
    
    (34.9)p
    
    
    
    (28.0)pWeighted average common shares outstanding (£000)
    
    
    33,375
    
    
    
    104,439
 Set out below is the Consolidated Statement of Operations, Consolidated Balance
Sheet and Consolidated Statement of Cash Flows in accordance with US GAAP. Consolidated Statements of Operations Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Revenues:Product sales and royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,022Collaborations
    
    
    1,588
    
    
    
    1,450
    
    
    
    1,078
    
    
    
    2,987Total Revenues
    
    
    1,588
    
    
    
    1,450
    
    
    
    1,078
    
    
    
    5,009Costs and expenses:Cost of sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (179
    )Research and development
    
    
    (23,578
    )
    
    
    (20,782
    )
    
    
    (14,292
    )
    
    
    (22,084
    )Selling, general and administrative
    
    
    (4,124
    )
    
    
    (3,377
    )
    
    
    (6,658
    )
    
    
    (5,497
    )Acquired in-process research and development
    
    
    (1,089
    )
    
    
    (898
    )
    
    
    (5,077
    )
    
    
    (4,091
    )Amortization of intangibles
    
    
    (146
    )
    
    
    (474
    )
    
    
    
    
    
    
    (2,739
    )Gain / (loss) on sale of property
    
    
    
    
    
    
    2,505
    
    
    
    
    
    
    
    (2,988
    )Total costs and expenses
    
    
    (28,937
    )
    
    
    (23,026
    )
    
    
    (26,027
    )
    
    
    (37,578
    )Loss from operations
    
    
    (27,349
    )
    
    
    (21,576
    )
    
    
    (24,949
    )
    
    
    (32,569
    )Other income (expense):Investment income
    
    
    3,449
    
    
    
    2,542
    
    
    
    1,435
    
    
    
    1,941Realized (loss)/gain on marketable securities, net
    
    
    (275
    )
    
    
    275
    
    
    
    80
    
    
    
    (40
    )Amounts written of investments
    
    
    (799
    )
    
    
    (324
    )
    
    
    (799
    )
    
    
    (862
    )Net loss before income taxes
    
    
    (24,974
    )
    
    
    (19,083
    )
    
    
    (24,233
    )
    
    
    (31,530
    )Research and development tax credit
    
    
    130
    
    
    
    1,608
    
    
    
    1,738
    
    
    
    2,249Net loss attributable to shareholders
    
    
    (24,844
    )
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )Net loss attributable to common shareholders, basic
and diluted
    
    
    (74.6)p
    
    
    
    (52.4)p
    
    
    
    (66.0)p
    
    
    
    (28.0)pWeighted average shares, basic and diluted (£000)
    
    
    33,318
    
    
    
    33,362
    
    
    
    34,107
    
    
    
    104,439
 F-13




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##### Table of Contents



Consolidated Balance Sheet As at April 30,
    
    As at December 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000AssetsCurrent assets:Cash and cash equivalents
    
    
    18,990
    
    
    
    4,445
    
    
    
    24,868
    
    
    
    16,148Marketable securities
    
    
    45,746
    
    
    
    45,969
    
    
    
    19,138
    
    
    
    8,106Inventory
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Prepaid expenses and other current assets
    
    
    5,622
    
    
    
    3,506
    
    
    
    7,105
    
    
    
    10,991Total current assets
    
    
    70,358
    
    
    
    53,920
    
    
    
    51,111
    
    
    
    35,294Property and equipment, net
    
    
    13,877
    
    
    
    9,902
    
    
    
    11,258
    
    
    
    7,062Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83Goodwill
    
    
    
    
    
    
    
    
    
    
    4,875
    
    
    
    4,620Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    2,406
    
    
    
    56,780Total assets
    
    
    84,235
    
    
    
    63,822
    
    
    
    69,650
    
    
    
    103,389Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    
    5,951
    
    
    
    4,777
    
    
    
    2,205
    
    
    
    9,129Accrued expenses
    
    
    3,016
    
    
    
    3,002
    
    
    
    6,217
    
    
    
    9,441Current portion of deferred revenue
    
    
    1,378
    
    
    
    568
    
    
    
    550
    
    
    
    4,822Current portion of capital lease obligations
    
    
    385
    
    
    
    117
    
    
    
    770
    
    
    
    738Current proportion of long term debt
    
    
    291
    
    
    
    286
    
    
    
    270
    
    
    
    270Total current liabilities
    
    
    11,021
    
    
    
    8,750
    
    
    
    10,012
    
    
    
    24,400Deferred revenue, net of current portion
    
    
    317
    
    
    
    
    
    
    
    2,298
    
    
    
    1,299Capital lease obligations net of current portion
    
    
    235
    
    
    
    63
    
    
    
    499
    
    
    
    18Long term debt, net of current portion
    
    
    1,890
    
    
    
    1,620
    
    
    
    1,350
    
    
    
    6,802Shareholders equity:Common stock, 5 pence per value
    
    
    33,326
    
    
    
    33,375
    
    
    
    35,045
    
    
    
    42,577Additional paid-in capital
    
    
    308,623
    
    
    
    308,475
    
    
    
    332,400
    
    
    
    369,978Deferred compensation
    
    
    2,225
    
    
    
    2,413
    
    
    
    1,802
    
    
    
    1,802Accumulated deficit
    
    
    (273,385
    )
    
    
    (290,860
    )
    
    
    (313,742
    )
    
    
    (343,023
    )Accumulated other comprehensive income
    
    
    (17
    )
    
    
    (14
    )
    
    
    (14
    )
    
    
    (14
    )Total stockholders equity
    
    
    70,772
    
    
    
    53,389
    
    
    
    55,491
    
    
    
    71,320Total liabilities and stockholders equity
    
    
    84,235
    
    
    
    63,822
    
    
    
    69,650
    
    
    
    103,839
 F-14




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##### Table of Contents



Consolidated Statement of Cash Flows Year ended April 30,
    
    Eight months
endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Cash flows from operating activities:Net loss
    
    
    (24,844
    )
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )Adjustments to reconcile net loss to cash used in operating activities:Acquired in-process research and development
    
    
    (1,089
    )
    
    
    898
    
    
    
    
    
    
    
    4,758Depreciation and amortization
    
    
    2,616
    
    
    
    1,743
    
    
    
    1,374
    
    
    
    3,723Realized (gain on marketable securities)
    
    
    3,344
    
    
    
    (290
    )
    
    
    (29
    )
    
    
    Stock compensation expense
    
    
    
    
    
    
    40
    
    
    
    2,889
    
    
    
    Other non-cash expenses
    
    
    (46
    )
    
    
    (3,223
    )
    
    
    775
    
    
    
    1,948Inventory
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Prepaid expenses and other current assets
    
    
    (1,993
    )
    
    
    2,306
    
    
    
    42
    
    
    
    1,624Accounts payable and accrued expenses
    
    
    5,002
    
    
    
    (2,190
    )
    
    
    (2,307
    )
    
    
    (10,770
    )Deferred revenue
    
    
    (810
    )
    
    
    (18
    )
    
    
    
    
    
    
    1,299Net cash used in operating activities
    
    
    (17,820
    )
    
    
    (18,209
    )
    
    
    (19,751
    )
    
    
    (26,691
    )Cash flows from investing activities:Proceeds from sales and maturities of marketable
securities
    
    
    8,000
    
    
    
    1,423
    
    
    
    39,798
    
    
    
    14,879Purchase of property and equipment
    
    
    7,587
    
    
    
    2,686
    
    
    
    (775
    )
    
    
    (16
    )Net cash used in Ribotargets acquisition
    
    
    
    
    
    
    
    
    
    
    1,967
    
    
    
    Net cash used in Vernalis acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,573Net cash provided by (used in) investing activities
    
    
    15,587
    
    
    
    4,109
    
    
    
    40,990
    
    
    
    25,436Cash flows from financing activities:Repayment of principal of long term debt obligations
    
    
    (381
    )
    
    
    (342
    )
    
    
    (665
    )
    
    
    (7,000
    )Principal payments on capital leases
    
    
    (132
    )
    
    
    (121
    )
    
    
    (180
    )
    
    
    (410
    )Net cash provided by financing activities
    
    
    (513
    )
    
    
    (463
    )
    
    
    (845
    )
    
    
    (7,410
    )Increase (decrease) in cash and cash equivalents
    
    
    (2,746
    )
    
    
    (14,563
    )
    
    
    20,394
    
    
    
    (8,665
    )Equity adjustment from foreign currency translation
    
    
    62
    
    
    
    18
    
    
    
    29
    
    
    
    (55
    )Cash and cash equivalents, beginning of period
    
    
    21,674
    
    
    
    18,990
    
    
    
    4,445
    
    
    
    24,868Cash and cash equivalents, end of period
    
    
    18,990
    
    
    
    4,445
    
    
    
    24,868
    
    
    
    16,148
 Accounting Developments At the November 21, 2002 meeting, the EITF reached a final consensus on Issue
No. 00-21 Accounting for Revenue Arrangements with Multiple Deliveries. This
Issue addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF 00-21 is effective
for revenue arrangements entered into in fiscal periods beginning after June
15, 2003. Management is evaluating the potential impact of the Issue on the
Groups results. In June 2002, the Council for the European Union adopted a regulation requiring
listed companies in its member states to prepare their consolidated financial
statements in accordance with International Financial Reporting Standards
(IFRS). Under this regulation the Group will prepare its first financial
statements under IFRS during the year ending December 31 2005. A project to
implement the conversion from UK GAAP to IFRS is under way. FIN 46 was issued in January 2003, was revised in December 2003, and has been
interpreted in various FASB staff positions. It is effective immediately for
all variable interests in variable interest entities (VIE) created after
January 31, 2003. For VIEs created before that date, the requirements are
effective from January 1, 2004. FIN 46 requires certain transitional
disclosures to be made immediately if it is reasonably possible that an entity
will consolidate or disclose information about VIEs when FIN 46 becomes
effective. FIN 46 defines a VIE as an entity where either the total equity
investment at risk is not sufficient to permit the entity to finance its
activities, without additional subordinated financial support; or the equity
investors lack any one of the following: (1) the ability to make decisions
about an entitys F-15




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##### Table of Contents



activities; (2) the obligation to absorb losses of the entity; or (3) the right
to receive residual returns of the entity. VIEs are required to be consolidated
by the primary beneficiary, which is the party that absorbs the majority of the
entitys expected losses, expected gains, or both. As the Group does not have
any interests in VIEs as of December 31, 2003, the adoption of this statement
did not have an effect on its consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
No. 133 Accounting for Derivative Instruments and Hedging Activities.This
Statement is effective for derivative contracts and hedging instruments entered
into after June 30, 2003. The adoption of this statement did not have a
material impact on the Groups consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
imposes certain additional disclosure requirements. The provisions of SFAS No.
150 are effective for financial instruments entered into or modified after May
31, 2003 and must be applied to all financial instruments at the beginning of
the third quarter of 2003. The adoption of this statement did not have an
effect on the Groups consolidated financial statements. 4.  Analysis of Revenues, Expenditure, Operating Results and Assets Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000(i)
    
    £000(a) Revenues by activityContinuing operationsProduct sales and royalties
    
    
    491
    
    
    
    799
    
    
    
    2,097
    
    
    
    2,592Collaborations (Note (c))
    
    
    4,125
    
    
    
    13,967
    
    
    
    7,046
    
    
    
    6,0394,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631(b) Revenues by geographic areaUnited Kingdom
    
    
    1,377
    
    
    
    602
    
    
    
    90
    
    
    
    49United States
    
    
    190
    
    
    
    
    
    
    
    420
    
    
    
    2,937Rest of World
    
    
    3,049
    
    
    
    14,164
    
    
    
    8,633
    
    
    
    5,6454,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631
 (c) Collaborative agreements During the periods under review, the Group earned income under a number of
collaborative agreements as set out in the following table. The amounts
received are non-refundable. Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000GeneSoft Inc
    
    
    
    
    
    
    
    
    
    
    420
    
    
    
    2,820Serono Inc
    
    
    1,300
    
    
    
    1,378
    
    
    
    568
    
    
    
    Roche
    
    
    2,825
    
    
    
    530
    
    
    
    
    
    
    
    1,230Elan
    
    
    
    
    
    
    12,059
    
    
    
    6,058
    
    
    
    1,872Astra Zeneca
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1174,125
    
    
    
    13,967
    
    
    
    7,046
    
    
    
    6,039
 F-16




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##### Table of Contents



(d) Operating costs and expenses Operating loss for continuing operations is stated after charging: Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Wages and salaries
    
    
    (16,869
    )
    
    
    (12,876
    )
    
    
    (12,059
    )
    
    
    (8,299
    )Social Security costs
    
    
    (1,573
    )
    
    
    (1,337
    )
    
    
    (1,271
    )
    
    
    (846
    )Other pension costs
    
    
    (953
    )
    
    
    (896
    )
    
    
    (806
    )
    
    
    (716
    )Staff costs
    
    
    (19,395
    )
    
    
    (15,109
    )
    
    
    (14,136
    )
    
    
    (9,861
    )Average number of employees
    
    
    315
    
    
    
    376
    
    
    
    217
    
    
    
    211
 Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Depreciation of property, plant
and equipment (including assets
under finance leases)
    
    
    (3,653
    )
    
    
    (2,268
    )
    
    
    (2,197
    )
    
    
    (1,575
    )(Loss) profit on disposal of
fixed assets (excluding
exceptional profit)
    
    
    (249
    )
    
    
    183
    
    
    
    (38
    )
    
    
    (171
    )Amortization of intangible assets
    
    
    (2,073
    )
    
    
    (2,242
    )
    
    
    (3,373
    )
    
    
    (3,985
    )Impairment of intangible assets
    
    
    
    
    
    
    (301
    )
    
    
    
    
    
    
    Operating lease rentals:Property
    
    
    (1,616
    )
    
    
    (1,651
    )
    
    
    (1,133
    )
    
    
    (1,495
    )Plant, machinery and vehicles
    
    
    (301
    )
    
    
    (130
    )
    
    
    (72
    )
    
    
    (48
    )Auditors remunerationAudit fees
    
    
    (102
    )
    
    
    (104
    )
    
    
    (134
    )
    
    
    (193
    )Other services
    
    
    (621
    )
    
    
    (340
    )
    
    
    (431
    )
    
    
    (314
    )(723
    )
    
    
    (444
    )
    
    
    (565
    )
    
    
    (507
    )One-off chargesRestructuring costs
    
    
    (974
    )
    
    
    
    
    
    
    (1,627
    )
    
    
    (2,269
    )Asset write offs
    
    
    (127
    )
    
    
    (582
    )
    
    
    (16
    )
    
    
    Terminated deal costs
    
    
    
    
    
    
    
    
    
    
    (1,454
    )
    
    
    (1,101
    )
    
    
    (582
    )
    
    
    (3,097
    )
    
    
    (2,269
    )
 One-off charges: Restructuring costs in fiscal 2001 were incurred in relation
to the reorganization announced in June 2000 and related principally to
redundancy costs. Restructuring costs in fiscal 2003 were incurred in relation
to the merger with RiboTargets announced in April 2003 and related principally
to redundancy costs. Restructuring costs in the transition period relate to the
merger with Vernalis Group plc and consists primarily of redundancy costs. Terminated deal costs in fiscal 2003 were incurred in relation to the
terminated merger discussion with MorphoSys A.G. and relate principally to
legal and professional fees. Auditors remuneration: Other services relates to fees of £165,000 (April 2003:
£173,000) for proposed and completed acquisitions and other fees of £149,000
(April 2003: £258,000) that have been paid for taxation advice on collaborative
agreements and services on SEC filings. In addition, fees of £225,000 (April
2003: £340,000) were paid in respect of the fund raising by Vernalis Group plc
in May 2003; and in respect of the acquisition of RiboTargets by British Biotech
plc in April 2003. There were no fees paid in respect of management consultancy
services.  F-17




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##### Table of Contents



Administrative expenses Total Group
    
    Acquisition
    
    Merged BusinessEight months ended
    
    Eight months ended
    
    Eight months ended
    
    Year endedDecember 31,2003
    
    December 31,2003
    
    December 31,2003
    
    April 30,2003£000
    
    £000
    
    £000
    
    £000Other
    
    
    5,601
    
    
    
    1,297
    
    
    
    4,304
    
    
    
    9,344Terminated deal costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,454Restructuring costs
    
    
    2,269
    
    
    
    
    
    
    
    2,269
    
    
    
    1,627Amortization of goodwill
    
    
    3,031
    
    
    
    1,838
    
    
    
    1,193
    
    
    
    1,851Total administrative expenses
    
    
    10,901
    
    
    
    3,135
    
    
    
    7,766
    
    
    
    14,276
 Acquisition of RiboTargets Holdings plc: as permitted by FRS 3 (Reporting
Financial Performance), the acquisition of RiboTargets Holdings plc, which took
place seven days before the end of the previous financial period end on 23
April 2003, has been presented separately as if it was an acquisition in the
current period. (e) Gain/Loss on disposal of fixed assets The loss on sale of property for the transition period of £2,988,000 is due to
the planned divestment of the Oxford Facility. The profit on disposal of fixed assets of £2,505,000 in the year ended April
30, 2002, arises from the agreement signed with OSI Pharmaceuticals, Inc. in
August 2001 whereby the Group sold certain of its pre-clinical facilities and
59 British Biotech employees transferred to OSI along with the leases of two
properties and certain fixed assets. (f) Operating result by activity Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Continuing operationsPharmaceutical research and developments
    
    
    (48,436
    )
    
    
    (34,954
    )
    
    
    (36,249
    )
    
    
    (29,388
    )
 (g) Total net assets by activity April 30,2002
    
    April 30,2003
    
    December 31,2003£000
    
    £000
    
    £000Continuing operationsPharmaceutical research and development
    
    
    63,302
    
    
    
    53,576
    
    
    
    33,789
 All significant losses on ordinary activities before taxation and net assets
arise in the UK and relate to pharmaceutical research and development. (h) Analysis of capital expenditure by activity Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Continuing operationsPharmaceutical research and developments
    
    
    (1,772
    )
    
    
    (2,644
    )
    
    
    (4,299
    )
    
    
    (680
    )
 (i) Analysis of depreciation by activity Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Continuing operationsPharmaceutical research and developments
    
    
    (3,653
    )
    
    
    (2,268
    )
    
    
    (2,197
    )
    
    
    (1,575
    )
 F-18




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##### Table of Contents



5.  Merger with Vernalis Group plc On September 1, 2003 (the merger date) the Company and Vernalis Group plc
merged. The terms agreed for the proposed merger, reflecting the relative stock
market valuation of the two companies in the months preceding the announcement
of the merger, were that the Company would issue 0.861 of its own 5p New
Ordinary shares in consideration for each 10p Ordinary share in Vernalis Group
plc. Between the merger date and November 4, 2003, the Company issued
75,375,103 5p New Ordinary shares at par in exchange for 87,543,674 10p
Ordinary shares in Vernalis Group. On October 1, 2003, the Company changed its
name to Vernalis plc. Accounting for the merger
Reflecting the intentions, and the respective sizes of the merging parties, the
combination of the company and Vernalis Group plc has been treated as a merger
at September 1, 2003, and accordingly these financial statements have been
prepared using merger accounting principles as set out in the Companies Act
1985 and FRS 6. Under merger accounting, the shares issued by the Company in consideration for
the shares in Vernalis Group plc are recorded at nominal value and no share
premium arises. Similarly, the shares acquired are recorded in the Company
balance sheet as a fixed asset investment at the nominal value of the shares
issued in consideration. In the consolidated accounts of the Group, the
results, assets and liabilities and cash flows of Vernalis Group plc and the
Company are combined at the amounts at which they were previously recorded,
subject to adjustments to achieve consistency of accounting policies. The
consolidated profit and loss account, balance sheet and cash flow comparatives
are also stated on a combined basis. The consolidated profit and loss accounts used below shows the impact of the
merger for the period from May 1, 2003 to August 31, 2003, the nearest
practical date to the effective date of the merger. The consolidated balances
sheets are stated as at August 31, 2003. The following information is set out below:  (a) The nature and the amount of the accounting adjustments made to align the
two companies accounting policies;
(b) the principal components of the profit and loss account for the current
period and prior year; and
(c) the aggregated net assets at 31 August 2003, the nearest practical date to
the merger.a) Alignment of accounting policiesNo adjustments have been required to the Vernalis plc financial information to
reflect different accounting policies.b) Analysis of consolidated profit and loss account.(i) Eight months ended December 31 2003 British Biotech plc
    
    Vernalis Group plc
    
    Vernalis plc
    
    Vernalis plcFour months ended
    
    Four months ended
    
    Four months ended
    
    Eight months endedAugust 31,

2003
    
    August 31,
2003
    
    December 31,
2003
    
    December 31,
2003£000
    
    £000
    
    £000
    
    £000Turnover
    
    
    243
    
    
    
    3,444
    
    
    
    4,944
    
    
    
    8,631Operating loss
    
    
    (11,319
    )
    
    
    (4,862
    )
    
    
    (13,207
    )
    
    
    (29,388
    )Provision for loss on disposal of
fixed assets
    
    
    (2,538
    )
    
    
    
    
    
    
    (450
    )
    
    
    (2,988
    )Merger transaction expenses
    
    
    (5,396
    )
    
    
    
    
    
    
    
    
    
    
    (5,396
    )Loss on ordinary activities
before interest and taxation
    
    
    (19,253
    )
    
    
    (4,862
    )
    
    
    (13,657
    )
    
    
    (37,772
    )Net interest receivable and
similar income/charges
    
    
    379
    
    
    
    (168
    )
    
    
    697
    
    
    
    908Loss on ordinary activities
before taxation
    
    
    (18,874
    )
    
    
    (5,030
    )
    
    
    (12,960
    )
    
    
    (36,864
    )Tax on loss on ordinary activities
    
    
    1,060
    
    
    
    396
    
    
    
    1,189
    
    
    
    2,645Loss on ordinary activities after
taxation
    
    
    (17,814
    )
    
    
    (4,634
    )
    
    
    (11,771
    )
    
    
    (34,219
    )
 Merger transaction expenses relate only to the costs of the merger between
British Biotech plc and Vernalis Group plc. F-19




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##### Table of Contents



(ii) Year ended April 30, 2003 British Biotech plc
    
    Vernalis Group plc
    
    TotalYear ended
    
    Year ended
    
    Year endedApril 30,
2003
    
    April 30,
2003
    
    April 30,
2003£000
    
    £000
    
    £000Turnover
    
    
    1,078
    
    
    
    8,065
    
    
    
    9,143Operating loss
    
    
    (19,862
    )
    
    
    (16,387
    )
    
    
    (36,249
    )Loss on ordinary activities before interest and taxation
    
    
    (19,862
    )
    
    
    (16,387
    )
    
    
    (36,249
    )Net interest receivable and similar income/charges
    
    
    636
    
    
    
    1,368
    
    
    
    2,004Loss on ordinary activities before taxation
    
    
    (19,226
    )
    
    
    (15,019
    )
    
    
    (34,245
    )Tax on loss on ordinary activities
    
    
    1,738
    
    
    
    1,921
    
    
    
    3,659Loss on ordinary activities after taxation
    
    
    (17,488
    )
    
    
    (13,098
    )
    
    
    (30,586
    )
 c) Aggregated net assets of Vernalis Group plc and British Biotech plc at the time of the merger. August 31,
2003£000Book value of net assets of British Biotech Plc at 31 August 2003
    
    
    40,302Book value of net assets of Vernalis Group Plc at 31 August 2003
    
    
    5,282Total net assets at 31 August 2003
    
    
    45,584
 No adjustments arose out of the alignment of accounting policies at the time of the merger. 6.   Interest Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Interest incomeBank interest
    
    
    4,756
    
    
    
    3,651
    
    
    
    2,129
    
    
    
    1,136Exchange gains on other creditors
    
    
    
    
    
    
    
    
    
    
    1,413
    
    
    
    1,1784,756
    
    
    
    3,651
    
    
    
    3,542
    
    
    
    2,314Interest expenseSecured loans
    
    
    (453
    )
    
    
    (639
    )
    
    
    (656
    )
    
    
    (435
    )Finance leases
    
    
    (103
    )
    
    
    (132
    )
    
    
    (81
    )
    
    
    (109
    )Bank overdraft
    
    
    (1
    )
    
    
    (97
    )
    
    
    (2
    )
    
    
    (557
    )
    
    
    (868
    )
    
    
    (739
    )
    
    
    (544
    )4,199
    
    
    
    2,783
    
    
    
    2,803
    
    
    
    1,770
 7.  Taxation Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Overseas taxation
    
    
    130
    
    
    
    4
    
    
    
    
    
    
    
    Research and development tax credits
    
    
    1,719
    
    
    
    2,895
    
    
    
    3,659
    
    
    
    2,6451,849
    
    
    
    2,899
    
    
    
    3,659
    
    
    
    2,645
 F-20




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##### Table of Contents



Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Factors affecting the tax charge for the period:Loss before tax at 30%
    
    
    (16,000
    )
    
    
    (8,997
    )
    
    
    (10,274
    )
    
    
    (11,058
    )Expenses not deductible for tax purposes
    
    
    1,264
    
    
    
    507
    
    
    
    1,328
    
    
    
    752Goodwill on consolidation
    
    
    537
    
    
    
    537
    
    
    
    555
    
    
    
    909Deferred tax asset not recognized
    
    
    10,580
    
    
    
    2,887
    
    
    
    4,133
    
    
    
    6,120Research and development tax credit received at
24% of losses compared with 30% tax rate
    
    
    1,900
    
    
    
    2,171
    
    
    
    1,039
    
    
    
    632Overseas taxation refunded
    
    
    (130
    )
    
    
    (4
    )
    
    
    
    
    
    
    Under provision in respect of prior year tax credit
    
    
    
    
    
    
    
    
    
    
    (440
    )
    
    
    (1,849
    )
    
    
    (2,899
    )
    
    
    (3,659
    )
    
    
    (2,645
    )
 No liability for UK corporation tax has arisen in any of the periods to
December 31, 2003. The Group had losses, as computed for taxation purposes, of
approximately £413 million at December 31, 2003, (£412 million at April 30,
2003) (2002: £393 million) available to be carried forward to future periods. Tax losses can be carried forward with no expiry date against the profits of
the same trade. In the event that there is a change of ownership of the Group
(where one party or a group of connected parties gain control) then under
current UK tax law, if there is also a major change in the nature or conduct of
the trade within a period of three years either side of the change of
ownership, any tax losses at the time of change of ownership may not be
available for relief against future trading profits. Available tax losses have
been recognized as assets under US GAAP to the extent of any deferred tax
liabilities, and, a valuation allowance has been recognized against the
remaining deferred tax asset. In accordance with the provisions of the Finance Act 2000 in respect of
Research and Development Allowances, the Group is entitled to claim tax credits
for certain research and development expenditure. The amount included in the
financial statements in respect of the period ended December 31, 2003 of
£2,645,000 (year ended April 30, 2003: £3,659,000) represents the tax credit
receivable by the Group. There was no potential liability to deferred tax at December 31, 2003 or April
31, 2003. The analysis, computed at the tax rate of 30 per cent, was as
follows: Tax effect of timing differences Year ended April 30,
    
    Eight months endedDecember 31,2002
    
    2003
    
    2003£000
    
    £000
    
    £000Losses
    
    
    (117,900
    )
    
    
    (123,461
    )
    
    
    (123,773
    )(Excess)/deficit of taxation allowances over depreciation
    
    
    117
    
    
    
    (32
    )
    
    
    (2,074
    )Tax losses
    
    
    (117,783
    )
    
    
    (123,493
    )
    
    
    (125,847
    )
 8.  Dividends No dividends have been paid since inception. F-21




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9.  Intangible Assets April 30,2002
    
    April 30,2003
    
    December 31,2003£000
    
    £000
    
    £000CostAt May 1
    
    
    10,190
    
    
    
    28,738
    
    
    
    37,007Additions
    
    
    18,548
    
    
    
    8,269
    
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    (2,607
    )At April 30 /December 31
    
    
    28,738
    
    
    
    37,007
    
    
    
    34,400AmortizationAt May 1
    
    
    2,404
    
    
    
    4,947
    
    
    
    8,320Charge for the year
    
    
    2,242
    
    
    
    3,373
    
    
    
    3,985Impairment
    
    
    301
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    (830
    )At April 30 / December 31
    
    
    4,947
    
    
    
    8,320
    
    
    
    11,475Net book value
    
    
    23,791
    
    
    
    28,687
    
    
    
    22,925
 Intangible assets comprise Goodwill, License Fees and Patents and other
Intangibles Goodwill of £17.2 million arises on the acquisitions of RiboTargets and
Cerebrus and is being amortized over three years and five years respectively,
which is based on the directors estimate of its useful economic life. License fees and patents of £2.6 million represent payments made to third
parties to acquire licenses to develop their intellectual property. The
accounting policy for such assets is set out in Note 4. Disposals in the period
relate to the termination of collaboration agreements with Immunogen and
Methylgene following the portfolio review, for nil consideration received. Other intangibles of £17.2 million represent the capitalization of payments
conditionally due to GlaxoSmithKline (GSK) to buy out royalties due to GSK on
sales of frovatriptan. These are being amortized on a straight-line basis from
the date of launch of frovatriptan in June 2002 to the end of the patent life
in 2014, which is considered by the Directors to be the useful life of the
asset. 10.  Property, plant and equipment April 30,2002
    
    April 30,2003
    
    December 31,2003£000
    
    £000
    
    £000CostFreehold land and buildings
    
    
    9,249
    
    
    
    9,165
    
    
    
    Leasehold land and buildings
    
    
    987
    
    
    
    3,272
    
    
    
    3,804Assets held for resale
    
    
    
    
    
    
    
    
    
    
    10,937Plant and machinery
    
    
    12,112
    
    
    
    12,483
    
    
    
    8,105Fixtures and fittings
    
    
    1,163
    
    
    
    1,629
    
    
    
    82023,511
    
    
    
    26,549
    
    
    
    23,666Accumulated DepreciationFreehold land and buildings
    
    
    2,259
    
    
    
    2,612
    
    
    
    Lease land and buildings
    
    
    569
    
    
    
    1,824
    
    
    
    2,034Assets held for resale
    
    
    
    
    
    
    
    
    
    
    6,870Plant and machinery
    
    
    9,556
    
    
    
    9,270
    
    
    
    6,561Fixtures and fittings
    
    
    882
    
    
    
    1,279
    
    
    
    69313,266
    
    
    
    14,985
    
    
    
    16,158Net book value
    
    
    10,245
    
    
    
    11,564
    
    
    
    7,508
 The net book value of plant and machinery includes an amount of £674,000 (April
30, 2003: £1,066,000) in respect of assets held under finance leases. The depreciation charge for the year period in respect of these assets was
£392,000 (April 30, 2003: £13,000). F-22




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##### Table of Contents



Capital commitments at December 31/April 30 were as follows: April 30,
2002
    
    April 30,
2003
    
    December 31,
2003£000
    
    £000
    
    £000Contracted for but not provided
    
    
    411
    
    
    
    102
    
    
    
    
 11.  Investments Quoted
Companies
    
    Unquoted
Companies
    
    Total£000
    
    £000
    
    £000CostAt May 1, 2003
    
    
    1,623
    
    
    
    1,406
    
    
    
    3,029Disposal
    
    
    (974
    )
    
    
    (1,406
    )
    
    
    (2,380
    )At December 31, 2003
    
    
    649
    
    
    
    
    
    
    
    649ProvisionsAt May 1, 2003
    
    
    1,444
    
    
    
    478
    
    
    
    1,922Write down during the period
    
    
    26
    
    
    
    
    
    
    
    26Disposals
    
    
    (904
    )
    
    
    (478
    )
    
    
    (1,382
    )At December 31, 2003
    
    
    566
    
    
    
    
    
    
    
    566Net book value at December 31, 2003
    
    
    83
    
    
    
    
    
    
    
    83
 Amounts written off investments were as follows: Year to
    
    Eight months toApril 30,
2003
    
    December 31,
2003£000
    
    £000Loss on disposal
    
    
    
    
    
    
    929Profit on disposal
    
    
    
    
    
    
    (93
    )Charge for the period
    
    
    799
    
    
    
    26799
    
    
    
    862
 During the year, provision has been made for the permanent diminution in value
of listed and unlisted investments by reference to the Groups accounting
policy. On February 2, 2004, the shareholders of Genesoft Pharmaceuticals Inc approved
its merger with Oscient Pharmaceuticals Corp (formerly Genome Therapeutics
Corp., a NASDAQ quoted company). As a result of the merger, the Groups holding
in Genesoft has been exchanged for 424,118 shares in Oscient. Of these, 93,141
will remain in escrow and will not be made available to the Company for up to
18 months. These shares are held at nil book value at December 31, 2003. 12.  Accounts receivable April 30,
2002
    
    April 30,
2003
    
    December 31,
2003£000
    
    £000
    
    £000Trade debtors
    
    
    
    
    
    
    843
    
    
    
    1,133Interest receivable
    
    
    765
    
    
    
    414
    
    
    
    136Research and development tax credits
    
    
    3,668
    
    
    
    5,942
    
    
    
    5,804Other receivables
    
    
    630
    
    
    
    2,571
    
    
    
    2,079Prepayments and accrued income
    
    
    694
    
    
    
    2,214
    
    
    
    1,8395,757
    
    
    
    11,984
    
    
    
    10,991
 No reserves for doubtful debts are considered necessary. F-23




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##### Table of Contents



13.  Creditors: amounts falling due within one year April 30,2002
    
    April 30,2003
    
    December 31,2003£000
    
    £000
    
    £000Secured loan (see Note 14)
    
    
    270
    
    
    
    270
    
    
    
    270Interest payable
    
    
    
    
    
    
    211
    
    
    
    Bank overdraft
    
    
    16
    
    
    
    
    
    
    
    Current portion of obligations under finance leases
    
    
    560
    
    
    
    1,027
    
    
    
    738Trade creditors
    
    
    6,641
    
    
    
    4,692
    
    
    
    2,538Taxation and social security
    
    
    510
    
    
    
    628
    
    
    
    458Accruals
    
    
    4,073
    
    
    
    6,688
    
    
    
    5,352Other creditors
    
    
    3,468
    
    
    
    3,179
    
    
    
    5,774Deferred income
    
    
    3,419
    
    
    
    4,292
    
    
    
    4,64318,957
    
    
    
    20,987
    
    
    
    19,773
 At December 31, 2001, the Group had a loan of £6.9 million ($10 million) from
Elan Corporation. The obligation to pay this loan and accrued interest was
waived during April 2002 in conjunction with a reduction in the rate of
royalties due and a commitment by the Group to undertake certain Phase IIIb
trials. Deferred income of £5,942,000 (April 2003: £7,932,000) included above and in
creditors falling due after more than one year relates to the deferral of
revenues arising from the loan waiver noted above and a milestone payment from
Elan. These revenues are being deferred and recognized by reference to
expenditure being incurred to complete certain Phase IIIb trials on
frovatriptan which the Group has agreed with Elan to undertake. In May 2004,
The Group announced that it had re-acquired the rights to Frovatriptan. (See
Note 26). 14.  Long term debt April 30,2002
    
    April 30,2003
    
    December 31,2003£000
    
    £000
    
    £000Secured loan
    
    
    1,620
    
    
    
    1,350
    
    
    
    1,2156.5% convertible loan
    
    
    
    
    
    
    7,000
    
    
    
    Obligations under finance leases
    
    
    186
    
    
    
    549
    
    
    
    18Accruals, Other Creditors and Deferred Income
    
    
    20,421
    
    
    
    15,874
    
    
    
    6,88622,227
    
    
    
    24,773
    
    
    
    8,119Loans and obligations under finance leases are repayable as follows:Over one and under two years
    
    
    456
    
    
    
    819
    
    
    
    288Over two and under three years
    
    
    270
    
    
    
    270
    
    
    
    270Over three and under four years
    
    
    270
    
    
    
    270
    
    
    
    270Over four and under five years
    
    
    270
    
    
    
    270
    
    
    
    270Repayable beyond five years, by installments
    
    
    540
    
    
    
    270
    
    
    
    1351,806
    
    
    
    1,899
    
    
    
    1,233
 The loan at April 30, 2003 of £7 million related to a convertible loan facility
with Roche that was entered into coincident with a strategic agreement to
research and develop new drugs for the treatment of depression in May 2002.
Interest was paid bi-annually at 6.5 per cent and the loan was originally fully
repayable on May 13, 2007, or convertible at any time at the option of the
holder. Following the merger of Vernalis Group plc with the Company, the loan,
plus accrued interest, was repaid in full in November 2003. The secured loan is for a term of 20 years from April 14, 1989 and is secured
by a fixed charge over three of the Groups freehold properties. The terms of
the loan provided for a moratorium on capital repayments for five years from
April 14, 1989, after which the loan is repayable quarterly in arrears by equal
instalments. Interest is fixed at 12.13 per cent per annum throughout the term. Other creditors primarily relates to payments conditionally due to
GlaxoSmithKline (GSK) under the agreement of December 2000 to buy out royalties
due to GSK on sales of frovatriptan. The Group is committed to making
four
annual payments of $5 million dollars, the first having been made in September
2002, and the following three due on each anniversary of the first
payment. A
fifth payment is due in 2006 if cumulative worldwide sales of frovatriptan
exceed $300 million on that date, or 90 days thereafter. After discussion
with GSK, the payment due in September 2003 has been deferred, with $2.5
million paid in March 2004 and $2.5 million payable in September 2004. As a
result, creditors F-24




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##### Table of Contents



due within one year includes $10 million in respect of GSK. The full liability
for $20 million (£11,172,000) has been recognized as the Directors believe it
is probable that cumulative global sales will exceed $300 million. During the
period ended December 31, 2003, exchange gains of £1,178,000 (year ended April
30, 2003: gain of £1,413,000) were recognized in the profit and loss account in
relation to this liability. 15.  Provisions for liabilities and charges Restructuring
    
    Vacant lease
    
    Dilapidationprovision
    
    provision
    
    provision
    
    Total£000
    
    £000
    
    £000
    
    £000At May 1, 2003
    
    
    915
    
    
    
    412
    
    
    
    1,190
    
    
    
    2,517Utilized during the period
    
    
    (2,467
    )
    
    
    (122
    )
    
    
    (250
    )
    
    
    (2,839
    )Change for the period
    
    
    2,269
    
    
    
    1,642
    
    
    
    500
    
    
    
    4,411At December 31, 2003
    
    
    717
    
    
    
    1,932
    
    
    
    1,440
    
    
    
    4,089
 The restructuring provision at May 1, 2003 represented costs incurred in
relation to the acquisition of RiboTargets on April 23, 2003, and is related to
redundancy costs. The provision at December 31, 2003 relates to redundancy
costs incurred as part of the Groups ongoing restructuring following the
acquisition of RiboTargets and the merger of the Company and Vernalis Group plc
on September 1, 2003, and is expected to be utilized in 2004. 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 is expected to be utilized over the life
of the related leases to 2014. The dilapidation provision relates principally to costs associated with the
Groups obligation to reinstate leased buildings to their original state. The
provision is expected to be utilized on vacation of the properties by 2014. The
charge in the year has been capitalized to Fixed Assets and is being
depreciated over the life of the lease. 16.  Share capital April 30, 2002
    
    April 30, 2003
    
    December 31, 2003Number
    
    £000
    
    Number
    
    £000
    
    Number
    
    £000AuthorizedNew Ordinary Shares of 5 pence each
    
    
    
    
    
    
    
    
    
    
    285,858,083
    
    
    
    14,293
    
    
    
    285,858,083
    
    
    
    14,293Old Ordinary shares of 5 pence each
    
    
    920,000,000
    
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred shares of 95p each
    
    
    
    
    
    
    
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    33,375,891
    
    
    
    31,707Allotted, called up and fully paidNew Ordinary shares of 5 pence each
    
    
    36,919,685-
    
    
    
    1,846
    
    
    
    103,772,425
    
    
    
    5,188
    
    
    
    142,126,883
    
    
    
    7,106Deferred shares of 95p each
    
    
    
    
    
    
    
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    33,375,891
    
    
    
    31,707Old Ordinary shares of 5 pence each
    
    
    667,493,141
    
    
    
    33,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,221
    
    
    
    
    
    
    
    36,895
    
    
    
    
    
    
    
    38,813
 F-25




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##### Table of Contents



Group
    
    GroupAuthorized
    
    Allotted, called up
    
    Authorized
    
    Allotted, called upand fully paid
    
    
    
    and fully paidNumber of shares
    
    Number of shares
    
    £000
    
    £000At 1 May 2003Equity capital:British Biotech plc Ordinary shares of 5p each
    
    
    285,858,083
    
    
    
    66,751,780
    
    
    
    14,293
    
    
    
    3,338Vernalis
Group plc equivalent(1)
    
    
    
    
    
    
    37,020,645
    
    
    
    
    
    
    
    1,850285,858,083
    
    
    
    103,772,425
    
    
    
    14,293
    
    
    
    5,188Non equity capitalDeferred shares of 95p each
    
    
    33,375,891
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    31,707Total share capital at 1 May 2003
    
    
    319,233,974
    
    
    
    137,148,316
    
    
    
    46,000
    
    
    
    36,895AllotmentsEquity capitalVernalis Group plc equivalent (i)
    
    
    
    
    
    
    38,354,458
    
    
    
    
    
    
    
    1,918Total allotments for the period ended
December 31 2003
    
    
    
    
    
    
    38,354,458
    
    
    
    
    
    
    
    1,918At December 31 2003Equity capital:Ordinary shares of 5p each
    
    
    285,858,083
    
    
    
    142,126,883
    
    
    
    14,293
    
    
    
    7,106Non-equity capitalDeferred shares of 95p each
    
    
    33,375,891
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    31,707Total share capital at December 31 2003
    
    
    319,233,974
    
    
    
    175,502,774
    
    
    
    46,000
    
    
    
    38,813
   (i)
    
    The Vernalis Group plc equivalent number of shares represents 0.861 times
the number of Vernalis Group plc shares that were in issue at the start of
the period and that were allotted during the period prior to the merger
with British Biotech plc. Rights and restrictions attaching to the Ordinary shares. The rights and restrictions attaching to the Ordinary shares are set out in the
Articles of Association. Rights and restrictions attaching to the Deferred Shares. Income
The Deferred shares carry no rights to participate in the profits of the
Company. Capital
On a return of capital in a winding up or dissolution (but not otherwise) the
holders of the Deferred shares shall be entitled to participate in the
distribution of the assets of the Company pari passu with the holders of the
Ordinary shares but only in respect of any excess of those assets above
£1,000,000,000,000. The holders of the Deferred shares shall not be entitled to
any further right of participation in the assets of the Company. Attendance and voting at general meetings
The holders of the Deferred shares are not entitled, in their capacity as
holders of such shares, to receive notice of any general meeting of the Company
or to attend, speak or vote at any such meeting. Form
The Deferred shares shall not be listed on any stock exchange nor shall any
share certificates be issued in respect of such shares. The Deferred Shares
shall not be transferable, save as referred to below or with the written
consent of the directors. Class rights
The Company may from time to time create, allot and issue further shares,
whether ranking pari passu with or in priority to the Deferred shares, and on
such creation, allotment or issue any such further shares (whether or not
ranking in any respect in priority to the Deferred shares) shall be treated as
being in accordance with the rights attaching to the Deferred shares and shall
not involve a variation of such rights for any purpose. A reduction by the
Company of the capital paid up on the Deferred shares shall be in accordance
with the rights attaching to the Deferred shares and shall F-26




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##### Table of Contents



not involve a variation of such rights for any purpose and the Company shall be
authorized at any time to reduce its capital (subject to and in accordance with
the Companies Act) and without obtaining the consent of the holders of the
Deferred shares. 17.  Share option schemes The company currently operates two share option schemes, the Share Option Plan
(which comprises an Inland Revenue approved company share option plan and an
option plan that has not been approved by the Inland Revenue) and the SAYE
Plan, under which grants of options may be made. In addition option incentive
arrangements under the British Biotech Group 1992 Share Option Scheme (the
1992 Scheme), the British Biotech Executive Share Option Scheme (the
Executive Scheme); the British Biotech Deferred Share Bonus Scheme (the
Bonus Scheme) remain in place but will not be operated again. The options over the unissued Ordinary Shares of five pence that have been
granted to Directors and employees in the period from April 30, 2000 to
December 31, 2003 are set out below. All of the quotations and prices have been
adjusted to reflect the effects of the capital reorganization in April 2003. Number of
    
    Exercise
    
    Weighted averageShare options
    
    Price
    
    Exercise price£
    
    £Balance at April 30, 2000
    
    
    1,655,991
    
    
    
    1-47
    
    
    
    11.60Exercisable at April 30, 2000
    
    
    279,915
    
    
    
    1-47
    
    
    
    9.40Exercised
    
    
    17,543
    
    
    
    1
    
    
    
    1.00Surrendered
    
    
    279,784
    
    
    
    1-47
    
    
    
    12.00Granted
    
    
    765,585
    
    
    
    1
    
    
    
    1.00Balance at April 30, 2001
    
    
    2,124,249
    
    
    
    1-47
    
    
    
    7.60Exercisable at April 30, 2001
    
    
    374,787
    
    
    
    1-47
    
    
    
    13.40Exercised
    
    
    49,093
    
    
    
    1
    
    
    
    1.00Surrendered
    
    
    975,464
    
    
    
    1-42
    
    
    
    7.60Granted
    
    
    612,500
    
    
    
    1
    
    
    
    1.00Balance at April 30, 2002
    
    
    1,712,191
    
    
    
    1-47
    
    
    
    5.80Exercisable at April 30, 2002
    
    
    432,713
    
    
    
    1-47
    
    
    
    11.20Exercised
    
    
    1,233
    
    
    
    1
    
    
    
    1.00Surrendered
    
    
    400,138
    
    
    
    1-42
    
    
    
    10.147Granted
    
    
    5,422,911
    
    
    
    0.59-1
    
    
    
    0.80Balance at April 30, 2003
    
    
    6,733,731
    
    
    
    0.59-47
    
    
    
    1.31Exercisable at April 30, 2003
    
    
    405,354
    
    
    
    1-47
    
    
    
    10.67Exercised
    
    
    0
    
    
    
    
    
    
    
    Surrendered
    
    
    (1,554,238
    )
    
    
    0.835-33.40
    
    
    
    2.19Granted
    
    
    4,846,036
    
    
    
    0.835
    
    
    
    0.835Balance at December 31, 2003
    
    
    10,025,529
    
    
    
    0.59-47
    
    
    
    1.07Exercisable at December 31, 2003
    
    
    321,823
    
    
    
    1-47
    
    
    
    8.27
 The following table summarizes information about the range of exercise prices for share options outstanding at December 31, 2003. Weighted averageremaining
    
    Weighted
    
    
    
    
    
    Weighted averageExercise
    
    Number
    
    contractual life
    
    average exercise
    
    Exercisable
    
    exercise price ofprices
    
    outstanding
    
    (years)
    
    price (£)
    
    options
    
    exercisable options
(£)£0.585-£0.835
    
    
    6,558,876
    
    
    
    9.41
    
    
    
    0.73
    
    
    Nil
    
    
    Nil£1-4.40
    
    
    3,283,035
    
    
    
    8.45
    
    
    
    1.11
    
    
    
    138,309
    
    
    
    2.35£5.60-£7.20
    
    
    49,983
    
    
    
    1.85
    
    
    
    6.68
    
    
    
    49,983
    
    
    
    6.68£8
    
    
    76,250
    
    
    
    4.752
    
    
    
    8.00
    
    
    
    76,250
    
    
    
    8.00£16.40-£20.40
    
    
    46,327
    
    
    
    3.66
    
    
    
    19.86
    
    
    
    46,327
    
    
    
    19.86£22.00-£47.00
    
    
    11,058
    
    
    
    3.13
    
    
    
    43.19
    
    
    
    10,954
    
    
    
    43.247
 F-27




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##### Table of Contents



The weighted-average grant-date fair values of options granted in the period were: Weighted averageNumber of
    
    grant-dateshare options
    
    fair values (£)Exercise price less than market value on day of grant
    
    Nil
    
    
    NilExercise price equal to market value on day of grant
    
    
    4,846,036
    
    
    
    0.594Exercise price greater than market value on day of grant
    
    Nil
    
    
    Nil
 18.  Pension schemes At December 31, 2003 the Groups pension schemes were defined contribution
schemes under which the Group had no obligations beyond the payment of the
premiums. The pension costs for the schemes have been as follows: Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Pension costs
    
    
    790
    
    
    
    896
    
    
    
    806
    
    
    
    716
 19.  Commitments and contingencies (a)  Operating lease commitments At December 31, 2003, the Group had the following commitments under operating
leases, principally relating to leased properties: Years ended December
31,
    
    
    £0002004
    
    
    2,2942005
    
    
    2,2832006
    
    
    2,2512007
    
    
    2,2512008
    
    
    2,251Later years
    
    
    19,782
 The future aggregated minimum lease commitment is £31,112,000 (b)  Financial commitments and contingencies The Group has commitments under license agreements of up to £12.45 million
(April 30, 2003: £12.45 million) and US $nil (April 30, 2003: $13.25 million)
which are contingent upon successful product development, registration and
approval. Commercial Collaborations The following section describes the Groups existing commercial collaborators
and the commercial agreements with respect to the Groups principal research
and development programs and marketed products. SmithKline Beecham (frovatriptan)
Frovatriptan is the Companys most advanced program and the Companys only
currently marketed product. Vernalis originally licensed frovatriptan from
SmithKline Beecham in 1994. In 1998, SmithKline Beecham waived its option to
commercialize the compound and worldwide marketing rights passed to Vernalis in
return for a residual royalty payable to SmithKline Beecham on future worldwide
sales of frovatriptan. During 2000, in connection with SmithKline Beechams
merger with Glaxo Wellcome plc, Vernalis made two important amendments to the
1994 agreement:  
    
    in July 2000, SmithKline Beecham assigned to Vernalis all of
SmithklineBeechams patents covering frovatriptan (with no substantive
changes in the royalty arrangements); and
    
    in December 2000, SmithKline Beecham waived all of its rights to
royalties on sales of frovatriptan in return for a series of five $5
million cash payments by Vernalis. The first instalment of $5 million
was paid on September 16, 2002. The second instalment due in September
2003 was deferred with $2.5 million paid in March 2004 and $2.5
million payable in September 2004. Subsequent instalments are due on
each anniversary of the initial payment. The final payment is subject
to cumulative worldwide sales of frovatriptan from launch exceeding
$300 million. F-28




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##### Table of Contents



Elan (frovatriptan)
In May 2004 this agreement was terminated, but was in operation throughout the
period. Vernalis signed a license agreement with Elan in 1998 granting Elan
exclusive marketing rights for frovatriptan in the United States, Canada and
Mexico. On signing, Elan paid Vernalis a fee of $7.5 million and made a $10
million investment in Vernalis Group ordinary shares at a negotiated price of
£6.25 per share. Elan subsequently paid Vernalis a further $7.5 million in 1999
when the FDA formally accepted Vernaliss frovatriptan New Drug Application
(NDA) for review, and a further $15 million in the fourth quarter of 2001
following FDA marketing approval. Under the terms of the 1998 license
agreement, Vernalis could have potentially received three additional milestone
payments exceeding $30 million in total on achievement by Elan of agreed sales
targets for frovatriptan. In addition, Elan would pay Vernalis a royalty based
on its net sales of frovatriptan. In December 2000, Vernalis entered into a new
financing agreement with Elan under which Elan made a $10 million loan to
Vernalis and a further equity investment of £4.96 million. Following that
investment, Elan held 2,943,396 Ordinary Shares, representing approximately 6.7
per cent of Vernalis Groups issued share capital, which was subsequently sold
in July 2002. Elan no longer has any shareholding in Vernalis. In the first quarter of 2002 Elan appointed UCB as its co-promotion partner for
frovatriptan in the US market. The co-promotion agreement was between Elan and
UCB and Vernalis had/has no contractual relationship directly with UCB. In
conjunction with the appointment of UCB, Vernalis agreed to revised commercial
arrangements with Elan. Under the new terms, Elan forgave the full amount of
its loan to Vernalis, including accrued interest, and accelerated a $5.4
million sales milestone payment due under the restated 1998 license agreement
to 30 days following the US launch. In return, Vernalis would have received
royalties at a reduced rate on US sales up to a pre-determined level during the
launch phase and early years of marketing of frovatriptan. At the end of an
initial three-year period following the US launch of frovatriptan, Elan would
have had an option to extend the reduced royalty period by up to four years by
making an additional lump sum payment to Vernalis. This payment replaced the
second sales milestone payment due under the 1998 license agreement. Thereafter, or if Elan had elected not to the make the lump sum payment, the
royalty rate due to Vernalis would have reverted to the previous levels. The
third sales milestone payment was not affected by the new agreement. This was a
payment of $15 million from Elan to Vernalis which was triggered when the net
sales of frovatriptan by Elan and UCB in North America exceeded $100 million in
any 12-month period. Elan made its first royalty payment to Vernalis in August
2002 and payments have subsequently been received on a quarterly basis (prior
to the agreement for the reacquisition of North American rights). For
additional information on frovatriptan, see Item 4B, Business Overview. In the period from launch to the end of 2002, Elan reported Frova sales of
$11.2 million, including initial stock to trade ahead of the June launch. In
the first quarter of 2003, Elan reported Frova sales of a further $8.7 million
and in the second quarter of 2003 Elan reported Frova sales of $5.9 million.
Vernalis received its first royalty payment from Elan in August 2002 and (prior
to the reacquisition of North American rights from Elan) royalty payments were
received on a quarterly basis. By December 2003, 18 months following launch,
Frova had achieved a share of approximately three per cent of the US market for
the triptan class of drugs, according to prescription data generated by the
market research organization IMS Health. In the first quarter of 2004, Elan
reported sales of $6.7 million. In addition, Vernalis was committed to funding and conducting a number of
additional clinical studies with frovatriptan, known as Phase IIIb support
studies, up to a predetermined total cost. These included the ongoing studies
in the prophylaxis of menstrually associated migraine and a new study in the
treatment of adolescent migraine, which Vernalis commenced in April 2003. A
total commitment of approximately $8 million was outstanding as at December 31,
2003. In March 2004 Vernalis announced that it has entered into an agreement to
reacquire in their entirety the North American rights for frovatriptan from
Elan for a total of $50 million payable over 21 months. The transaction was
completed in May 2004. Vernalis intends to seek a major pharmaceutical partner
to realize frovatriptans significant commercial potential, including the new
proposed menstrually-associated migraine indication. Vernalis also intends to
raise additional funds by way of an equity fundraising to assist with the
reacquisition of frovatriptan. Under the terms of the agreement, Vernalis made an initial payment of $5
million to Elan on completion. This will be followed by payments of $20 million
on December 31, 2004 and $25 million on December 31, 2005. Vernalis will also
purchase certain inventory from Elan at an expected approximate cost of $5.4
million payable no later than December 31 2004. The license previously granted
by Vernalis to Menarini International in respect of Europe and Central America
remains in place (see below). More detail on the current contractual arrangements with Elan is given at Item
10C. Menarini (frovatriptan)
Vernalis has also signed a license agreement with Menarini granting Menarini
exclusive marketing rights for frovatriptan in the European Union, Eastern
Europe and specified countries in Central America. Under this agreement
Vernalis will supply Menarini with the finished packed product ready for sale.
Vernalis receives revenue on supply of product and also from royalties. F-29




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##### Table of Contents



Potential Additional Marketing Partners (frovatriptan)
Vernalis is exploring opportunities to generate further revenues by selecting
marketing partners for frovatriptan in other geographic areas not covered by
its existing marketing agreements. Diosynth and Evotec OAI (frovatriptan)
Vernalis also has agreements in place with Diosynth Limited and Evotec OAI,
with respect to the manufacture and supply of the bulk active pharmaceutical
ingredient in frovatriptan. This bulk active is used by Galen Limited to
produce finished product that is supplied by Vernalis to Menarini. Galen Limited (frovatriptan)
Vernalis has an agreement with Galen Limited for tableting and packaging of
frovatriptan which is supplied as finished product to Menarini. Following the
reacquisition of the North American rights to frovatriptan from Elan, Vernalis
has also taken assignment of an agreement under which Galen supplies tableting
and packaging services with regard to North America. Vernalis is in discussion
with Galen about a proposed assignment of the two Galen agreements from Galen
to Pharmaceutical Development & Manufacturing Services Limited. DSM Biologics Company Inc. (V10153)
Vernalis has had a series of agreements with DSM Biologics, the most recent
being January 1, 2003, all of which concern the supply of V10153 for clinical
trials. Monash University (V140)
V140 (alphadolene acetate) In October 2002, Vernalis was granted an exclusive
license to develop and commercialize the compound alphadolone (V140) for all
human and animal prophylactic and therapeutic analgesic indications from Monash
University and Professor Colin Goodchild (Victoria, Australia). In return for
an exclusive license, Vernalis will pay Monash and Professor Goodchild success
milestones and royalties upon the sale of product. Currently, V140 is in Phase
I studies. Roche (5-HT2C receptor)
In December 1999 Vernalis signed an agreement with Roche to collaborate on
Vernaliss research program directed toward selective 5-HT2C agonists as
potential anti-obesity agents. Under the terms of this agreement, Vernalis received funding for an initial
two-year joint research program with Roche. Vernalis also received a license
fee on signature of the agreement and three subsequent milestone payments from
Roche: in November 2000 on the selection of VR 1065 as the first lead
development compound; in June 2001 when this compound was confirmed as the
first clinical development candidate; and in May 2002 when it entered Phase I
studies. In February 2002, Vernalis and Roche entered into a further two-year research
collaboration to support the objective of bringing further product candidates
into Phase I clinical trials. This agreement was extended for a further six
months in February 2004. Under the terms of this new agreement, Vernalis
receives additional research funding for the period of the new research
collaboration. In May 2002, Roche commenced Phase I clinical trials with
VR-1065. Although there were no side effects, the pharmacokinetic data on
VR-1065 did not meet the criteria for progression to Phase II. Together with
Roche, Vernalis is now focusing on follow-on compounds from different chemical
series that have already been identified in the substantial 5-HT2C library
generated by the collaboration so far. Roche has exclusive worldwide rights to develop, manufacture and market all the
product candidates coming out of the program for the treatment of obesity and
related eating disorders, and will also fund and conduct all aspects of the
development program for each compound it elects to take into development for
this indication. Novartis Institutes for Biomedical Research, Inc.
In December 2003 Vernalis formed a research collaboration with the Novartis
Institutes for BioMedical Research, Inc., (NIBRI) in Cambridge, MA, USA, to
investigate inhibitors of a target implicated in the progression of a range of
cancers. Under the agreement Vernalis is providing elements of its ongoing
oncology research to NIBRI for an initial six-month evaluation period after
which NIBRI will have the right to enter a longer-term research and development
collaboration. During this evaluation period NIBRI is conducting its own
research and funding research at Vernalis laboratories in Cambridge, UK. Serono S.A. (MEIs: inflammation)
In October 2000, Vernalis and Serono S.A. (Serono) (SWX: SEO; NYSE: SRA) signed
a two-year agreement to jointly research, develop and commercialize
metalloenzyme inhibitors for the treatment of various inflammatory diseases.
Under the terms of the agreement, Vernalis received from Serono an up-front
payment of $5 million. The agreement with Serono covered BB-2827, BB-76163 and research activities.
The clinical development, manufacture and commercialization of BB-2827, a
collagenase inhibitor with potential application in rheumatoid F-30




---



##### Table of Contents



arthritis, and the pre-clinical research of BB-76163, an aminopeptidase
inhibitor, with potential application in multiple sclerosis, were terminated in
2001. In October 2002, the term of the research agreement was extended to October
2003. The research agreement has now concluded. Serono is now in the process of
selecting candidates for further development. Serono will undertake the further
development of these compounds, with the Company receiving milestone and
royalty payments. GeneSoft Pharmaceuticals Inc. (MEIs: antibiotics)
In August 2002, Vernalis signed agreements with GeneSoft Pharmaceuticals Inc.
(now part of the Oscient Pharmaceuticals Corp group) for a broad-based
collaboration to discover and develop novel anti-infective drugs based on
Vernaliss proprietary bacterial metalloenzyme inhibitors. The collaboration
combined Vernaliss novel targets, chemistry and clinical development with
GeneSofts experience in antibiotic lead optimisation and clinical expertise. GeneSoft made an initial payment to Vernalis in August 2002 of $4 million. Upon
initiation of the initial Phase I study of BB-83698 in October 2002, Vernalis
received a further payment from GeneSoft of $1 million and one million shares
of convertible-preferred stock (representing approximately 3.45 per cent of
GeneSofts outstanding equity as of the date of the transaction, on a
fully-diluted basis). In September 2003 the parties terminated the August 2002 agreements and
replaced them with a new Research Agreement relating to four anti-infective
projects in respect of Vernalis proprietary bacterial metalloenzyme
inhibitors, and a new agreement relating to the development and
commercialization of BB-83698. Under the revised September 2003 arrangements
GeneSoft will conduct all further research and development at no cost to
Vernalis and Vernalis may receive milestone and royalty payments (dependent on
progression of development and sales respectively). Chroma Therapeutics Limited
On November 24, 2003, Vernalis entered into an agreement with Chroma
Therapeutics Limited (Chroma) under which Vernalis granted Chroma an exclusive
license covering BB-76163 for use in cancer. Vernais was paid a small sum on
signature and will receive royalties if Chroma progresses development and sells
product. Institute of Cancer Research (Hsp 90 inhibitors)
This program for cancer is being conducted in collaboration with the Institute
of Cancer Research, under an exclusive research and development agreement which
provides access to relevant cancer models. ImmunoGen Inc. (BB-10901)
In May 2000, Vernalis and ImmunoGen Inc., (NASDAQ: IMGN) (ImmunoGen), a US
biotechnology company, entered into a collaboration to develop and
commercialize ImmunoGens huN901-DM1, subsequently re-named as BB-10901,
targeted at the treatment of small cell lung cancer. Under the agreement, Vernalis was granted exclusive rights to apply for
regulatory approval and commercialize BB-10901 in Europe and Japan. Upon
signature of the agreement, Vernalis paid $1.5 million for its rights to
BB-10901. Having previously stated that this agreement was under review, in January 2004
Vernalis announced that it had relinquished all rights to this product and will
not undertake any further development beyond the completion of certain ongoing
clinical studies. MethylGene Inc. (MG 98)
In February 2002, Vernalis signed an agreement with MethylGene Inc., a
privately-held Canadian biopharmaceuticals company, granting Vernalis the
European development and commercialization rights for MG98, MethylGenes
leading experimental anti-cancer drug. Under the License, Development and Commercialization Agreement, Vernalis made
an initial research and development payment to MethylGene of $1.7 million, to
be followed by milestone payments of up to $12.8 million based on successful
regulatory approval and commercialization for MG98 in Europe. MethylGene would
also receive undisclosed royalties on sales. In addition, under a separate
Stock Purchase Agreement, Vernalis made an equity investment of $2 million in
the private stock of MethylGene. Having previously stated that this agreement was under review, in January 2004
Vernalis announced that it had relinquished all rights to this product and will
not undertake any further development beyond the completion of certain ongoing
clinical studies. Eli Lilly & Company (VML 670)
In 1998 Vernalis signed an agreement with Lilly for Vernalis to develop an
early development stage drug discovered by Lilly, VML 670, in one or more
indications, including as a treatment for sexual dysfunction experienced by
people taking a class of drug for depression called SSRIs. F-31




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##### Table of Contents



An initial Phase IIa study with the product in treatment emergent sexual
dysfunction met some secondary end-points but failed to meet its primary
end-point. The study data have been provided to Lilly. Vernalis will not
undertake any further development. Roche (A2A receptor)
In May 2002, Vernalis entered a collaboration with Roche to discover and
develop new drugs for the treatment of depression. Under the terms of this
agreement, Roche had an option to license worldwide rights to develop,
manufacture and commercialize compounds arising from Vernaliss adenosine A2A
antagonist research program in depression. Roches option terminated in June
2003 and Vernalis now has complete control over its A2A antagonist programs,
which are targeted at a range of indications including Parkinsons disease and
depression. AstraZeneca
On October 17, 2003 Vernalis signed an initial research agreement with
AstraZeneca related to the use of Vernalis structure-based drug discovery
(SBDD) technology to investigate a number of proprietary AstraZeneca compounds
against certain anti-infective drug targets. The work under this agreement is
now completed and Vernalis received $200,000 for the services it provided. The Vernalis SBDD technology platform exploits the detailed molecular structure
of drug targets to drive the discovery and design of novel therapeutic
molecules. Novel compounds are discovered through a combination of proprietary
molecular docking calculations and fragment based methods. High throughput
crystallographic methods reveal the atomic detail of the binding mode of the
compounds, guiding rational design of the desired drug-like properties. The
effective integration of these structural, computational and medicinal
chemistry methods allows rapid progression of lead candidate molecules,
improving the quality and speed of the drug discovery process. Merlion Pharmaceuticals
In May 2003 MerLion Pharmaceuticals Pte Ltd., a Singapore-based drug discovery
company, and Vernalis entered into a two-year research agreement to discover
and develop new classes of anti-bacterial ribosomal inhibitors from natural
sources. The collaboration will combine Vernalis expertise in ribosomal biology and
structure-based drug design, including site specific assays, crystallography
and NMR technology with MerLions extensive collection of natural product
samples, its high throughput screening capabilities and natural product and
medicinal chemistry expertise. Identification and characterization of lead candidates from MerLions natural
product library will be performed using Vernalis proprietary ribosomal assays.
The two companies will jointly progress selected lead compounds through initial
pre-clinical development and will share in the intellectual property generated. OSI Pharmaceuticals, Inc.
In August 2001, Vernalis transferred part of its pre-clinical research
facilities to OSI Pharmaceuticals, Inc. (OSI) (NASDAQ: OSIP) for consideration
of £8.7 million in cash. In addition, Vernalis and OSI entered into an
agreement whereby OSI acquired rights to screen Vernaliss metalloenzyme
inhibitor (MEI) and other chemical libraries. The agreement with OSI expired in
November 2003. Schering-Plough Limited
In September 1999, Vernalis and Schering-Plough Limited (Schering-Plough)
signed an agreement to develop and commercialize Vernaliss MMPIs, including
marimastat and BB-3644, for the treatment of cancer. The agreement was in line
with Vernaliss declared strategy, established in 1998, to seek a partnership
with a major international pharmaceutical group to develop and market
marimastat and BB-3644 in North America and Europe. On execution of the agreement, Vernalis received payments totalling $8 million.
These consisted of a non-refundable milestone payment of $4 million and a $4
million equity investment in Vernalis by Schering-Plough. This equity
investment was made on September 10, 1999 and was satisfied by the issue of 4.5
million new shares, representing 0.7 per cent of the Vernalis share capital as
enlarged by the issue. Eight phase III clinical trials of marimastat have reported and, in each,
marimastat failed to meet the primary end-point. In addition clinical
development of BB-3644 has been stopped after it failed to show advantage over
marimastat in a Phase I study. The parties have now ceased all collaborative
efforts and the agreement between the parties was terminated in March 2003. Tanabe Seiyaku
In November 1996, Vernalis signed a development and license agreement with
Tanabe Seiyaku (Tanabe) to develop and market marimastat in the territories of
Japan, China (including Hong Kong), Taiwan and Indonesia. Under the agreement,
Tanabe made an initial payment to Vernalis of $7 million, to be followed by
further payments of up to $67 F-32




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##### Table of Contents



million, subject to the successful development and marketing of marimastat in
its territories. In addition, Tanabe assumed the cost and responsibility for
the development of marimastat in its territories. Tanabe commenced Phase I
clinical trials of marimastat in healthy volunteers in Japan in October 1997
and initiated the first of a planned series of Phase II clinical trials during
that year in gastric and lung cancer. The agreement with Tanabe is still in
place but Tanabe has taken the results of the Vernalis and Schering-Plough
clinical trials into account and has now decided to discontinue development in
Japan. DevCo Pharmaceuticals Limited
In March 2000, Vernalis and DevCo Pharmaceuticals Limited (DevCo) announced
that they had signed an agreement to develop the platelet activating factor
(PAF) antagonist, lexipafant, for prophylaxis of certain serious neurological
and renal complications experienced by patients undergoing cardiac surgery. The terms of the agreement grant DevCo exclusive rights to develop, manufacture
and sell lexipafant for the treatment of human disease other than in the fields
of oncology and ophthalmology. DevCo will undertake all development and, if
lexipafant is brought to market, pay Vernalis a royalty on sales. R&D Systems Europe Limited
Following the sale in July 1993 of British Bio-technology Products Ltd (now
known as R&D Systems Europe Ltd) to Techne Corporation, a joint biological
research agreement was entered into between Vernalis, R&D Systems Europe Ltd
and Techne Corporation. Under the terms of this agreement, R&D Systems Europe
Ltd paid Vernalis research fees for the exclusive rights to develop,
manufacture and sell products to the basic research reagent or diagnostic
markets arising from biological molecules developed by Vernalis. Royalties are
payable to Vernalis on any products developed by R&D Systems Europe Ltd from
such biological molecules. The agreement was terminated on December 31, 1999,
however, royalties continue to be paid in respect of the sale by R&D Systems
Europe Ltd of research reagents and diagnostic kits that arose from the
biological molecules supplied by Vernalis. 20.  Reconciliation of operating loss to operating cash flows Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Operating loss
    
    
    (48,436
    )
    
    
    (34,954
    )
    
    
    (36,249
    )
    
    
    (29,388
    )Depreciation
    
    
    3,653
    
    
    
    2,268
    
    
    
    2,197
    
    
    
    1,575Amortization of intangible fixed assets
    
    
    2,073
    
    
    
    2,242
    
    
    
    3,373
    
    
    
    3,985Amortization of investment in own shares
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    Impairment of intangible fixed assets
    
    
    227
    
    
    
    
    
    
    
    
    
    
    
    Credit for deferred shares awarded
    
    
    
    
    
    
    
    
    
    
    (611
    )
    
    
    Adjustment for exchange gain
    
    
    (69
    )
    
    
    (22
    )
    
    
    (29
    )
    
    
    Other profit / (loss) on disposal of fixed tangible assets
    
    
    (247
    )
    
    
    171
    
    
    
    (38
    )
    
    
    171Loss on disposal of intangible fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,777Tangible fixed assets written off
    
    
    127
    
    
    
    582
    
    
    
    16
    
    
    
    (Increase) / decrease in debtors
    
    
    (2,109
    )
    
    
    (3,960
    )
    
    
    (3,143
    )
    
    
    578Decrease in creditors
    
    
    (969
    )
    
    
    748
    
    
    
    (3,273
    )
    
    
    (4,133
    )Increase / (decrease) in provisions
    
    
    50
    
    
    
    (413
    )
    
    
    915
    
    
    
    1,572Increase / (decrease) in deferred income
    
    
    6,086
    
    
    
    3,039
    
    
    
    396
    
    
    
    (4,838
    )Decrease /
(increase) in stock
    
    
    
    
    
    
    (3
    )
    
    
    (57
    )
    
    
    8Merger transaction expenses paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,396
    )Reconstruction costs
    
    
    (1,030
    )
    
    
    
    
    
    
    
    
    
    
    Net cash outflow from operating activities
    
    
    (40,644
    )
    
    
    (30,302
    )
    
    
    (36,448
    )
    
    
    (34,089
    )
 21.  Returns on investments and servicing of finance Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Interest received
    
    
    5,435
    
    
    
    3,484
    
    
    
    2,480
    
    
    
    1,414Interest paid,
including interest
element of finance
lease payments
    
    
    (393
    )
    
    
    (458
    )
    
    
    (528
    )
    
    
    (755
    )Net cash inflow
from returns on
investments and
servicing of
finance
    
    
    5,042
    
    
    
    3,026
    
    
    
    1,952
    
    
    
    659
 F-33




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##### Table of Contents



22.  Capital expenditure Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Purchase of tangible fixed assets
    
    
    (1,798
    )
    
    
    (2,623
    )
    
    
    (1,310
    )
    
    
    (180
    )Sale of tangible fixed assets
    
    
    11,226
    
    
    
    7,275
    
    
    
    238
    
    
    
    2Purchase of fixed asset investments
    
    
    (1,623
    )
    
    
    (1,406
    )
    
    
    
    
    
    
    Sale of fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Purchase of intangible fixed assets
    
    
    (1,236
    )
    
    
    (2,447
    )
    
    
    (3,227
    )
    
    
    Net cash inflow / (outflow) from capital expenditure
    
    
    6,569
    
    
    
    799
    
    
    
    (4,299
    )
    
    
    (16
    )
 23.  Financing Year ended April 30,
    
    Eight months endedDecember 31,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Issue of Ordinary share capital
    
    
    3,622
    
    
    
    375
    
    
    
    139
    
    
    
    15,960Share issue costs
    
    
    
    
    
    
    
    
    
    
    (216
    )
    
    
    (1,527
    )Debt due within one year: Repayment of secured loan
    
    
    (497
    )
    
    
    (270
    )
    
    
    (270
    )
    
    
    (135
    )Capital element of finance lease payments
    
    
    (224
    )
    
    
    (392
    )
    
    
    (438
    )
    
    
    (820
    )Receipt / (repayment) of loans
    
    
    3,630
    
    
    
    5,044
    
    
    
    7,000
    
    
    
    (7,000
    )Net cash inflow from financing
    
    
    6,531
    
    
    
    4,757
    
    
    
    6,215
    
    
    
    6,478
 24.  Analysis of changes in net funds At April 30,
    
    
    
    
    
    Exchange
    
    At April 30,2001
    
    Cash flow
    
    movement
    
    2002£000
    
    £000
    
    £000
    
    £000Cash
    
    
    860
    
    
    
    (649
    )
    
    
    62
    
    
    
    273Short term deposits and investments
    
    
    82,162
    
    
    
    (19,453
    )
    
    
    
    
    
    
    62,709Bank overdraft
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )83,022
    
    
    
    (20,118
    )
    
    
    62
    
    
    
    62,966Secured loan due within one year
    
    
    (270
    )
    
    
    
    
    
    
    
    
    
    
    (270
    )Secured loan due after one year
    
    
    (5,249
    )
    
    
    3,629
    
    
    
    
    
    
    
    (1,620
    )Finance leases
    
    
    (1,433
    )
    
    
    687
    
    
    
    
    
    
    
    (746
    )76,070
    
    
    
    (15,802
    )
    
    
    62
    
    
    
    60,330
 At May 1,
    
    
    
    
    
    Acquisitions
    
    Exchange
    
    At April 30,2002
    
    Cash flow
    
    (excluding cash)
    
    movement
    
    2003£000
    
    £000
    
    £000
    
    £000
    
    £000Cash
    
    
    273
    
    
    
    (1
    )
    
    
    
    
    
    
    67
    
    
    
    339Short-term deposits and investments
    
    
    62,709
    
    
    
    (27,443
    )
    
    
    12,903
    
    
    
    (54
    )
    
    
    48,115Bank overdraft
    
    
    (16
    )
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    62,966
    
    
    
    (27,428
    )
    
    
    12,903
    
    
    
    13
    
    
    
    48,454Secured loan due within one year
    
    
    (270
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (270
    )Secured loan due after one year
    
    
    (1,620
    )
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )Convertible 6.5% loan
    
    
    
    
    
    
    (7,000
    )
    
    
    
    
    
    
    
    
    
    
    (7,000
    )Finance leases
    
    
    (746
    )
    
    
    439
    
    
    
    (1,269
    )
    
    
    
    
    
    
    (1,576
    )60,330
    
    
    
    (33,719
    )
    
    
    11,634
    
    
    
    13
    
    
    
    38,258
 F-34




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##### Table of Contents



At 1 May
    
    
    
    
    
    Exchange
    
    Other
    
    At December 31,2003
    
    Cash flow
    
    movement
    
    movements
    
    2003£000
    
    £000
    
    £000
    
    £000
    
    £000Cash
    
    
    339
    
    
    
    1,601
    
    
    
    (55
    )
    
    
    
    
    
    
    1,885Short-term deposits and investments
    
    
    48,115
    
    
    
    (25,786
    )
    
    
    
    
    
    
    
    
    
    
    22,32948,454
    
    
    
    (24,185
    )
    
    
    (55
    )
    
    
    
    
    
    
    24,214Secured loan due within one year
    
    
    (270
    )
    
    
    135
    
    
    
    
    
    
    
    (135
    )
    
    
    (270
    )Secured loan due after one year
    
    
    (1,350
    )
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    (1,215
    )Convertible 6.5% loan
    
    
    (7,000
    )
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    Finance leases
    
    
    (1,576
    )
    
    
    820
    
    
    
    
    
    
    
    
    
    
    
    (756
    )38,258
    
    
    
    (16,230
    )
    
    
    (55
    )
    
    
    
    
    
    
    21,973
 25.  Financial instruments related disclosure The Group does not trade in financial instruments. All the Groups debtors and creditors falling due within one year (other than
the bank overdraft and secured loan) have been excluded from the disclosures
below either due to the exclusion of short-term items or because they do not
meet the definition of a financial liability. Interest rate risk profile The interest rate profile of the Groups financial assets and liabilities are: April 30,2002
    
    2003Floating
    
    Fixed
    
    
    
    
    
    Floating
    
    Fixedrate
    
    rate
    
    Total
    
    rate
    
    rate
    
    Total£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000Financial liabilitiesUS dollar bank overdraft
    
    
    16
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    Sterling secured loan (i)
    
    
    
    
    
    
    1,890
    
    
    
    1,890
    
    
    
    
    
    
    
    1,620
    
    
    
    1,620Convertible loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    7,000Finance leases (ii)
    
    
    
    
    
    
    746
    
    
    
    746
    
    
    
    
    
    
    
    1,576
    
    
    
    1,57616
    
    
    
    2,636
    
    
    
    2,652
    
    
    
    
    
    
    
    10,196
    
    
    
    10,196Financial assetsSterling cash at bank and in hand (v)
    
    
    238
    
    
    
    
    
    
    
    238
    
    
    
    180
    
    
    
    
    
    
    
    180Euro cash at bank and in hand
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    11
    
    
    
    
    
    
    
    11US dollar cash at bank and in hand
    
    
    33
    
    
    
    
    
    
    
    33
    
    
    
    147
    
    
    
    
    
    
    
    147Sterling short-term investments (iii)(v)
    
    
    2,137
    
    
    
    
    
    
    
    2,137
    
    
    
    16,491
    
    
    
    
    
    
    
    16,491Sterling short-term deposits (iv)
    
    
    
    
    
    
    60,572
    
    
    
    60,572
    
    
    
    4,483
    
    
    
    27,141
    
    
    
    31,624US dollar investment
    
    
    98
    
    
    
    
    
    
    
    98
    
    
    
    70
    
    
    
    
    
    
    
    70Australian Dollar investment
    
    
    402
    
    
    
    
    
    
    
    402
    
    
    
    109
    
    
    
    
    
    
    
    109Canadian dollar investment
    
    
    1,406
    
    
    
    
    
    
    
    1,406
    
    
    
    928
    
    
    
    
    
    
    
    928Sterling investment
    
    
    55
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    4,371
    
    
    
    60,572
    
    
    
    64,943
    
    
    
    22,419
    
    
    
    27,141
    
    
    
    49,560
 F-35




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##### Table of Contents



December 31, 2003Floating rate
    
    Fixed rate
    
    Total£000
    
    £000
    
    £000Financial liabilitiesSterling secured loan (i)
    
    
    
    
    
    
    1,485
    
    
    
    1,485Convertible loan
    
    
    
    
    
    
    
    
    
    
    Finance leases (ii)
    
    
    
    
    
    
    756
    
    
    
    756
    
    
    
    2,241
    
    
    
    2,241Financial assetsSterling cash at bank and in hand (v)
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )Euro cash at bank and in hand
    
    
    99
    
    
    
    
    
    
    
    99US dollar cash at bank and in hand
    
    
    1,802
    
    
    
    
    
    
    
    1,802Sterling short-term investment (iii)(v)
    
    
    10,360
    
    
    
    
    
    
    
    10,360Sterling short-term deposits (iv)
    
    
    
    
    
    
    11,969
    
    
    
    11,969US dollar investment
    
    
    
    
    
    
    
    
    
    
    Australian Dollar investment
    
    
    83
    
    
    
    
    
    
    
    83Canadian dollar investment
    
    
    
    
    
    
    
    
    
    
    12,328
    
    
    
    11,969
    
    
    
    24,297
 The Groups provisions and other creditors are non interest-bearing  (i)
    
    The secured loan is for a term of 20 years from April 14, 1989, and is
secured by a fixed charge over three of the Groups freehold properties.
Interest is fixed at 12.13 per cent per annum throughout the term. The
loan is repayable quarterly in arrears by equal instalments. The weighted
average period until maturity is six years.(ii)
    
    The finance leases were all in sterling at fixed rates of interest. The
weighted average interest rate and period remaining on liabilities at
April 30, 2003 was 8.8 per cent and 1.9 years.(iii)
    
    The floating rate short term investments are invested in a money market
managed fund with a weighted average maturity of less than 120 days and is
repayable within 48 hours.(iv)
    
    The fixed rate short-term deposits are placed with a range of banks and
building societies at fixed terms ranging between overnight and 12 months
and at fixed rates ranging between 3.55 per cent and 4.12 per cent.(v)
    
    Sterling short-term investments are used to maintain a positive sterling
bank balance. Foreign currency exposure
At December 31, 2003 the Groups operating companies had net monetary assets of
£1.8 million (April 30, 2003: £0.1 million denominated in US dollars, £0.1
million (April 30, 2003: £0.1 million) denominated in Australian dollars, £0.1
million (April 30, 2003: £nil) denominated in euros and £ nil (April 30, 2003:
£0.9 million) denominated in Canadian dollars. Fair value of financial assets and liabilities
There is no significant difference between the fair value and the carrying
value of the Groups financial assets and liabilities at December 31, 2003 and
April 30, 2003, except for the secured loan, other creditors and fixed asset
investments. The fair value of the loan at £1.7 million (April 30, 2003: £1.9
million) and other creditors at £9.5 million (April 30, 2003: £10.9 million)
was calculated using a discounted cash flow method as market values were
unavailable. The book value of the loan at December 31, 2003 was £1.5 million
(April 30, 2003: £1.6 million). The book value of other creditors was £11.4
million (April 30, 2003: £12.6 million). The market value of the Groups listed
investments at December 31, 2003 was £83,000 (April 30, 2003: £179,000). In February 2004, following the merger of Genesoft Pharmaceuticals Inc. with
Oscient Pharmaceuticals Corp. (see note 11) the Group has a new US dollar
investment to replace that held at December 31, 2003. The book value and fair
value of these shares was nil at December 31, 2003. Borrowing facilities
The Group had no significant undrawn committed borrowing facilities
at December 31, 2003. F-36




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##### Table of Contents



26.  Post balance sheet events On March 30, 2004 the Company announced it had reached agreement with Elan to
reacquire the North American rights for frovatriptan, subject to shareholder
approval. The agreement was approved by shareholder vote at an Extraordinary
General Meeting of the Company held on May 13, 2004. The deferred income (see
note 13) will be offset against the consideration payment of $50 million and
the balance will be capitalized as an intangible asset and amortized over the
remaining patent life of the product. 27.  Related party transaction Following Mr Edwards resignation from the Board on September 10, 2003, he was
paid £150,000 in respect of consultancy provided to the Company. F-37