##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number: 0-20104
 VERNALIS plc
  England and Wales
 Oakdene Court, 613 Reading Road, Winnersh, Berkshire RG41 5UA, United Kingdom
  None
  Ordinary Shares of 5 pence each (Ordinary Shares)
American Depositary Shares each representing the right to receive two (2) Ordinary Shares
  None
  311,463,549 Ordinary Shares of 5 pence each
  o þ
  o þ
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  þ o
  o þ




---



##### 



TABLE OF CONTENTS
 PART IITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    1A
    
    Selected Financial Data
    
    
    1B
    
    Capitalisation and Indebtedness
    
    
    3C
    
    Reasons for the Offer and Use of Proceeds
    
    
    3D
    
    Risk Factors
    
    
    3ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    16ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    40ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    57ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    74ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    75ITEM 9.
    
    THE OFFER AND LISTING
    
    
    75ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    76ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    94ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    94PART IIITEM 13.
    
    DEFAULTS, DIVIDEND ARREARS AND DELINQUENCIES
    
    
    95ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    95ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    95ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    95ITEM 16B.
    
    CODE OF ETHICS
    
    
    95ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    95ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES
    
    
    96ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    96PART IIIITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    97ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    97ITEM 19.
    
    EXHIBITS
    
    
    97SIGNATURES
    
    
    
    
    100EX-1EX-4.3(F)EX-4.3(G)EX-4.3(H)EX-4.5EX-4.6(A)EX-4.6(B)EX-4.7(A)EX-4.7(B)EX-4.7(C)EX-4.7(D)EX-4.7(E)Exhibit 12Exhibit 13EX-23




---



##### Table of Contents



PREAMBLE
 THE ACQUISITION OF VERNALIS GROUP PLC AND USE OF CERTAIN DEFINED TERMS




---



##### Table of Contents



PRESENTATION OF FINANCIAL INFORMATION: AVAILABLE INFORMATION




---



##### Table of Contents



FORWARD-LOOKING STATEMENTS
 Cautionary Statement for Purposes of the Safe Harbor Provisions of the US Private Securities
Litigation Reform Act of 1995.
   
    
    difficulties inherent in the discovery and development of new
products and the design and implementation of pre-clinical and
clinical studies, trials and investigations;
    
    delays in and results from such studies, trials and investigations
that are inconsistent with previous results and the Groups
expectations;
    
    the uncertainties related to the regulatory process including the
failure to obtain and maintain required regulatory approvals;
    
    product and pricing initiatives by the Groups competitors;
    
    the ability of the Group to market existing products (including
Apokyn® and Frova®) and new products effectively;
    
    the ability of the Group to identify and agree beneficial terms
with potential partners for any of its products or the failure of
the Groups existing partners to perform their obligations;
    
    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 transactions; and
    
    the ability of the Group to identify and consummate suitable
strategic and business combination transactions.




---



##### Table of Contents



PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 
 A Selected Financial Data
    Consolidated Statement of Operations: Amounts in Accordance with IFRS
 Year ended December 312004
    
    
    2005
    
    
    2005£000
    
    
    £000
    
    
    $000*Revenues
    
    
    15,195
    
    
    
    14,131
    
    
    
    24,288Research and development expenditure
    
    
    (21,423
    )
    
    
    (26,491
    )
    
    
    (45,533
    )Operating loss
    
    
    (27,523
    )
    
    
    (32,834
    )
    
    
    (56,435
    )Net interest income
    
    
    112
    
    
    
    (1,598
    )
    
    
    (2,747
    )Net loss
    
    
    (25,653
    )
    
    
    (32,848
    )
    
    
    (56,459
    )Net loss per Ordinary share
    
    
    (17.4
    )p
    
    
    (16.3
    )p
    
    
    (28.0
    )pOrdinary shares used in computing
net loss per Ordinary share (000s)
    
    
    147,388
    
    
    
    202,174
    
    
    
    202,174




---



##### Table of Contents



Consolidated Statement of Operations: Amounts in Accordance with US GAAP
 Year ended April 30
    
    Period ended
    
    Year ended December 31December 312001
    

    2002
    

    2003
    

    2003
    

    2004
    

    2005
    

    2005£000
    

    £000
    

    £000
    

    £000
    

    £000
    

    £000
    

    $000*Revenues
    
    
    1,588
    
    
    
    1,450
    
    
    
    1,078
    
    
    
    5,009
    
    
    
    15,195
    
    
    
    14,131
    
    
    
    24,288Research and development
expenditure
    
    
    (23,578
    )
    
    
    (20,782
    )
    
    
    (14,292
    )
    
    
    (22,084
    )
    
    
    (21,423
    )
    
    
    (68,616
    )
    
    
    (117,937
    )Income (loss) from operations
    
    
    (27,349
    )
    
    
    (21,576
    )
    
    
    (24,949
    )
    
    
    (32,569
    )
    
    
    (35,901
    )
    
    
    (75,761
    )
    
    
    (130,218
    )Net interest income
    
    
    3,174
    
    
    
    2,817
    
    
    
    1,515
    
    
    
    1,901
    
    
    
    (374
    )
    
    
    (1,760
    )
    
    
    (3,025
    )Net loss
    
    
    (24,844
    )
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )
    
    
    (29,328
    )
    
    
    (75,937
    )
    
    
    (130,521
    )Loss per share from
continuing activities
    
    
    (82.1p
    )
    
    
    (64.7p
    )
    
    
    (73.1p
    )
    
    
    (31.2p
    )
    
    
    (24.4p
    )
    
    
    (37.5p
    )
    
    
    (64.4¢
    )Net loss per Ordinary share
    
    
    (74.6p
    )
    
    
    (52.4p
    )
    
    
    (66.0p
    )
    
    
    (28.0p
    )
    
    
    (19.9p
    )
    
    
    (37.6p
    )
    
    
    (64.5¢
    )Ordinary shares used in
computing net loss per
Ordinary share (000s)
    
    
    33,318
    
    
    
    33,362
    
    
    
    34,107
    
    
    
    104,439
    
    
    
    147,388
    
    
    
    202,174
    
    
    
    202,174
  Consolidated Balance Sheets: Amounts in Accordance with IFRS
 At December 312004
    
    
    2005
    
    
    2005£000
    
    
    £000
    
    
    $000*Cash and cash equivalents and held-to-maturity financial
assets
    
    
    33,323
    
    
    
    68,295
    
    
    
    117,385Property, plant and equipment
    
    
    1,596
    
    
    
    1,910
    
    
    
    3,283Intangible fixed assets, goodwill and available-for-sale
financial assets
    
    
    41,905
    
    
    
    89,797
    
    
    
    154,343Total assets
    
    
    104,646
    
    
    
    184,767
    
    
    
    317,577Non-current borrowings, deferred income and other liabilities
    
    
    (67,002
    )
    
    
    (69,587
    )
    
    
    (111,390
    )Total liabilities
    
    
    (86,749
    )
    
    
    (101,907
    )
    
    
    (175,158
    )Total shareholders equity
    
    
    17,897
    
    
    
    82,860
    
    
    
    142,419
 Selected Balance Sheet information in Accordance with US GAAP
 At April 30
    
    At December 312001
    

    2002
    

    2003
    

    2003
    

    2004
    

    2005
    

    2005£000
    

    £000
    

    £000
    

    £000
    

    £000
    

    £000
    

    $000*Cash, cash equivalents and held
to maturity financial assets
    
    
    64,736
    
    
    
    50,414
    
    
    
    44,006
    
    
    
    24,254
    
    
    
    33,323
    
    
    
    68,295
    
    
    
    117,385Property, plant and equipment
    
    
    13,877
    
    
    
    9,902
    
    
    
    11,258
    
    
    
    7,062
    
    
    
    1,362
    
    
    
    1,793
    
    
    
    3,082Intangible fixed assets
    
    
    
    
    
    
    
    
    
    
    2,406
    
    
    
    56,780
    
    
    
    69,644
    
    
    
    74,735
    
    
    
    128,454Goodwill
    
    
    
    
    
    
    
    
    
    
    4,875
    
    
    
    4,620
    
    
    
    4,815
    
    
    
    1,178
    
    
    
    2,025Total assets
    
    
    84,235
    
    
    
    63,822
    
    
    
    69,650
    
    
    
    103,389
    
    
    
    137,601
    
    
    
    171,367
    
    
    
    294,546Non-current borrowings, deferred
income and other liabilities
    
    
    (2,442
    )
    
    
    (1,683
    )
    
    
    (4,147
    )
    
    
    (8,119
    )
    
    
    (66,761
    )
    
    
    (66,886
    )
    
    
    (114,964
    )Total liabilities
    
    
    (13,463
    )
    
    
    (10,433
    )
    
    
    (14,159
    )
    
    
    (32,519
    )
    
    
    (86,679
    )
    
    
    (99,151
    )
    
    
    (170,421
    )Share capital
    
    
    33,326
    
    
    
    33,375
    
    
    
    36,895
    
    
    
    38,813
    
    
    
    39,492
    
    
    
    47,280
    
    
    
    81,265Total shareholders equity
    
    
    84,235
    
    
    
    62,822
    
    
    
    69,650
    
    
    
    103,839
    
    
    
    50,922
    
    
    
    72,216
    
    
    
    124,125Number of Ordinary shares (000s)
    
    
    33,326
    
    
    
    33,375
    
    
    
    66,752
    
    
    
    142,127
    
    
    
    155,700
    
    
    
    311,464
    
    
    
    311,464
 
 *
    
    The GBP amounts have been translated into US dollars at the rate of 1.7188 dollars to the
pound. Such translations should not be construed as representations that the GBP amounts
represent, or have been or could be converted into US dollars at that or any other rate. Dividends




---



##### Table of Contents



Exchange Rates
   Months Highest
    
    
    Months LowestExchange Rate
    
    
    Exchange RateDecember 2005
    
    
    1.7739
    
    
    
    1.7188January 2006
    
    
    1.7885
    
    
    
    1.7404February 2006
    
    
    1.7807
    
    
    
    1.7343March 2006
    
    
    1.7567
    
    
    
    1.7256April 2006
    
    
    1.8220
    
    
    
    1.7389May 2006
    
    
    1.8911
    
    
    
    1.8286
 Years ended
    
    Period End
    
    Average
    
    High
    
    LowApril 30, 2001
    
    
    1.43
    
    
    
    1.46
    
    
    
    1.56
    
    
    
    1.40April 30, 2002
    
    
    1.46
    
    
    
    1.43
    
    
    
    1.48
    
    
    
    1.37April 30, 2003
    
    
    1.60
    
    
    
    1.55
    
    
    
    1.65
    
    
    
    1.43Eight months ended December 31, 2003
    
    
    1.78
    
    
    
    1.64
    
    
    
    1.78
    
    
    
    1.57December 31, 2004
    
    
    1.916
    
    
    
    1.8356
    
    
    
    1.9482
    
    
    
    1.7544December 31,2005
    
    
    1.7188
    
    
    
    1,8204
    
    
    
    1.9292
    
    
    
    1.7138
   
 B            Capitalisation and Indebtedness
  
 C            Reasons for the Offer and Use of Proceeds
  
 D            Risk Factors
 Prospective investors and shareholders should be aware that any investment in the Company 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. Additional
risks currently unknown to Vernalis or currently believed to be immaterial, could have an adverse
effect on the Group. 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
the Companys shares could decline, possibly rapidly, resulting in the loss of all or part of any
investment therein.




---



##### Table of Contents



1.
    
    For the foreseeable future, the Group will be highly dependent on the success of Frova® and
Apokyn® in the marketplace. The discovery of any serious new adverse reactions to Frova® or
Apokyn® could have a material adverse effect on the cash position and income of the Group. In
addition, the intense competition to which Frova® and Apokyn® are subject could impede growth
in Frova®s and Apokyn®s respective market shares.Frova® and Apokyn® are the marketed products of the Group. As such the Groups future is
highly dependent on the sales of Frova® and Apokyn® The discovery of serious new 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.Frova® is one of seven triptans currently marketed as an acute treatment for migraine. The
Companys principal competitors for Frova® include some of the largest and most well funded
pharmaceutical companies in the world, including GlaxoSmithKline plc, Merck & Co Inc, Pfizer
Inc and AstraZeneca International. 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.Apokyn® has been granted orphan drug exclusivity by the
US Food and Drug Administration (FDA) until 2011 but could be subject to generic competition
after this exclusivity period has expired. In addition, since Apokyn® may cause a decrease in
blood pressure when first administered and is also associated with nausea and vomiting, initial
treatment and titration is usually conducted under medical supervision. This initial visit may
require a significant time commitment from the neurologist and can create resistance to
initiating Apokyn® therapy. Insurance coverage for both the drug itself and the titration
office visit are additional factors that must be successfully addressed for Apokyn® to gain
acceptance in the neurology community.The Group may not be able to increase or maintain the market share of Frova® or Apokyn® in
light of such competition which, in turn, could have a significant adverse effect on the
Groups revenue.2.
    
    Failure by the Group either by itself or through its licensees, for any reason, to achieve
and sustain the level of sales of Frova® 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 Vernalis partner, the
Menarini Group (Menarini). In North America the sales and marketing of Frova® is now undertaken
by Endo Pharmaceuticals Inc (Endo) pursuant to the arrangements described in Item 4.B
Information on the Company  Business Overview  Commercial Collaborations below.If the Group or if Menarini (in respect of Europe) or Endo (in respect of the North American
market), does not exercise sufficient efforts in marketing and selling of frovatriptan/Frova®,
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 Endo, Menarini, or any of their respective
subsidiaries or affiliates which could have an adverse effect on the sales and marketing of
frovatriptan/Frova®. These include a direct or indirect sale or proposed sale to a third party
or an assignment or proposed assignment of respective licences in frovatriptan/Frova® to a
third party or the commencement of insolvency proceedings in respect of those entities.




---



##### Table of Contents



3.
    
    The Group may experience delay or failure in achieving approval for the MM indication for
Frova®.The Group is working towards obtaining approval for the use of Frova® for the short-term
preventative treatment of MM. Frova® recently completed a third Phase III clinical trial in
respect of this new indication. This latter trial, which was completed in May 2006, was a
second efficacy study and corroborated the positive findings from the two previous Phase III
trials. The headline data from this trial demonstrated efficacy, with statistical significance
compared to placebo in the number of patients who were headache free during the peri-menstrual
period. A supplemental New Drug Application (sNDA) will be filed with
the FDA in mid-2006, but failure to achieve FDA approval for the new indication
for Frova® or restriction of the label by the FDA could adversely affect the anticipated sales
potential and, therefore, income from the product.4.
    
    Vernalis may be unable to repay Endos $50 million loan by August 2009 particularly if
approval for Frova® in the MM indication is not obtained.The $50 million loan from Endo is repayable in full by Vernalis not later than August 2009.
Endo has the option to off-set 50 per cent of any royalties payable to Vernalis under the
Frova® licence agreement and 50 per cent of the $40 million milestone payment, which it will
owe to Vernalis if Frova® is approved for the MM indication, against any outstanding balance of
the loan. The Companys ability to repay any outstanding amounts due under the loan in August
2009 will be dependent on its financial position at that time. If the Company fails to repay
the loan in full in August 2009, Endo has the right to withhold amounts due thereafter from
Endo to Vernalis under the Frova® licence agreement until the loan is repaid in full.5.
    
    Income from Apokyn® may be adversely affected by the Groups inability to successfully
promote the product and by any failure to successfully complete Phase IV studies.Sales of Apokyn® in North America are dependent on the Groups ability to establish its US
commercial infrastructure with adequate and experienced sales personnel and on competition from
generic products which may arise once Apokyn®s Orphan Drug status in the US expires. The
ability to continue to sell the product is also dependent on the successful completion of Phase
IV studies, the outcome of which will be unknown until they are completed, and on any adverse
reactions to Apokyn® which patients may experience and which could have a material adverse
effect on sales of the product.6.
    
    The Group has a history of operating losses and negative cash flow and may never become
profitable.Vernalis is an early stage biotechnology company with 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. On March 16, 2006, Vernalis announced its audited preliminary
results for the twelve months ended December 31, 2005. In this period, Vernalis pre-tax losses
were £34.4 million. The Groups cash and short term investments amounted to approximately £68.3
million as at December 31, 2005. To date, the Group has generated revenues through royalties,
licence fees, milestone payments, contract research, supply of compound and research and
development funding from its partners. In addition, Vernalis has generated income from royalty
fees related to the licensing of Frova® in the US and intends to continue to generate income in
the US in the future from sales revenue through its licensee, Endo and from sales of the
product in Europe and any new territories. 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. Sales of Frova® and Apokyn® may not generate revenues at the levels anticipated. In
addition the Group is committed to the repayment of the $50 million loan from Endo on or before
August 2009. The Group may not be successful in developing any additional products and any
other products it may develop may not generate revenues.




---



##### Table of Contents



7.
    
    While the Group has sufficient working capital to fund its operations for at least the next
twelve months, additional funding may be required to give the Group time to reach
profitability. If the Group is unable to raise additional funds it may have to curtail its
operations.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 commercialising Frova® and Apokyn®;
    
    The ability to enter into collaborations to support its research and development programmes;
    
    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, technology and other adverse market developments; and
    
    Changes in, or termination of, the Groups existing collaboration and licensing arrangements.
 Additional funding may be required to give the Group time to reach profitability. 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 programmes.
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 licences on
unfavourable terms.8.
    
    The Group may be unable to retain certain important employees which could weaken the Groups
scientific and management capabilities.The Group has limited capacity to provide duplicate cover for key activities. Incentivisation
of key employees to remain with the Group remains key to the Groups success. The loss of these
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. Vernalis is
significantly dependent on certain scientific and management personnel. Although the Group has
entered into employment or consultancy arrangements with each of the Groups important
personnel with the aim of securing their services, the retention of such services cannot be
guaranteed. Biotechnology companies such as Vernalis are highly dependent on employees who have
an in-depth and long-term understanding of their companies technologies, products, programmes,
collaborative relationships and strategic goals. The biotechnology industry has a highly
competitive market for qualified scientific and managerial employees. Competitors may try to
recruit some of the Groups important employees. The loss of these 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.In addition, as the Group develops it may need to attract new personnel to manage new
programmes 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 Frova® in the US, in pursuance of its co-promotion rights under the
agreement with Endo and to support the promotion of Apokyn®.




---



##### Table of Contents



9.
    
    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.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. As the Group has exercised
its option under the agreement with Endo to co-promote Frova® in the US, the Group will need
to undertake additional tasks not previously required. 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.
 10.
    
    No assurance can be given that the Group will be able to secure rights to additional products
for promotion by its US sales force.Following exercise by Vernalis of its option to co-promote Frova® with Endo in the US, Vernalis
is now co-promoting Frova® and marketing its newly acquired Parkinsons disease drug, Apokyn®.
Endo is providing certain funding for up to five years from January 1, 2006 towards the support
of this sales force. Additional products will be required for promotion by the sales force to
maintain its viability. Vernalis continues to actively seek to license in rights to other
marketed products. There can be no assurance that it will be able to obtain rights to promote
such products.11.
    
    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 to successfully 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.




---



##### Table of Contents



12.
    
    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 payers, 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.
 13.
    
    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 commercialisation 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.




---



##### Table of Contents



14.
    
    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 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.15.
    
    The Groups business faces intense competition from major pharmaceutical companies and
specialised biotechnology companies engaged in the development of drugs directed at the
conditions and disorders that are the focus of the Groups drug programmes.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 programmes
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.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 preventive
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.16.
    
    Technological changes could overtake the products being developed by 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 characterised 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.




---



##### Table of Contents



17.
    
    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.
 18.
    
    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 authorised 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.19.
    
    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 licence 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 licence fees.




---



##### Table of Contents



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 favour. 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 a
material adverse effect on the Groups ability to bring a drug candidate to market, enter into
collaborations in respect of the disputed or other drug candidates, or raise additional funds.20.
    
    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 Frova® and collaborative
agreements is received in US dollars or Euros including payments from Endo under the agreement
for Frova®. A fixed milestone payment of $15 million is due from Endo in August 2006. In
addition, a further payment of $40 million is due to Vernalis from Endo conditional on
obtaining FDA approval to market Frova® for short-term prevention of MM. Sales-related
milestones may also be due to Vernalis dependent upon Frova® achieving
certain annual sales targets. In addition, as at December 31, 2005, the Group had a US$5
million denominated liability to GlaxoSmithKline and a loan outstanding to Endo for US$50
million plus accrued interest agreed at the time of the Frova® licensing agreement.
Furthermore, the Group incurs a proportion of its expenditure in US dollars, relating primarily
to the clinical trials that it conducts in the US and to the costs of its US commercial
operation. The Groups cash balances are predominantly held in pounds 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, the Canadian dollar and the Euro may
result in realised or unrealised 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 minimise 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.21.
    
    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
commercialised 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 commercialisation 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 Endo, Menarini, Serono S.A., Oscient Pharmaceuticals
Corporation (Oscient) of which Genesoft Pharmaceuticals, Inc (Genesoft) is a subsidiary, Biogen
Idec Inc (Biogen Idec), The Novartis Institutes for BioMedical Research (Novartis) and Reckitt
Benckiser plc (Reckitt Benckiser).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.




---



##### Table of Contents




    
    Existing collaborative arrangements or licence agreements or agreements with third
party contractors will be able to be maintained;
    
    Any new collaborative arrangements or licence agreements or agreements with third party
contractors will be on favourable terms; or
    
    Any collaborative arrangements or licence agreements or agreements with third party
contractors will prove successful.
  22.
    
    The Group is dependent on single sources of supply for its compounds in research and
development and for Apokyn® and Frova® and some of their components.The Group currently depends on single sources of supply (in some cases through individual
purchase orders rather than long term contracts) for components it needs to conduct its
research and development activities and for some of the raw materials and ingredients used to
manufacture and supply Frova® and Apokyn® in finished form. 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
either an alternative supplier for the raw materials and ingredients used to manufacture Frova®
and Apokyn® or an alternative secondary manufacturer, manufacture and delivery to the
marketplace of Frova® and Apokyn® could be interrupted. Similarly, if the Group had to
interrupt its research or development programmes in order to locate an alternative supplier of
essential components, the Group could be forced to delay preclinical or clinical trials. Any of
these events would adversely affect the Groups programmes and projected revenues.23.
    
    The Groups suppliers may encounter unexpected difficulties in the design and construction of
manufacturing processes and the scale-up of production to viable commercial levels.Suppliers of the Group may encounter unexpected difficulties in the design and construction or
adaptation of production facilities and the scale-up of production processes to viable
commercial levels. These difficulties could result in substantial additional costs or affect
the commercial viability of a product.24.
    
    If the Group fails to maintain its computer hardware, software and related infrastructure,
market approval could be delayed and revenues lost.The Groups research and development programmes 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.




---



##### Table of Contents



25.
    
    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 acquisition of assets by the Group may be made for shares, diluting
existing shareholdings.The biotechnology sector in the United States and in Europe has been characterised by
consolidation. It is possible that the Company may 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. There can be no guarantee that the Group will be
able to successfully integrate any businesses or assets that it may acquire in future
transactions. Part of the Groups business strategy is to acquire businesses and assets
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 acquire assets
for which it pays wholly or partly in shares of the Company, diluting existing shareholdings.26.
    
    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 operating history makes it difficult for an investor to evaluate its 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.27.
    
    Ordinary Shares may fluctuate in value substantially.The market price for Ordinary Shares and the securities of other emerging biotechnology
companies have been volatile. During the 12 months ended December 31, 2004, Vernalis closing
share price ranged from 47.5 pence to 97 pence and during the 12 months ended December 31 2005
ranged from 57.25 pence to 88.5 pence. Factors that could significantly impact the market price
of Ordinary Shares in the future other than those described elsewhere in this document include:
 
    
    Sales of Frova® and Apokyn®;
    
    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, the UK Medicines & Healthcare Products Regulatory Agency or the 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, amongst other things, repay its $50 million loan
to Endo (which is repayable in full in August 2009), 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;




---



##### Table of Contents




    
    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.
 28.
    
    The Group may be unable to secure adequate insurance at an acceptable cost.The Groups business exposes it to potential product liability, and professional indemnity and
other risks which 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.29.
    
    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, including those of
the European Union, Canada, 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 equivalent competition law provisions concerning agreements
that affect trade within the UK.Agreements restricting competition to an appreciable extent 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 fall within a
block exemption. Prior to 1 May 2004, parties to an agreement not covered by a block exemption
could apply to the European Commission for an individual exemption from the Article 81(1)
prohibition under Article 81(3). Since 1 May 2004 however, 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 the Group has entered into or may enter into, such as with
collaborators and licensees, contain provisions which might be deemed to be restrictive of
competition under Article 81(1). In particular, certain licence agreements that a member of the
Group has entered into, or the Group may enter into, involving the grant of exclusive licences
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) individual exemption
criteria are not met, provisions of any agreement that restricts 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
which it enters.




---



##### Table of Contents



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 favouring 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 minimis 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 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 which 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.30.
    
    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 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.31.
    
    The Group may face product liability claims. 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 from customers, suppliers and/or investors. 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
pharmaceutical 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.32.
    
    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.




---



##### Table of Contents



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
 A            History and Development of the Company




---



##### Table of Contents



st
  Important Events From April 30, 2005 to Year End 2005
 
    
    On July 27 Vernalis acquired Ionix Pharmaceuticals Limited (Ionix), strengthening the Companys
pipeline with V1003, a proprietary intranasal formulation of buprenorphine for acute post-operative
pain.
    
    On August 22 Vernalis started a Phase II clinical trial of V1003 in acute post-operative pain.
    
    On September 6 Vernalis completed recruitment for the Frova® Phase III efficacy study for the
short-term prevention of MM.
    
    On November 4 Vernalis acquired exclusive rights in North America to Apokyn® (apomorphine
hydrochloride injection) for a one-off payment of $23 million. Apokyn® was formerly owned by Mylan
Bertek Pharmaceuticals Inc (Mylan) and is approved for the acute, intermittent treatment of
hypomobility, off episodes (end-of-dose wearing off and unpredictable on/off episodes)
associated with advanced Parkinsons disease.
    
    On November 4 Vernalis also announced a collaboration with Britannia Pharmaceuticals Limited
(Britannia) to explore the development of new formulations of apomorphine in North America
(specifically, a continuous sub-cutaneous infusion of apomorphine, as well as the rights to
negotiate the nasal dry powder system).
    
    On December 13 shareholders approved a Placing and Open Offer of Ordinary Shares to raise £42.7
million (before expenses), a Vendor Placing of £15.3 million of Ordinary Shares and the acquisition
of Cita for initial consideration of $29.9 million (and deferred consideration of up to $35 million
depending on performance in clinical development of Citas two main programmes), all of which had
been announced on November 18. Vernalis completed its acquisition of Cita on December 14.
    
    On December 19 Vernalis partner Novartis selected a pre-clinical development candidate under the
joint research and development collaboration for the oncology target Hsp90, triggering a milestone
payment of $1.5 million to Vernalis.
    
    On December 20 Vernalis successfully completed the Phase III Frova® safety study for the short-term
prevention of MM, indicating that the long-term safety profile observed was in line with previous
data from shorter-term studies
 Results and Dividends




---



##### Table of Contents



Important Events Since Year End 2005
 
    
    On January 24 Vernalis announced the launch of its US
speciality neurology sales force. This 34-strong team
is promoting Vernalis Parkinsons disease drug
Apokyn®, as well as co-promoting the Vernalis migraine
drug, Frova®, alongside Endo.
    
    On March 16 Vernalis announced the results of a Phase
IIa study of V1003, a novel proprietary intranasal
formulation of buprenorphine for the management of
post-operative pain.
    
    On May 8 Vernalis announced the positive data from the
second Phase III efficacy study of Frova® for the
short-term prevention of Menstrual Migraine.
 Principal Capital Expenditures
   Principal Capital Expenditures in Progress
  B            Business Overview
 Business Strategy




---



##### Table of Contents



Medical Focus
  Marketed Products and Product Development Programs
  Pain
 Frovatriptan  Marketed for acute migraine




---



##### Table of Contents



Frova®  Menstrual Migraine (MM)
  Initial efficacy study Neurology




---



##### Table of Contents



Safety study
 Second efficacy study
  V1003  post-operative pain




---



##### Table of Contents



V3381  neuropathic pain
   Neurology
 Apokyn®  Marketed for advanced Parkinsons disease
    TM




---



##### Table of Contents




    
    A reusable injector pen pack without drug.
    
    The drug which is supplied in a 3 mL cartridge containing 30 mg of apomorphine (10 mg/ml).
    V1512  Parkinsons disease




---



##### Table of Contents



V2006
 Parkinsons disease
 2A 2A
  2A 2A
  V10153
 ischaemic stroke




---



##### Table of Contents



Other Programmes
 V24343
 obesity
    MMP-12
 multiple sclerosis




---



##### Table of Contents



Hsp90 inhibitors  oncology
    Pin1  oncology
  Metalloenzyme
Inhibitors  infection
  Identification of novel gene targets  depression
  Commercial Collaborations
  SmithKline Beecham (now GlaxoSmithKline) (Frova®)
  
    
    in July 2000, SmithKline Beecham assigned to Vernalis all of
SmithKline Beechams patents covering Frova® (with no substantive
changes in the royalty arrangements); and




---



##### Table of Contents




    
    in December 2000, SmithKline Beecham waived all of its rights to
royalties on sales of Frova® 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 $7.5 million paid in September 2004. A further payment of
$5 million was made in September 2005, with the final $5 million
payment being conditional upon total sales exceeding £300 million
(which has not yet occurred).
 Endo (Frova®)
    Menarini (frovatriptan)
  SK Chemicals (frovatriptan)
  Mylan Pharmaceuticals Inc (Apokyn®)




---



##### Table of Contents



Britannia (Apokyn®)
   Reckitt Benckiser Healthcare (V1003)
   Archimedes (V1003)
  Diosynth BV (V10153)
  Chiesi Farmaceutici SpA (V3381 + V1512)




---



##### Table of Contents



Biogen Idec (V2006)
 2A
 2A
    Novartis Institutes for Biomedical Research, Inc. (Hsp90)
      Pintex Pharmaceuticals Inc (Pin1)




---



##### Table of Contents



Serono S.A. (MEIs: inflammation)
    Oscient Pharmaceuticals Corp. (MEIs: infection)
      External Consultation
  Principal Markets in which Vernalis Competes
  (i)
    
    licensing and collaborative research and development agreements, including from Endo and SK
Chemicals with respect to Frova®; Novartis with respect to Hsp90 and Biogen Idec with respect
to the A2Areceptor antagonist research program;




---



##### Table of Contents



(ii)
    
    fees from Endo and royalties from Menarini for sales of Frova® by those companies in the
United States and in Europe respectively, and sales revenues from Menarini for supply of
finished Frova® product for European markets; and(iii)
    
    sales of the Companys marketed Parkinsons disease
product, Apokyn®.
    
    
    Frova®s performance, in terms of market share, in the countries in which it is marketed;
    
    Apokyn®s sales performance in the US;
    
    the approval or not of Frova® as a short-term preventative treatment for MM;
    
    operation of the US commercial infrastructure and promotional expenses for marketed products;
    
    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.




---



##### Table of Contents



Revenues
  Year ended December 312004
    
    
    2005£000
    
    
    £000United Kingdom
    
    
    161
    
    
    
    2,178Rest of Europe
    
    
    3,822
    
    
    
    3,622North America
    
    
    11,207
    
    
    
    8,317Rest of the
World
    
    
    5
    
    
    
    1415,195
    
    
    
    14,131
  Year ended December 312004
    
    
    2005£000
    
    
    £000Product Sales
    
    
    9,330
    
    
    
    3,602Royalties
    
    
    688
    
    
    
    110Collaborative Agreements
    
    
    5,177
    
    
    
    10,41915,195
    
    
    
    14,131
 Seasonality of the Companys Business
  Sources and Availability of Raw Materials
  Marketing Channels and Sales Methods




---



##### Table of Contents



TM
 Patents, Licenses and Proprietary Rights




---



##### Table of Contents








---



##### Table of Contents



(a)
    
    Frova®Frova® is the single enantiomeric form of a racemic compound. Vernalis owns composition of
matter patents covering the racemic compound and the single enantiomeric form. Patents
covering the racemic compound have been granted in the United States, Europe, Japan and a
substantial number of other countries, and are set to generally expire in 2012. However,
the United States Patent & Trademark Office has granted an extension of patent term for US
Patent No. 5464864 set to expire in 2015, and in Europe, of the 22 applications already
filed for SPCs seeking to extend the term of national patents covering the racemic compound
to 2015, 12 have been granted. Patents covering the single enantiomeric form have been
granted in the United States, Europe, Japan and other major markets, and will expire in
2013. A process patent covering the manufacturing process for the single enantiomeric form
of Frova® has been issued in the United States and is due to expire in 2019. Patent
applications covering the manufacturing route are pending in Europe and Japan.(b)
    
    V2006V2006 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 that covers the molecule both generically and
specifically, and which has a priority date of January 10, 2001.(c)
    
    V10153Four patent families relate to V10153. Of the three families that protect plasminogen
mutants, all have been issued with US, European and Japanese patents, due to expire between
2010 and 2014. A further family protecting V10153 in association with a tissue plasminogen
activator (tPA) has been issued with US, European and Japanese patents due to expire
between 2015 and 2017.(d)
    
    Apokyn®Apokyn® is a formulation of apomorphine. The product was approved by the FDA as an Orphan
Drug in April 2004 and has market exclusivity in the US until 2011.(e)
    
    V1512V1512 is an effervescent oral formulation of L-dopa methylester and carbidopa, and is the
subject of a family of patents under which Vernalis has a worldwide exclusive license
outside of Italy. Patents have been granted in the US, Europe and several other countries,
and patent applications are pending in Japan and several other countries.




---



##### Table of Contents



(f)
    
    V3381V3381 is a compound potentially useful in treatment of chronic pain. It is the subject of
two patent families under which Vernalis has a worldwide exclusive license. Within the
first patent family, patents have been granted in the US, Europe and several other
countries, and patent applications are pending in Japan and several other countries. The
second patent family was filed relatively recently, in major markets such as the US, Europe
and Japan, and patent applications are therefore still pending at the pre-grant stage.(g)
    
    V1003V1003, is a formulation of buprenorphine for intranasal administration in the treatment of
pain. Vernalis holds a worldwide exclusive license for V1003 under three patent families.
In the first patent family, patents have been granted in the US, Europe and several other
countries, and patent applications are pending in Japan and several other countries.
 Competition




---



##### Table of Contents



Material Effects of Government Regulation




---



##### Table of Contents



C            Organisational Structure




---



##### Table of Contents



Subsidiary Undertaking
    
    Nature of business
    
    IncorporationVernalis (R&D) Limited (previously Vernalis (Oxford) Limited,
    
    
    
    England& Waleswhich was previously British Biotech Pharmaceuticals Limited
    
    R&D
    
    (E&W)British Biotech Services Limited
    
    Dormant
    
    E&WBritish Biotech International Limited
    
    Dormant
    
    E&WBritish Biotech Investments Limited
    
    Holding company
    
    E&W- British Biotech (UK) Limited
    
    Dormant
    
    E&W- British Biotech Americas Inc.
    
    Holding company
    
    Delaware, USVernalis (Cambridge) Limited (previously RiboTargets Limited)
    
    Dormant
    
    E&WVernalis Group Limited
    
    Holding company
    
    E&W- Vernalis Development Limited (previously Vernalis Limited)
    
    R&D
    
    E&W- Vernalis Research Limited
    
    Dormant
    
    E&WIonix Pharmaceuticals Limited
    
    R&D
    
    E&WVernalis Pharmaceuticals Inc
    
    Sales
    
    Delaware, USVernalis (Canada) Inc
    
    Holding company
    
    Ontario, Canada- Cita NeuroPharmaceuticals Inc
    
    R&D
    
    Ontario, Canada
 D            Property, Plant and Equipment
  ApproximateProperty
    
    Description
    
    Title
    
    Location
    
    area (m2)Oakdene Court
    
    Office and laboratory facilities
    
    Leasehold
    
    Winnersh, UK
    
    
    4,400Granta Park (Building I)
    
    Office and laboratory facilities
    
    Leasehold
    
    Cambridge, UK
    
    
    2,608Granta Park (Building II)
    
    Office and laboratory facilities  unoccupied
    
    Leasehold
    
    Cambridge, UK
    
    
    2,4184-10 The Quadrant
    
    Offices and laboratory facilities  unoccupied
    
    Leasehold
    
    Oxford, UK
    
    
    1,9441140 Headquarters Plaza
    
    Offices
    
    Leasehold
    
    Morristown, New
Jersey, US
    
    
    2002480 Dunwin Drive
    
    Offices
    
    Leasehold
    
    Mississauga, Ontario,
 Canada
    
    
    1,027




---



##### Table of Contents



ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  A            OPERATING RESULTS
 Business Overview




---



##### Table of Contents



Financial Overview




---



##### Table of Contents




    
    The Groups cash and other investments as at December 31, 2005
amounted to £68.3 million (£33.3 million at December 31, 2004).
The increase of £35.0 million arises as a result of the net
proceeds from two placings of new shares in March 2005 and
December 2005 totalling £69.0 million.
    
    The Group has derived revenue from collaborations with other
pharmaceutical companies in respect of its R&D programmes.
    
    The Group has derived revenues from frovatriptan in Europe since
its launch in 2002 through payments from Vernalis licensee,
Menarini, for the supply of finished product for resale by
Menarini.
    
    The Group has derived revenues from Frova® in North America since
its launch in 2002. Until May 2004, this comprised milestone and
royalty payments from Vernalis licensee, Elan. Following the
reacquisition of the North American rights to Frova® in May 2004,
the Group booked sales of Frova® in the United States until August
2004 when the product was relicensed to Endo.
    
    In August 2004, Vernalis licensed Frova® to Endo. Under the terms
of the license, Endo will make unconditional payments totalling
$60 million to Vernalis, including $30 million which was paid at
closing and two further payments of $15 million on the first and
second anniversary of closing. Endo will also make various
milestone payments to Vernalis upon the achievement of sales
thresholds starting with a milestone of $10 million upon reaching
$200 million net annual sales. Starting on January 1, 2007, Endo
will make royalty payments to Vernalis which will be tiered from
20% or higher if FDA approval of the MM indication is obtained.
    
    In August 2004, the Company drew down a £50 million loan facility,
which is subject to 5% interest and is repayable on or before
August 2009. The Company is dependent on the revenues received
from Frova® in order to repay this loan.
    
    In November 2005, the Group acquired the North American rights to
Apokyn® from Mylan and has booked sales of this product from that
date.
 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:
 
    
    Frova®s performance, in terms of market share, in the countries in which it is marketed;
    
    Apokyn®s sales performance in the US and Canada;
    
    the approval or not of Frova® as a short-term preventative treatment for MM;
    
    operation of the US commercial infrastructure and promotional expenses for marketed products;
    
    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;




---



##### Table of Contents




    
    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.
 Major Recent Transactions
 The acquisition of Ionix
    Carrying values
    
    
    Fair valuepre-acquisition
    
    
    adjustments
    
    
    Fair value£000
    
    
    £000
    
    
    £000AssetsTangible fixed assets
    
    
    759
    
    
    
    (283
    )(1)
    
    
    476Intangible fixed assets
    
    
    
    
    
    
    9,781
    (2)
    
    
    9,781Non-current assets
    
    
    759
    
    
    
    9,498
    
    
    
    10,257Trade and other receivables
    
    
    751
    
    
    
    
    
    
    
    751Cash and cash equivalents
    
    
    406
    
    
    
    
    
    
    
    406Current assets
    
    
    1,157
    
    
    
    
    
    
    
    1,157Total assets
    
    
    1,916
    
    
    
    9,498
    
    
    
    11,414LiabilitiesCurrent liabilitiesTrade and other payables
    
    
    (291
    )
    
    
    
    
    
    
    (291
    )Total liabilities
    
    
    (291
    )
    
    
    
    
    
    
    (291
    )Net assets acquired
    
    
    1,625
    
    
    
    9,498
    
    
    
    11,123Goodwill
    
    
    
    
    
    
    
    
    
    
    926Consideration
    
    
    
    
    
    
    
    
    
    
    12,049Consideration satisfied by:Shares issued
    
    
    
    
    
    
    
    
    
    
    11,080Cash
    
    
    
    
    
    
    
    
    
    
    96912,049
 
 (1)
    
    Write-down of unwanted property, plant and equipment(2)
    
    Purchase price allocation to the license for V1003




---



##### Table of Contents



£000Cash consideration
    
    
    969Cash acquired
    
    
    (44
    )Deposits acquired
    
    
    (362
    )563
 The Acquisition of Cita
    Carrying values
    
    
    Fair valuepre-acquisition
    
    
    adjustments
    
    
    Fair value£000
    
    
    £000
    
    
    £000AssetsTangible fixed assets
    
    
    45
    
    
    
    
    
    
    
    45Intangible fixed assets
    
    
    3,443
    
    
    
    28,103
    
    
    
    31,546
    (1)Non-current assets
    
    
    3,488
    
    
    
    28,103
    
    
    
    31,591Trade and other receivables
    
    
    3,820
    
    
    
    
    
    
    
    3,820Cash and cash equivalents
    
    
    189
    
    
    
    
    
    
    
    189Current assets
    
    
    4,009
    
    
    
    
    
    
    
    4,009Total assets
    
    
    7,497
    
    
    
    28,103
    
    
    
    35,600LiabilitiesCurrent liabilitiesTrade and other payables
    
    
    (2,196
    )
    
    
    
    
    
    
    (2,196
    )Other payables
    
    
    (3,592
    )
    
    
    
    
    
    
    (3,592
    )Provisions
    
    
    (324
    )
    
    
    
    
    
    
    (324
    )Loan
    
    
    (1,155
    )
    
    
    (128
    )(2)
    
    
    (1,283
    )Total liabilities
    
    
    (7,267
    )
    
    
    (128
    )
    
    
    (7,395
    )Net assets acquired
    
    
    230
    
    
    
    27,975
    
    
    
    28,205Goodwill
    
    
    
    
    
    
    
    
    
    
    2,282Consideration
    
    
    
    
    
    
    
    
    
    
    30,487Consideration satisfied by:Shares
    
    
    
    
    
    
    
    
    
    
    16,688Cash
    
    
    
    
    
    
    
    
    
    
    2,732Deferred consideration
    
    
    
    
    
    
    
    
    
    
    11,06730,487
 
 (1)
    
    Purchase price allocation to the rights to V1512 (£15,462,000) and V3381 (£16,084,000).(2)
    
    Repayment of loan.




---



##### Table of Contents



£000Cash consideration
    
    
    2,732Cash acquired
    
    
    (189
    )Loan acquired repaid at completion
    
    
    1,2833,826
  Unaudited£000Revenue
    
    
    14,131Net loss
    
    
    (39,707
    )
   Placing and Open Offers




---



##### Table of Contents



Application of Critical Accounting Policies
 Purchase Accounting for Business Contributions
 (i)
    
    Calculation of ConsiderationIonix Under IFRS, the consideration share capital issued for the acquisition of Ionix
was calculated by reference to the share price on July 26, 2005, the date of completion.
The bid price on that day was 56.29 pence, resulting in a total initial consideration of
£10.0 million. In addition, a commitment was made to issue
the remaining 1.7 million shares on July 26, 2006, subject to any reduction in the purchase price resulting from
warranty or indemnity claims. Under IFRS, this contingent consideration has been accrued,
because it is considered more likely than not.Under US GAAP, the measurement date is taken as the date the agreement was made, which was
July 12, 2005, and the contingent consideration is not recognised until it is determinable
beyond reasonable doubt.Total consideration at December 31, 2005, under US GAAP was £12.0 million, whereas it was
£12.3 million under IFRS and correspondingly, goodwill is £0.3 million more under US GAAP.
Under US GAAP, the consideration and goodwill will increase by the amount of deferred
consideration issued in July 2006, whereas it will remain unchanged under IFRS.Cita Under IFRS, the consideration share capital issued for the acquisition of Cita was
calculated by reference to the share price on December 14, 2005, the completion date. The
bid price on that day was 62 pence, resulting in a total initial consideration of £16.7
million in shares. In addition, a further $35 million of contingent consideration may be
paid in the future, subject to V1512 and V3381 meeting certain milestones. Under IFRS,
these have been accrued to the extent that they are considered more likely than not. Under
US GAAP, unless it is determinable beyond reasonable doubt, they are only accrued to the
extent that it eliminates any negative goodwill arising on the transaction. In addition, the
measurement date for the acquisition is taken as the day the terms become fixed, which was
November 18, 2005.As a result, the total consideration under IFRS was £30.5 million, whereas under US GAAP it
was £28.2 million, with no Goodwill recorded under US GAAP.Vernalis Group plc Under the predecessor UK GAAP treatment to IFRS, the combination of
British Biotech plc and Vernalis Group plc was treated as a pooling of interests. As a
result, the shares were issued at par. Under US GAAP, these shares were issued at fair
value on the date that the acquisition was announced. As a result, there was a £42.0
million increase in the fair value of intangible assets under US GAAP. This amount is
being amortised over the remaining ten year life of the assets, resulting in a £3.5 million
additional amortisation charge to the income statement every year. This treatment is
maintained under IFRS.(ii)
    
    Identification, Valuation and Accounting Treatment of Intangible Fixed AssetsIn accordance with FAS 141 and IFRS, the acquired in-process research and development assets in relation to the two
acquisitions in the year have been identified and valued. Under IFRS, these three assets, being V1512, V3381 and V1003
have been capitalised and will be amortised once they come into use, subject to an annual impairment charge. Under US
GAAP, and in accordance with FAS 141, these amounts have been written off in the year, resulting in a one-off charge of
£40.3 million.




---



##### Table of Contents



Revenue
      Capitalisation of Intangible Fixed Assets




---



##### Table of Contents



Principal Factors Affecting Results of Operations and Financial Condition
 Revenue
  Year ended December 312004
    
    
    2005£000
    
    
    £000(a)Revenues by activityContinuing operationsProduct sales and royalties
    
    
    10,018
    
    
    
    3,712Collaborations
    
    
    5,177
    
    
    
    10,419Total
    
    
    15,195
    
    
    
    14,131(b)Revenues by geographic areaUnited Kingdom
    
    
    161
    
    
    
    2,178North America
    
    
    11,207
    
    
    
    8,317Rest of World
    
    
    3,827
    
    
    
    3,636Total
    
    
    15,195
    
    
    
    14,131
   Research and development expenditure
  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.
 External Costs
 
    
    the cost of services provided by third-party research and manufacturing organisations that
Vernalis employs to conduct pre-clinical and clinical development work on its behalf;
    
    expenses related to the filing, defence 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.




---



##### Table of Contents



Year ended December 312004
    
    
    2005£000
    
    
    £000V10153
    
    
    177
    
    
    
    2,219V140
    
    
    1,283
    
    
    
    V1003
    
    
    
    
    
    
    90CB1
    
    
    
    
    
    
    503Frova®
    
    
    3,006
    
    
    
    5,676V2006
    
    
    
    
    
    
    52Hsp90
    
    
    611
    
    
    
    Other R&D projects and internal costs
    
    
    16,346
    
    
    
    17,95121,423
    
    
    
    26,491
        Cost of goods sold




---



##### Table of Contents



Selling, general & administration (SG&A) expenses
    Foreign currency fluctuations




---



##### Table of Contents



Results of Operations
  Year ended December 312004
    
    
    2005£000
    
    
    £000Revenue
    
    
    15,195
    
    
    
    14,131Cost of Sales
    
    
    (5,573
    )
    
    
    (4,991
    )Research and development expenditure
    
    
    (21,423
    )
    
    
    (26,491
    )Selling, general and administrative expenses
    
    
    (15,722
    )
    
    
    (15,483
    )Operating loss
    
    
    (27,523
    )
    
    
    (32,834
    )Interest receivable and similar income
    
    
    2,933
    
    
    
    3,892Interest payable and similar charges
    
    
    (2,821
    )
    
    
    (5,490
    )Loss on ordinary activities before taxation
    
    
    (27,411
    )
    
    
    (34,432
    )Tax credit on loss on ordinary activities
    
    
    1,758
    
    
    
    1,584Loss for the year
    
    
    (25,653
    )
    
    
    (32,848
    )Loss per share (basic and diluted)
    
    
    (17.4
    )p
    
    
    (16.3
    )p
 Comparative Discussion of fiscal year ended December 31, 2005 and fiscal year ended December 31,
2004 (IFRS)
  Revenue




---



##### Table of Contents



Year ended December 312004
    
    
    2005£000
    
    
    £000Novartis
    
    
    1,385
    
    
    
    2,689Biogen Idec
    
    
    1,110
    
    
    
    1,927Endo
    
    
    1,327
    
    
    
    3,184Serono
    
    
    
    
    
    
    578Roche
    
    
    487
    
    
    
    Elan
    
    
    677
    
    
    
    Reckitt Benckiser
    
    
    
    
    
    
    2,000Other
    
    
    191
    
    
    
    415,177
    
    
    
    10,419
  Cost of goods sold
  Research and development expenses
   Selling, general & administration (SG&A) expenses
  Operating loss




---



##### Table of Contents



Net interest
   Provision for income taxes
    B            LIQUIDITY AND CAPITAL RESOURCES
      
    
    payroll and related staff costs;




---



##### Table of Contents




    
    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 Flows (IFRS)
  Year ended December 312004
    
    
    2005£000
    
    
    £000Cash (used in)/generated from operations
    
    
    2,390
    
    
    
    (20,099
    )Taxation received
    
    
    1,129
    
    
    
    4,284Interest paid
    
    
    (216
    )
    
    
    (8
    )Net cash (used in)/generated from operating activities
    
    
    3,303
    
    
    
    (15,823
    )Cash flows from investing activitiesPurchase of tangible fixed assets
    
    
    (101
    )
    
    
    (589
    )Acquisition of subsidiary undertakings net of cash acquired
    
    
    
    
    
    
    (3,104
    )Sale of tangible fixed assets
    
    
    3,250
    
    
    
    Purchase of intangible fixed assets
    
    
    (30,841
    )
    
    
    (16,570
    )Sale of investment
    
    
    12
    
    
    
    Interest received
    
    
    19
    
    
    
    710Interest received on financial assets held to maturity
    
    
    664
    
    
    
    898Cash flows from financing activitiesFinance charge on US dollar secured loan
    
    
    (372
    )
    
    
    Interest payable on US dollar secured loan
    
    
    (388
    )
    
    
    Receipt of US dollar secured loan
    
    
    27,539
    
    
    
    Repayment of sterling secured loan
    
    
    (1,485
    )
    
    
    Movement in held-to-maturity financial assets
    
    
    (6,933
    )
    
    
    (13,052
    )Issue of shares
    
    
    8,295
    
    
    
    72,958Share issue costs
    
    
    
    
    
    
    (3,996
    )Capital element of finance lease payments
    
    
    (738
    )
    
    
    (23
    )Foreign exchange on cash and cash equivalents
    
    
    (48
    )
    
    
    511Movements in cash and cash equivalents in the period
    
    
    2,176
    
    
    
    21,920




---



##### Table of Contents



£000Cash at bank and in hand
    
    
    1,812Short-term bank deposits
    
    
    38,43140,243
     C            RESEARCH AND DEVELOPMENT
  D            TREND INFORMATION




---



##### Table of Contents



E            OFF BALANCE SHEET ARRANGEMENTS
  F            TABLE OF CONTRACTUAL CASH OBLIGATIONS
  Payments due (£000)Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    one year
    
    
    1-3 years
    
    

3-5 years
    
    
    five yearsUS dollar secured loan (i)
    
    
    37,358
    
    
    
    1,598
    
    
    
    23,447
    
    
    
    12,313
    
    
    
    Obligations under finance leases
    
    
    132
    
    
    
    33
    
    
    
    66
    
    
    
    33
    
    
    
    Operating lease commitments (ii)
    
    
    27,941
    
    
    
    2,511
    
    
    
    4,925
    
    
    
    4,763
    
    
    
    15,742Commitments under licence agreements (iii)
    
    
    8,400
    
    
    
    200
    
    
    
    3,700
    
    
    
    1,600
    
    
    
    2,900R&D purchase commitments (iv)
    
    
    8,700
    
    
    
    8,700
    
    
    
    
    
    
    
    
    
    
    
    Capital commitments
    
    
    232
    
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    82,763
    
    
    
    13,274
    
    
    
    32,138
    
    
    
    18,709
    
    
    
    18,642
  (i)
    
    The US dollar secured loan is for a term of five years from August 31, 2004, and is secured
against all royalty and milestone income received by Vernalis in respect of the license deal
with Endo.(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 4.B Information on the Company  Business
Overview and Note 18 to the consolidated financial statements. In addition the Company has
commitments relating to ongoing clinical trials of its products under development.(iv)
    
    In addition, the Company is commencing trials in other clinical programmes, as detailed in
research and development expenditure above, that have resulted in commitments being made after
the year end.




---



##### Table of Contents



US GAAP Reconciliation
  
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A            Directors and Senior Management
    Re-election
  Name
    
    Age
    
    Position/s Held
    
    Period during which director has served in officePeter Fellner
    
    
    62
    
    
    Executive Chairman
    
    January 2003  date of filingSimon Sturge
    
    
    47
    
    
    Chief Executive Officer
    
    April 2003  date of filingJohn Slater
    
    
    53
    
    
    General Counsel
    
    October 2004  date of filingJohn Hutchison
    
    
    50
    
    
    Development Director
    
    September 2003  date of filingTony Weir
    
    
    46
    
    
    Chief Financial Officer
    
    April 1999  date of filingAllan Baxter
    
    
    56
    
    
    Non-executive Director
    
    May 2004  date of filingCarol Ferguson
    
    
    59
    
    
    Non-executive Director
    
    September 2003  date of filingGeorge Kennedy
    
    
    65
    
    
    Deputy Chairman, Senior Independent Director
    
    September 2003  date of filingKeith Merrifield
    
    
    64
    
    
    Non-executive Director
    
    December 1995  May 24, 2006Peter Read
    
    
    67
    
    
    Non-executive Director
    
    September 2003  date of filing




---



##### Table of Contents



Peter Fellner
  Simon Sturge
  Tony Weir
  John Hutchison
  John Slater




---



##### Table of Contents



George Kennedy
  Carol Ferguson
  Keith Merrifield
  Peter Read
  Allan Baxter
  Board changes




---



##### Table of Contents



B. Compensation
   Directors remuneration (audited)
 Performance
    
    
    Performance

    
    
    
    
    
    Performancerelated bonus
    
    
    related bonus
    
    
    
    
    
    Related bonuspaid
    
    
    accrual

    
    
    
    
    
    paid
    
    
    Decemberrelating to
    
    
    relating to

    
    
    
    
    
    relating to
    
    
    20051 January to
    
    
    1 May to
    
    
    December
    
    
    1 May to
    
    
    total
    
    
    December
    
    
    December
    
    
    DecemberSalary/fees
    
    
    Benefits
    
    
    30 April 2005
    
    
    31 Dec 2005
    
    
    2005
    
    
    31 Dec 2004
    
    
    charge to
    
    
    2004
    
    
    2005
    
    
    2004£000
    
    
    
    
    
    (iv)
    
    
    (v)
    
    
    Total
    
    
    (iv)
    
    
    income
    
    
    Total
    
    
    Pension
    
    
    Pension£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    statement
    
    
    £000
    
    
    £000
    
    
    £000ExecutiveDr P J Fellner (vii)
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208
    
    
    
    
    
    
    
    208
    
    
    
    200
    
    
    
    
    
    
    
    S J Sturge (i) (ii)
    
    
    350
    
    
    
    1
    
    
    
    72
    
    
    
    213
    
    
    
    636
    
    
    
    145
    
    
    
    781
    
    
    
    491
    
    
    
    59
    
    
    
    58Dr J B Hutchison (ii)
    
    
    209
    
    
    
    1
    
    
    
    26
    
    
    
    80
    
    
    
    316
    
    
    
    53
    
    
    
    369
    
    
    
    254
    
    
    
    37
    
    
    
    35A J Weir (ii)
    
    
    209
    
    
    
    1
    
    
    
    26
    
    
    
    80
    
    
    
    316
    
    
    
    51
    
    
    
    367
    
    
    
    286
    
    
    
    37
    
    
    
    35J A D Slater (ii) (vi)
    
    
    244
    
    
    
    1
    
    
    
    30
    
    
    
    93
    
    
    
    368
    
    
    
    15
    
    
    
    383
    
    
    
    40
    
    
    
    44
    
    
    
    7Non-ExecutiveG M Kennedy
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    60
    
    
    
    60
    
    
    
    
    
    
    
    Dr P R Read
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    33
    
    
    
    33
    
    
    
    
    
    
    
    C C Ferguson
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    40
    
    
    
    40
    
    
    
    
    
    
    
    Dr A Baxter (iii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    K J Merrifield
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    38
    
    
    
    38
    
    
    
    
    
    
    
    Total
    
    
    1,391
    
    
    
    4
    
    
    
    154
    
    
    
    466
    
    
    
    2,015
    
    
    
    264
    
    
    
    2,279
    
    
    
    1,442
    
    
    
    177
    
    
    
    135
 
 Retirement benefits are accruing to four (2004: five) directors under a money purchase scheme.(i)
    
    Mr Sturges salary includes a relocation allowance of £24,000 paid in equal instalments of
£2,000 per month from November 2004 to October 2005.(ii)
    
    Salaries/fees for Mr Sturge, Dr Hutchison, Mr Weir and Mr Slater include a car allowance at
the rate of £12,600 per annum.(iii)
    
    Dr Baxter has waived any fees.(iv)
    
    Performance-related bonuses are assessed for the 12 months from May 1 to April 30 each year,
which is not coterminus with the financial year end. The directors were paid a
performance-related bonus in May 2005 relating to the 12 months ended April 30, 2005. This was
not accrued at December 2004 and has therefore been charged in full to the income statement in
2005. Since the bonus related to performance in both 2005 and 2004, it has been split in the
table above by reference to the year to which it relates.(v)
    
    The accrual is based on maximum achievement of bonuses. Actual bonuses for the year (which
could be lower) will be set by the Remuneration Committee in May 2006.(vi)
    
    Remuneration for 2004 was from date of employment, October 29, 2004, until December 31, 2004.(vii)
    
    Dr Fellner is entitled to receive certain fixed bonus payments once the Companys share
price has reached predetermined levels. The bonus payments are conditional on the exercise of
a part of the Option Deed granted to him on April 23, 2003 and are approximately half of the
price payable to exercise the option. An accrual of £200,000 has been made at December 31,
2005 based on the expected fair value of the bonus payments.




---



##### Table of Contents



C. Board Practices
 Service Contracts
 Appointment of directors and service contracts
   Non-executive directors appointments and remuneration
    Chairmans remuneration




---



##### Table of Contents



The Combined Code
  Compliance statement
   The Board




---



##### Table of Contents



Board committees
  Audit Committee




---



##### Table of Contents




    
    To review the effectiveness of the Companys internal financial control systems and
financial reporting procedures.
    
    To review the internal management of financial matters.
    
    To review annually the need for an internal audit function.
    
    To consider and make recommendations regarding the appointment of the Companys
external auditor including the pre-approval of non-audit services.
    
    To establish procedures for the receipt, retention and treatment of complaints
regarding accounting, internal accounting controls and auditing matters.
    
    To review the consistency and application of accounting policies.
    
    To review annual financial statements and interim and preliminary announcements
before submission for Board approval.
 Nominations and Corporate Governance Committee
   
    
    To review the structure, size and composition of the Board.
    
    To prepare a description of the role and capabilities required for a particular appointment.
    
    To identify and nominate candidates to fill Board vacancies as and when they arise.
    
    To satisfy itself with regard to succession planning.
    
    To keep the effectiveness of the corporate governance and system of internal non-financial controls under regular review.




---



##### Table of Contents



Remuneration Committee
   
    
    To determine the framework and policy and the individual packages for the
remuneration of the executive directors, Chairman and members of the executive
management.
    
    To determine targets for any performance-related pay schemes.
    
    To approve overall remuneration policy.
    
    To review employee benefit structures.
    
    To produce an Annual Report of the Committees remuneration policy.
 Policy on employee remuneration
    Components of remuneration




---



##### Table of Contents



Annual salary
 Performance-related bonus
  
    
    Shareholder value:the improvement in shareholder value over the
period, taking account of the following measures over the bonus
year: market capitalisation, share price performance (both
absolute and relative to the pharmaceutical and small cap indices,
Bloomberg and NASDAQ), investor feedback and analysts ratings.
    
    Growth of the portfolio:the progress of key strategic products,
the licensing in or out of compounds, the development of new
technologies or the acquisition of new products through mergers
and acquisitions.
    
    Operational effectiveness:related to the performance of the
business, ensuring appropriate financial controls, managing
staffing levels, whilst ensuring good corporate governance.
   Long-term incentives
 Pensions benefits




---



##### Table of Contents



Other benefits
 NASDAQ Corporate Governance Listing Requirements




---



##### Table of Contents



Corporate Social Responsibility




---



##### Table of Contents




    
    The Board takes account of the significance of social, ethical and HS&E issues.
    
    Business practices are managed ethically.
    
    Positive contributions are made to the scientific and medical communities.
    
    The business is focused on delivering value to stakeholders.
    
    Existing legislation, regulations and guidelines are adhered to as a minimum.
    
    Employees are recognised as key to the business with individual skills and experience
being valued and developed.
    
    All employees are educated as to the significance of CSR risks and opportunities.
    
    HS&E issues are treated as critical areas of importance for the business.
  Social
    
    
    
    Recognising the importance of the
Companys employees and of managing
external relations ethically.Ethical
    
    
    
    Investing in pharmaceutical
research and development with the
aim of establishing and sustaining a
business model designed to secure a
fair return for shareholders.Health, safety and environment
    
    
    
    Ensuring employee health and
safety risk prevention and limiting
the environmental impact of the
Companys activities by managing its
utility usage and waste production
 D            Employees
    Year ended
    
    
    Eight month period
    
    
    Twelve-month period
    
    
    Twelve-month periodApril 30
    
    
    ended December 31
    
    
    ended December 31
    
    
    ended December 31Division
    
    2002
    
    
    2003
    
    
    2003
    
    
    2004
    
    
    2005Research and Preclinical
    
    
    126
    
    
    
    148
    
    
    
    102
    
    
    
    77
    
    
    
    89Regulatory Affairs, Quality
and Clinical Research
    
    
    15
    
    
    
    15
    
    
    
    7
    
    
    
    9
    
    
    
    28Project Management
    
    
    16
    
    
    
    14
    
    
    
    8
    
    
    
    6
    
    
    
    5Biometrics and IT
    
    
    19
    
    
    
    22
    
    
    
    8
    
    
    
    7
    
    
    
    7Business Development
    
    
    5
    
    
    
    5
    
    
    
    3
    
    
    
    3
    
    
    
    2Corporate Services
    
    
    27
    
    
    
    38
    
    
    
    15
    
    
    
    15
    
    
    
    27Facilities Engineering
    
    
    11
    
    
    
    11
    
    
    
    4
    
    
    
    3
    
    
    
    4Directorate
    
    
    10
    
    
    
    9
    
    
    
    4
    
    
    
    4
    
    
    
    4Sales Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Total
    
    
    229
    
    
    
    262
    
    
    
    151
    
    
    
    124
    
    
    
    192




---



##### Table of Contents



E            Share Ownership
 Share Options
  (a) Share Option Plan
 (i)
    
    EligibilityEmployees and executive directors of the Company, other than those within
two years of their normal retirement date, are eligible to participate in the Share Option
Plan at the discretion of the Remuneration Committee.(ii)
    
    Exercise of optionsOptions will normally be exercisable between three and ten years
following grant provided that any performance target set by the Remuneration Committee has
been satisfied. The current performance condition for options granted under the Share
Option Plan 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 option 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).(iii)
    
    Award limitsThe Remuneration Committee has currently limited the number of options
granted to a maximum of twice basic salary for executive directors on appointment or one
and a half times basic salary in any subsequent year. Actual figures can be found in the
table below.
  (b) SAYE Plan




---



##### Table of Contents



(c) Chairmans Option Deed
  Shares subject to the option vesting %
    
    Vernalis share price equal to or greater than50
    
    100p25
    
    200p25
    
    300p
   Other Option Plans




---



##### Table of Contents



Ownership by directors
 Directors options
 At
    
    
    
    
    
    
    
    
    
    
    AtJanuary 1
    
    
    Granted
    
    
    Lapsed
    
    
    December 31
    
    
    Exercise
    
    
    Date from2005
    
    
    in the year
    
    
    in the year
    
    
    2005
    
    
    Price
    
    
    which
    
    
    
    
    
    
    PerformanceNumber
    
    
    Number
    
    
    Number
    
    
    Number
    
    
    £
    
    
    exercisable
    
    
    Expiry date
    
    
    conditionsDr P J Fellner
    
    
    2,670,071
    
    
    
    
    
    
    
    
    
    
    
    2,670,071
    
    
    
    1.00
    
    
    Apr 2003
    
    Apr 2013
    
    
    (v
    )Option Deed2,670,071
    
    
    
    
    
    
    
    
    
    
    
    2,670,071Dr J B Hutchison

    
    
    431,138
    
    
    
    
    
    
    
    
    
    
    
    431,138
    
    
    
    0.835
    
    
    Oct 2006
    
    Oct 2013
    
    (iv)Share Option Plan
    
    
    
    400,809
    
    
    
    
    
    
    
    400,809
    
    
    
    0.6925
    
    
    Apr 2008
    
    Apr 2015
    
    (iv)SAYE Plan
    
    
    13,345
    
    
    
    
    
    
    
    
    
    
    
    13,345
    
    
    
    0.71
    
    
    Dec 2007
    
    June 2008444,483
    
    
    
    400,809
    
    
    
    
    
    
    
    845,292J A D Slater

    
    
    538,922
    
    
    
    
    
    
    
    
    
    
    
    538,922
    
    
    
    0.835
    
    
    Oct 2007
    
    Oct 2014
    
    (iv)Share Option Plan
    
    
    
    162,455
    
    
    
    
    
    
    
    162,455
    
    
    
    0.6925
    
    
    Apr 2008
    
    Apr 2015
    
    (iv)538,922
    
    
    
    162,455
    
    
    
    
    
    
    
    701,377S J Sturge

    
    
    1,367,520
    
    
    
    
    
    
    
    
    
    
    
    1,367,520
    
    
    
    0.585
    
    
    Apr 2006
    
    Apr 2013
    
    (iv)Share Option Plan
    
    
    
    668,014
    
    
    
    
    
    
    
    668,014
    
    
    
    0.6925
    
    
    Apr 2008
    
    Apr 2015
    
    (iv)1,367,520
    
    
    
    668,014
    
    
    
    
    
    
    
    2,035,534A J Weir

    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    42.00
    
    
    Dec 2000
    
    Dec 2006
    
    
    (i
    )Executive Scheme1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    42.00
    
    
    Dec 2001
    
    Dec 2006
    
    (ii)3,078
    
    
    
    
    
    
    
    
    
    
    
    3,078
    
    
    
    20.30
    
    
    Dec 2000
    
    Dec 2007
    
    
    (i
    )3,078
    
    
    
    
    
    
    
    
    
    
    
    3,078
    
    
    
    20.30
    
    
    Dec 2002
    
    Dec 2007
    
    (ii)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2001
    
    Sep 2008
    
    
    (i
    )6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2003
    
    Sep 2008
    
    (ii)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2002
    
    Jul 2009
    
    
    (i
    )12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2004
    
    Jul 2009
    
    (ii)Share Option Plan
    
    
    615,380
    
    
    
    
    
    
    
    
    
    
    
    615,380
    
    
    
    0.585
    
    
    Apr 2006
    
    Apr 2013
    
    (iv)
    
    
    
    400,809
    
    
    
    
    
    
    
    400,809
    
    
    
    0.6925
    
    
    Apr 2008
    
    Apr 2015
    
    (iv)Bonus Scheme
    
    
    1,608
    
    
    
    
    
    
    
    (1,608
    )
    
    
    
    
    
    
    1.00
    
    
    Jul 1998
    
    Jul 2005
    
    (iii)3,217
    
    
    
    
    
    
    
    (3,217
    )
    
    
    
    
    
    
    1.00
    
    
    Jul 2000
    
    Jul 2005
    
    (iii)666,265
    
    
    
    400,809
    
    
    
    (4,825
    )
    
    
    1,062,249Total
    
    
    5,687,261
    
    
    
    1,632,087
    
    
    
    (4,825
    )
    
    
    7,314,523
  Performance conditions




---



##### Table of Contents



Name
    
    No. of shares under option
    
    
    Exercise priceS J Sturge
    
    
    668,014
    
    
    69.25 penceJ B Hutchison
    
    
    400,809
    
    
    69.25 penceJ D Slater
    
    
    162,455
    
    
    69.25 penceA J Weir
    
    
    400,809
    
    
    69.25 pence
  Directors interests in shares
   Ordinary Shares held
    
    
    Ordinary Shares heldat December 31, 2004
    
    
    at December 31, 2005Number
    
    
    NumberDr A Baxter
    
    
    
    
    
    
    2,899Dr P J Fellner (i)
    
    
    50,000
    
    
    
    80,888Ms C C Ferguson
    
    
    27,810
    
    
    
    46,639Dr J B Hutchison (ii)
    
    
    35,811
    
    
    
    45,757Mr G M Kennedy
    
    
    29,274
    
    
    
    49,094Mr K J Merrifield
    
    
    1,500
    
    
    
    1,500Dr P R Read
    
    
    2,583
    
    
    
    4,331Mr J A D Slater (iii)
    
    
    17,191
    
    
    
    28,828Mr S J Sturge (iv)
    
    
    56,435
    
    
    
    68,340Mr A J Weir (v)
    
    
    51,728
    
    
    
    86,747
 
 (i)
    
    Dr P J Fellner holds share options over 2,670,071 shares, which together with his holding of
80,888 shares, represents 0.883 per cent of the issued share capital.(ii)
    
    Dr J B Hutchison holds share options over 845,292 shares, which together with his holding of
45,757 shares, represents 0.286 per cent of the issued share capital.(iii)
    
    J A D Slater holds share options over 701,377 shares, which together with his holding of
28,828 shares, represents 0.234 per cent of the issued share capital.(iv)
    
    S J Sturge holds share options over 2,025,534 shares, which together with his holding of
68,340 shares, represents 0.672 per cent of the issued share capital.(v)
    
    A J Weir holds share options over 1,062,249 shares, which together with his holding of 86,747
shares, represents 0.369 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.




---



##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A            Major Shareholders
  As
at June 16, 2006
    
    As at April 6, 2005
    
    As at April 30, 2004
    
    As at October 15, 2003%
    
    
    
    
    
    %
    
    
    
    
    
    %
    
    
    
    
    
    %issued
    
    Number of
    
    issued
    
    Number of
    
    issued
    
    Number of
    
    issued
    
    Number ofshares
    
    shares held
    
    shares
    
    shares held
    
    shares
    
    shares held
    
    shares
    
    shares heldInvesco Perpetual (Amvescap)
    
    
    27.69
    
    
    
    86,250,380
    
    
    
    27.98
    
    
    
    55,663,903
    
    
    
    29.49
    
    
    
    41,909,773
    
    
    
    28.06
    
    
    
    38,097,713Apax Partners & Co Ltd
    
    
    8.79
    
    
    
    27,389,243
    
    
    
    6.10
    
    
    
    12,143,679
    
    
    
    8.54
    
    
    
    12,143,679
    
    
    
    8.54
    
    
    
    12,143,679Jupiter Asset Management Ltd
    
    
    5.55
    
    
    
    17,278,411
    
    
    
    5.79
    
    
    
    11,523,912
    
    
    
    6.00
    
    
    
    8,529,960
    
    
    
    6.28
    
    
    
    8,531,682Hunter Hall Investment
Management
    
    
    4.49
    
    
    
    13,972,079AXA Financial SA
    
    
    3.86
    
    
    
    12,019,103Legal &
General Investment Management Limited

    
    
    3.66
    
    
    
    11,388,638
    
    
    
    3.68
    
    
    
    7,313,720
    
    
    
    3.05
    
    
    
    4,335,781Aberforth
Partners
    
    
    3.44
    
    
    
    10,709,902Morley Fund Management Limited
    
    
    3.02
    
    
    
    9,392,580
    
    
    
    3.25
    
    
    
    6,470,854Biogen Idec Inc
    
    
    
    
    
    
    
    
    
    
    3.81
    
    
    
    7,581,673Fidelity Investment Services Ltd
    
    
    
    
    
    
    
    
    
    
    3.65
    
    
    
    7,257,496
    
    
    
    3.70
    
    
    
    5,257,295
    
    
    
    5.42
    
    
    
    7,365,230Novartis Pharma AG
    
    
    
    
    
    
    
    
    
    
    3.57
    
    
    
    7,106,344HBOS plc and subsidiary
companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.97
    
    
    
    7,060,123
    
    
    
    5.01
    
    
    
    6,800,274JP Morgan Partners (BHCA)
Limited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.73
    
    
    
    5,294,086
    
    
    
    3.62
    
    
    
    4,919,674Advent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.43
    
    
    
    4,873,605
    
    
    
    3.59
    
    
    
    4,873,605Gartmore
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.87
    
    
    
    5,256,442
    B            Related Party Transactions
    C            Interests of Experts and Counsel




---



##### Table of Contents



ITEM 8. FINANCIAL INFORMATION
  A. Consolidated Statements and Other Financial Information
  Dividends
  Legal matters
  B            Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
  A. Offer and Listing Details
 Trading Market for Ordinary Shares and ADSs




---



##### Table of Contents



Pence per Ordinary Share
    
    
    US$ per ADSHigh
    
    
    Low
    
    
    High
    
    
    LowFinancial year endApril 30, 2001
    
    
    605
    
    
    
    365
    
    
    
    4.31
    
    
    
    2.50April 30, 2002
    
    
    605
    
    
    
    210
    
    
    
    4.31
    
    
    
    1.48April 30, 2003
    
    
    250
    
    
    
    44
    
    
    
    7.16
    
    
    
    1.50Eight months ended December 31, 2003
    
    
    84
    
    
    
    57
    
    
    
    3.00
    
    
    
    1.86December 31, 2004
    
    
    97
    
    
    
    47.5
    
    
    
    4.14
    
    
    
    1.64December 31, 2005
    
    
    88.5
    
    
    
    57.25
    
    
    
    4.14
    
    
    
    1.94Financial 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
    
    
    70.5
    
    
    
    55.5
    
    
    
    2.90
    
    
    
    2.10Second quarter
    
    
    76.5
    
    
    
    48.5
    
    
    
    3.049
    
    
    
    1.78Third quarter
    
    
    97
    
    
    
    47.5
    
    
    
    4.14
    
    
    
    1.64Fourth quarter
    
    
    89
    
    
    
    81.5
    
    
    
    3.629
    
    
    
    2.80Financial year ending December 31, 2005First quarter
    
    
    88.5
    
    
    
    69.5
    
    
    
    4.14
    
    
    
    1.64Second quarter
    
    
    71.5
    
    
    
    62.5
    
    
    
    2.60
    
    
    
    2.11Third quarter
    
    
    73.25
    
    
    
    57.25
    
    
    
    2.50
    
    
    
    1.94Fourth quarter
    
    
    73.75
    
    
    
    59
    
    
    
    2.49
    
    
    
    1.99Financial year ending December 31, 2006First quarter
    
    
    84
    
    
    
    62.25
    
    
    
    3.14
    
    
    
    2.10Last six monthsNovember 2005
    
    
    64.75
    
    
    
    59
    
    
    
    2.48
    
    
    
    2.02December 2005
    
    
    63.75
    
    
    
    61
    
    
    
    2.41
    
    
    
    1.99January 2006
    
    
    80
    
    
    
    62.25
    
    
    
    2.82
    
    
    
    2.10February 2006
    
    
    84
    
    
    
    75
    
    
    
    2.85
    
    
    
    2.70March 2006
    
    
    83.25
    
    
    
    78.75
    
    
    
    3.14
    
    
    
    2.68April 2006
    
    
    85.25
    
    
    
    76
    
    
    
    2.85
    
    
    
    2.76May 2006
    
    
    81
    
    
    
    73.25
    
    
    
    3.10
    
    
    
    2.56
 
 ITEM 10. ADDITIONAL INFORMATION




---



##### Table of Contents



A. Share Capital
   B            Memorandum and Articles of Association
 Memorandum of Association and Articles of Association
  Memorandum
  Articles of Association
  (a)
    
    TransferThe 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 July 9,
1996, as contemplated by the Uncertificated Securities Regulations 1995 and effective under
the CREST Regulations. Existing Ordinary Shares can therefore be held in registered
(certificated or uncertificated) form.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.




---



##### Table of Contents



The share transfer form must be signed by or on behalf of the transferor and, in the case
of a partly paid share, 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
favour 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
   (b)
    
    Voting rightsSubject 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. Shareholders who are CREST members have the option of
submitting their proxy appointment and instructions electronically through the CREST
system.(c)
    
    DividendsSubject 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.




---



##### Table of Contents



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 go back to the Company.The board may, if authorised 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 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 authorise 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 member upon the basis of that value in order to
adjust the rights of members, and may vest any assets in trustees.(d)
    
    Distribution of assets on a winding upIf 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 Vernalis 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.(e)
    
    Alteration of share capitalThe 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 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 capitalise any sum
which is part of the Companys reserves or which the Company is holding as net profits.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.




---



##### Table of Contents



(f)
    
    Restrictions on shareholdersIf 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 Vernalis 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 certificated form and, as far as permitted by the CREST Regulations,
any of the identified shares in uncertificated form is prohibited, 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.(g)
    
    Variation of rightsSubject to the Companies Act and to special rights previously given to holders of existing
shares, Vernalis may issue shares with any 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 except that:(i)   
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;(ii)   If at an adjourned meeting, a quorum as defined above is not present, one
person who holds shares of the class, or his proxy, will be a
quorum;(iii)  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).
 (h)
    
    DirectorsNumberSubject 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).




---



##### Table of Contents



Age
  Appointment
  Removal
  Retirement by rotation
  Eligibility
  (i)
    
    directors retiring at that meeting;(ii)
    
    anyone recommended by the directors; and(iii)
    
    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
  Pensions and gratuities for directors




---



##### Table of Contents



Permitted interests
 (i)
    
    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;(ii)
    
    alone or through some firm with which he is associated, do paid professional
work for the Company (other than as auditor);(iii)
    
    hold any other position (other than auditor) in the Company as well as being
a director; and(iv)
    
    hold any position within, or be a shareholder of, any other Company in which
the Company has an interest.
   (i)
    
    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;(ii)
    
    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;(iii)
    
    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;(iv)
    
    a resolution about any proposal relating to an offer of any shares or
debentures or other securities for subscription or 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 sub-underwriting of the offer;(v)
    
    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;(vi)
    
    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




---



##### Table of Contents



(vii)
    
    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 employeesThe 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.(i)
    
    Borrowings
 (i)
    
    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.(ii)
    
    The directors will limit the total borrowings of the Company and, so far as
they are able, its subsidiary undertakings to 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. The Companys adjusted capital and reserves are determined
(based on its latest audited balance sheet) by adding the amount paid up on the
Companys issued share capital to the amount of its reserves then deducting any debit
balance on profit and loss account (if such a deduction has not already been made on
that account) and making any adjustments needed to reflect any changes since the date
of the latest audited balance sheet to the amount of paid up share capital, share
premium account or capital redemption reserve.
 (j)
    
    Shareholders MeetingsSubject to the provisions of the Companies Act, the annual general meeting is held at such
time as the board of Vernalis may determine. The board of Vernalis may call extraordinary
general meetings at any time. At general meetings of Vernalis two members present in person
and who are 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.(k)
    
    Untraced shareholdersThe 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:
 (i)
    
    During the 12 years before the earliest of the notices referred to in (ii)
below, at least three dividends have become payable on the shares and no dividend has
been claimed during that period; (ii) 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;(ii)
    
    During the 12 year period and for three months after the last of the notices
referred to in above appear, the Company has not heard from the shareholder or any
person entitled to the shares by law; and(iii)
    
    The Company has notified the London Stock Exchange that it intends to sell
the shares.




---



##### Table of Contents



Rights attaching to the Deferred Shares
  (a)
    
    IncomeThe Deferred Shares carry no rights to participate in the profits of the Company.(b)
    
    CapitalOn 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.(c)
    
    Attendance and voting at general meetingsThe 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.(d)
    
    FormThe 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.(e)
    
    Class rightsThe 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 not involve a
variation of such rights for any purpose and the Company shall be authorised 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.




---



##### Table of Contents



(f)
    
    Companys rightsThe 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 therefore) 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 authorised
Deferred Share capital of the Company existing following such purchase: (i) into shares of
any other class of share capital into which the authorised 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.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.
 C            Material Contracts
  (a)
    
    Lease between Allied Dunbar Assurance plc (successor to Marion Merrel Limited) and Vernalis
Research Limited (successor to Cerebrus Limited), dated May 13, 1997The 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.(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; and Supply Agreement between Vernalis Development Limited (formerly known as Vanguard
Medica Limited) and Menarini International Operations Luxembourg SA, dated as of September 10,
1999Vernalis have 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 4.B Information on the
Company  Business Overview  Commercial Collaborations under Menarini (frovatriptan).




---



##### Table of Contents



(c)
    
    Agreement for the Sale and Purchase of Elans rights to Frova® in North America by Vernalis,
dated March 30, 2004Under the Agreement, Vernalis Development Limited agreed to buy from the Elan group
companies (Sellers) all of the Sellers rights and assets relating to Frova® in North
America. Also, under the terms of the Agreement, the License Agreement and Development
Agreement between the parties was terminated.ConsiderationThe aggregate consideration payable by Vernalis Development Limited in respect of the
acquisition of rights and assets was $50 million in cash (of which $5 million was paid on
completion of the agreement) subsequently renegotiated to $44 million, plus a further
amount for the Frova® inventory held by Elan on May 18, 2004. Such inventory was audited
and valued by Vernalis Accountants at $4.5 million.The inventory payment was due to be paid on the earlier of December 31, 2004 or the
completion of an equity funding by Vernalis Development Limited. The remainder of the
consideration (other than that paid and that for inventory) was due 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
    Guarantee and security
  Transfer of Product Registrations




---



##### Table of Contents



(d)
    
    Licence Agreement between Vernalis Development Limited and Endo Pharmaceuticals Inc. dated
July 14, 2004, as amendedOn July 14, 2004, Vernalis Development Limited entered into an agreement granting an
exclusive licence of its rights and assets relating to Frova® in North America
(re-acquired from Elan) to Endo. The conditions precedent to the Licence Agreement were
fulfilled and closing achieved on August 17, 2004.In consideration of the licence, Endo paid an upfront licence fee of $30 million and a
further amount of $3 million for Frova® inventory acquired by Vernalis Development Limited
from Elan. Endo will also make to Vernalis Development Limited two unconditional payments
of $15 million on the first and second anniversary of closing of the Licence Agreement, the
first of which was received in August 2005, and will also make a payment of $40 million on
FDA approval of the use of Frova® as a short-term preventative treatment for MM and various
milestone payments upon the achievement of certain sales thresholds starting with a
milestone of $10 million upon reaching $200 million net annual sales. Starting on January
1, 2007, Endo will also pay tiered royalties on net sales of Frova® from 20% if FDA
approval of the MM indication is obtained.Under the terms of the Licence Agreement: -
 
    
    Product registrations for Frova® and the IND Application in respect of the MM study
are transferred to Endo.
    
    Endo is committed to specified minimum levels of commitment in respect of marketing
Frova®, both during the initial years of the agreement and following MM approval.
    
    Vernalis Development Limited will continue to conduct and control the MM clinical
development program as sponsor.
    
    Vernalis Development Limited has secured the option to co-promote Frova® in the
United States with effect from January 1, 2006. Endo are now paying a portion of the
cost of a specified number of details over a five-year period. Endo shall also
support the Vernalis salesforce by the provision of marketing materials and training
for the period. The co-promotion option gives Vernalis the opportunity to detail other
prospective CNS products alongside Frova® and this sales force is also now promoting
Vernalis other marketed product, Apokyn®.
 The obligations of Vernalis under the Licence Agreement are guaranteed by Vernalis plc.First Amendment to the Licence Agreement dated January 31,
2005, further details responsibilities allocated to the parties
relating to commercial payments, Government rebates and product
returns.Second Amendment to the Licence Agreement dated December 12,
2005, modified the terms applicable to Endos licence for
Canada, and, particularly, the royalty rates applicable on net sales
of Frova®; and increased the percentage of cost per detail where
Vernalis speciality sales personnel detail one or more products
other than Frova® to 100% to 2008.
 (e)
    
    Loan Agreement between Vernalis plc, Vernalis Development Limited and Endo Pharmaceuticals
Inc., dated July 14, 2004On July 14, 2004, Vernalis Development Limited, as Borrower, and Vernalis plc, as Parent,
entered into a Loan Agreement with Endo, pursuant to which Endo provided the Borrower with
a loan of $50 million (the Loan), drawn down by the Borrower on closing of the Licence
Agreement (described above).The terms of the Loan Agreement provide for the Loan to be applied to discharge all amounts
owing to Elan Pharma International Limited, by both Borrower and Parent, at the draw down
date, thereby discharging the Floating Charge between the Borrower and Elan Pharma
International Limited dated May 18, 2004. The balance of the Loan is available for general
corporate purposes.Interest, at a rate of 5% per annum, is payable on the Loan semi-annually in arrears. The
Borrower has the option to defer payment of interest and increase the Loan outstanding each
time interest payment becomes due.




---



##### Table of Contents



The Loan is secured against revenues receivable by the Borrower under the Licence
Agreement. At Endos election, Endo are able to offset $20 million of the MM milestone and
50% of royalties to be paid to the Borrower under the Licence Agreement, in repayment of
the Loan. To the extent not previously repaid, the Loan is due to be repaid in full after 5
years.(f)
    
    Co-Promotion Agreement dated July 1, 2005 between Vernalis Development Limited and Endo
Pharmaceuticals Inc., as amendedThis agreement was entered into pursuant to the Licence Agreement of July 14,
2004 between the parties and following Vernalis exercise of its
option to co-promote Frova® in the United States. The agreement
sets out the parties respective responsibilities for the promotion of
Frova®.This agreement was dated on December 12, 2005 to
 
    
    provide a process for determining products falling under
the non-compete provisions of the agreement;
    
    further details the Frova® detailing arrangements to be
undertaken by Vernalis; and
    
    revises the cost per detail payable to Vernalis in line with
the second amendment to the Licence Agreement.
 (h)
    
    Share Sale and Purchase Agreement dated July 5, 2005, in relation to the acquisition of Ionix
Pharmaceuticals LimitedIn consideration for Vernalis acquiring the entire issued share
capital of Ionix, Vernalis issued to Ionixs shareholders 19,685,040 Ordinary Shares,
representing approximately 9% of the enlarged issued share capital of Vernalis and valuing
Ionix at £12.5 million.  Of the 19,685,040 million Ordinary Shares, 17,847,769 million
(90%) were issued on completion of the transaction with the remaining shares to be issued
in July 2006, subject to reduction for any warranty or indemnity
claims.  A cash payment of £5 million will be paid to existing Ionix shareholders on
receipt of the first marketing authorisation for V-1003, subject to reduction for any warranty
or indemnity claims.(i)
    
    Asset Purchase and Assignment Agreement between Mylan Pharmaceuticals Inc / Mylan Berteck
Pharmaceuticals Inc and Vernalis (R&D) Ltd dated November 3, 2005, in relation to the
acquisition of Apokyn®On November 3, 2005, Vernalis acquired from Mylan the
exclusive rights to market and sell Apokyn®, an on-market drug
indicated for the acute, intermittent treatment of immobilising OFF
episodes associated with advanced Parkinsons disease, in North
America for a one-off cash payment of US$23 million. Vernalis has
acquired the US NDA, including Orphan Drug Designation, and IND
Application and exclusive rights to market Apokyn® in North
America, as well as certain know-how, marketing materials and rights
to the trademark relating to Apokyn®. Third party licenses
(including Mylans licence agreement with Britannia under which
Vernalis is licensed to use in North America certain know-how
belonging to Britannia) as well as supply, distribution and services
agreements in connection with the manufacture, supply and
distribution of Apokyn® in the US have been assigned to
Vernalis. In addition, Mylan agreed to provide certain transitional
services to Vernalis for a period of up to 12 months following the
acquisition. This includes customer service assistance and supply
chain management, including management of contracts and purchases
order arrangements with suppliers of the different elements that make
up the product.(j)
    
    Cita Acquisition AgreementsThe Cita acquisition agreements comprise:
 (i)
    
    Principal Share Purchase Agreement dated November 18, 2005|, between the Vendors, Cita
NeuroPharmaceuticals Inc, Vernalis plc and Vernalis (Canada) Inc(ii)
    
    Common Share Purchase Agreement dated November 18, 2005, between the Vendors, Vernalis plc
and Vernalis (Canada) Inc(iii)
    
    Share Purchase Agreement dated November 18, 2005, between MMV Financial Inc, Vernalis plc and
Vernalis (Canada) Inc(iv)
    
    Share Purchase Agreement dated November 18, 2005, between ALX Limited Partnership, Vernalis
plc and Vernalis (Canada) Inc(v)
    
    Right Purchase Agreement dated November 18, 2005, between Chiesi Farmaceutici SpA, Vernalis
plc and Vernalis (Canada) Inc
 Pursuant to the Cita Acquisition Agreements, Vernalis
acquired the entire issued, and to be issued share capital of Cita.
The initial consideration, which was paid by Vernalis on completion,
was
US$29.5 million and was satisfied by the issue of new Ordinary
shares. Vernalis assumed certain of Citas liabilities on
completion. Further deferred consideration of up to US$35 million is
payable in instalments by Vernalis dependent upon achieving certain
milestones in respect of the development of Citas clinical drug
candidates V1512 and V3381.The US$29.5 million (£17.2 million) initial
consideration was satisfied by the issue at completion of 26,915,831
Ordinary Shares (representing approximately 12.4 percent of
Vernalis
existing issued ordinary share capital) calculated at an issue price
of 63.91 pence per new Ordinary Share (being Vernalis average
closing price on the thirty dealing days prior to November 18, 2005).Of the shares issued as initial consideration, 2,630,847
Ordinary Shares were issued to certain Vendors and the remaining
24,284,984 Ordinary Shares were conditionally placed by Piper Jaffray
at the offer price pursuant to the Vendor placing to realise cash
proceeds payable to certain Vendors of approximately £15.3
million (US$26.2 million) (before expenses).Deferred consideration of up to US$35 million is payable by
Vernalis in six equal instalments payable upon the achievement of the
following milestones.
 
    
    enrolment of the first patient into a Phase III study for
V1512;
    
    the Company reporting that it has sufficient data to support
a submission to the FDA for regulatory approval to market and sell in
the US a product comprising V1512 for the treatment of
Parkinsons disease;




---



##### Table of Contents




    
    approval by the FDA of V1512 for the treatment of
Parkinsons disease;
    
    the Company reporting that it has sufficient data to justify progressing with a Phase II or a Phase III study for V3381;
    
    the Company reporting that it has sufficient data to support a submission to the FDA for regulatory approval to market and sell in the US a product comprising V3381 for the treatment of diabetic neuropathic pain; and
    
    approval by the FDA of V3381 for the treatment of diabetic
neuropathic pain, Alzheimers disease, post operative pain or mixed pain related to palliative care.
 Vernalis has the option to elect to satisfy each payment of deferred consideration in Ordinary Shares (such number of Ordinary Shares to be calculated using the average closing price on the thirty dealing days prior to the relative milestone event occurring), in cash or by a combination of cash and Ordinary Shares.The other principal terms of the Cita acquisition are as follows:
 
    
    Vernalis assumed certain of Citas liabilities on
completion, including an outstanding US$500,000 withholding tax
liability and the early repayment of the outstanding balance under a
loan to MMV, as described below.  Vernalis provided up to US$250,000
per week to Cita up to completion to fund certain costs associated
with V1512 and V3381, including Citas salaries and overheads during
that period (subject to prior approval by Vernalis).
 
    
    Citas expenditure on such items during the period from signing until completion will be deducted in equal amounts from the first two milestone payments paid under the Cita Acquisition Agreements;
    
    the consideration paid to certain Vendors was subject to a
net cash adjustment following completion to the extent that Citas net cash (less any liabilities or funding for which Vernalis agreed to be responsible) was more or less than zero (as relevant);
    
    the deferred consideration payments were subject to deduction for warranty and indemnity claims against certain Vendors;
    
    Vernalis gave certain commitments in respect of its future development of V1512 and V3381;
    
    Vernalis, on completion, procured the early repayment of the outstanding balance of US$2 million (plus interest and costs) of an existing loan from MMV to Cita;
    
    subject to certain limited exceptions, each Vendor allotted
in excess of 500,000 consideration shares at completion covenanted
not to dispose of those shares before the earlier of: (i) June 30,
2006; and (ii) the announcement by Vernalis of the results of pivotal
efficacy studies for Vernalis frovatriptan MRM prophylaxis
development programme other than with Vernalis prior approval
and through Vernalis brokers, provided that Vernalis brokers are able to dispose of such shares on commercially reasonable terms;
    
    in the event that the Cita Acquisition did not complete and the Cita Acquisition Agreements terminated in
 accordance with their terms, Vernalis would be entitled, on payment
of a license fee of US$3 million, to the first right of offer to
license from Cita the right to sell and market in the US any products
arising from V1512.  The weekly amounts funded by Vernalis to Cita,
referred to above, from signing until termination of the Cita
Acquisition Agreements would be treated as prepayments of the US$3
million license fee, if that fee became payable; and
    
    the Cita Acquisition Agreements were conditional, inter alia, on the passing of the resolutions, the placing and open offer agreement (and, accordingly, the Vendor placing and the placing and open offer) having become unconditional (save for any conditions relating to completion of the Cita Acquisition Agreements or admission) and not having been terminated in accordance with its terms and admission becoming effective.
 D            Exchange Controls and other Limitations Affecting Security Holders
   E            Taxation




---



##### Table of Contents




    
    a citizen or resident of the United States,
    
    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
authorised 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 Treaty.
  United Kingdom Taxation
 Taxation of Dividends
  Taxation of Capital Gains
  Inheritance Tax
  Stamp Duty and Stamp Duty Reserve Tax (SDRT)
  Page: 90




---



##### Table of Contents



United States Federal Income Taxation
 Taxation of Dividends
       Page: 91




---



##### Table of Contents



Taxation of Capital Gains
  Passive Foreign Investment Company Considerations
      Page: 92




---



##### Table of Contents



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.
 Page: 93




---



##### Table of Contents



H Documents on Display
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  Page: 94




---



##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARS AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Page: 95




---



##### Table of Contents



Year ended December 312004
    
    
    2005£000
    
    
    £000Audit fees
    
    
    122
    
    
    
    166Audit-related fees
    
    
    55
    
    
    
    70Tax fees
    
    
    58
    
    
    
    189All other fees
    
    
    160
    
    
    
    369Total
    
    
    395
    
    
    
    794
       Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors
  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  Page: 96




---



##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
   PageReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Income Statement
    
    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-42
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
  1.
    
    Memorandum and Articles of Association of the Company4.
    
    Material Contracts:4.1
    
    Service Contracts of Directors(a)
    
    Service Agreement, dated March 21, 2003 between the Company and Peter Fellner (3)(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 (3)(c)
    
    Service Agreement, dated June 24, 1999, between the Company and Tony Weir (4)
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 (3)(d)
    
    Service Agreement dated July 2, 2003, between the Company and John Hutchison (3)(e)
    
    Engagement Letter between the Company and Peter Read, dated July 18, 2003 (3)(f)
    
    Engagement Letter between the Company and George Kennedy, dated July 17, 2003 (3)(g)
    
    Engagement Letter between the Company and Carol Ferguson, dated July 17, 2003 (3)(h)
    
    Engagement Letter between the Company and Keith Merrifield, dated December 1, 1999
(4), 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 (3)(i)
    
    Engagement Letter between the Company and Allan Baxter, dated May 19, 2004 (2)
 Page: 97




---



##### Table of Contents



(j)
    
    Engagement Letter between the Company and John Slater, dated October 29, 2004 (1)4.2
    
    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 (3)(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
(5)(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
(3)4.3
    
    Reacquisition of North American Rights to Frova®(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 (2)(b)
    
    Transitional Services Agreement between Elan Corporation plc, Elan Pharmaceuticals Inc, Elan
Pharma Ltd and Vernalis Development Ltd dated May 18, 2004 (2)(c)
    
    Licence Agreement between Vernalis Development Ltd and Endo Pharmaceuticals Inc dated July
14, 2004 (5)(e)
    
    Loan Agreement between the Company, Vernalis Development Ltd and Endo Pharmaceuticals Inc
dated July 14, 2004 (1)(f)
    
    Co-Promotion Agreement between Vernalis Development Ltd and Endo Pharmaceuticals Inc dated
July 1, 2005 (8)(g)
    
    First Amendment dated December 12, 2005, to the Co-Promotion Agreement between Vernalis
Development Ltd and Endo Pharmaceuticals Inc dated July 1, 2005 (8)(h)
    
    Second Amendment dated December 12, 2005, to the Licence Agreement between Vernalis
Development Ltd and Endo Pharmaceuticals Inc dated July 14, 2004 (8)4.4
    
    Other contracts(a)
    
    The Company Discretionary Share Option Plan (3)(b)
    
    Deed of Grant of Option, dated April 23, 2003, between the Company and Peter Fellner
(3)4.5
    
    Share Sale and Purchase Agreement dated July 5, 2005, in relation to the acquisition of Ionix
Pharmaceuticals Limited(8)4.6
    
    Purchase of
Apokyn® Rights(a)
    
    Asset Purchase and Assignment Agreement between Mylan Pharmaceuticals Inc / Mylan Berteck
Pharmaceuticals Inc and Vernalis (R&D) Ltd dated November 3, 2005, in relation to the
acquisition of Apokyn® (8)(b)
    
    Licence Agreement between Britannia Pharmaceuticals Limited
and Mylan Pharmaceuticals Inc dated November 24, 1999 (8)4.7
    
    Acquisition of Cita NeuroPharmaceuticals Inc(a)
    
    Principal Share Purchase Agreement dated November 18, 2005|, between the Vendors, Cita
NeuroPharmaceuticals Inc, Vernalis plc and Vernalis (Canada) Inc (8)(b)
    
    Common Share Purchase Agreement dated November 18, 2005, between the Vendors, Vernalis plc
and Vernalis (Canada) Inc (8)
 Page: 98




---



##### Table of Contents



(c)
    
    Share Purchase Agreement dated November 18, 2005, between MMV Financial Inc, Vernalis plc and
Vernalis (Canada) Inc (8)(d)
    
    Share Purchase Agreement dated November 18, 2005, between ALX Limited Partnership, Vernalis
plc and Vernalis (Canada) Inc (8)(e)
    
    Right Purchase Agreement dated November 18, 2005, between Chiesi Farmaceutici SpA, Vernalis
plc and Vernalis (Canada) Inc (8)8.
    
    List of subsidiaries of the Group (6)12.
    
    CEO and Finance Director Certifications pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934 (7)13.
    
    CEO and Finance Director Certifications pursuant to Rule 13a-14(b) of the Securities Exchange
Act of 1934 (7)23.
    
    Consent of PricewaterhouseCoopers LLP
 
 LEGEND
 (1)
    
    Incorporated by reference to the Annual Report of Vernalis plc on Form 20-F for the
year ended December 31, 2004.(2)
    
    Incorporated by reference to the Annual Report of Vernalis plc on Form 20-F for the
year ended December 31, 2003.(3)
    
    Incorporated by reference to the Annual Report of Vernalis plc on Form 20-F for the
year ended April 30, 2003.(4)
    
    Incorporated by reference to the Annual Report of British Biotech plc on Form 20-F
for the year ended April 30, 2001.(5)
    
    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 plc in connection with previously filed Annual Reports on Form 20-F.(6)
    
    Incorporated by reference to Item 4.C Information on the Company  Organisational
Structure of this Annual Report on Form 20-F.(7)
    
    Furnished but not filed.(8)
    
    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 plc in connection with this Annual Report on Form 20-F.
 Page: 99




---



##### Table of Contents



SIGNATURES
  Vernalis plc(Registrant)By:
    
    /s/ A J WeirName:
    
    Anthony J WeirDate:
June 29, 2006
    
    Title:
    
    Chief Financial Officer
 Page: 100




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Shareholders of Vernalis plc
   PricewaterhouseCoopers LLP
London, UK
 F - 1




---



##### Table of Contents



CONSOLIDATED INCOME STATEMENT
 Year ended December 312004
    
    
    2005£000
    
    
    £000Revenue (Note 4a)
    
    
    15,195
    
    
    
    14,131Costs and expensesCost of sales
    
    
    (5,573
    )
    
    
    (4,991
    )Research and development expenditure
    
    
    (21,423
    )
    
    
    (26,491
    )Selling, general & administrative expenses
    
    
    (15,722
    )
    
    
    (15,483
    )Total operating costs & expenses
    
    
    (42,718
    )
    
    
    (46,965
    )Operating loss (Note 4)
    
    
    (27,523
    )
    
    
    (32,834
    )Net interest (Note 5)
    
    
    112
    
    
    
    (1,598
    )Loss before provision for income taxes
    
    
    (27,411
    )
    
    
    (34,432
    )Provision for income taxes (Note 6)
    
    
    1,758
    
    
    
    1,584Net Loss
    
    
    (25,653
    )
    
    
    (32,848
    )Net loss per share (basic and diluted) (Note 7)
    
    
    (17.4p
    )
    
    
    (16.3p
    )Ordinary shares used in computingNet loss per share(000s)
    
    
    147,388
    
    
    
    202,174
   F - 2




---



##### Table of Contents



CONSOLIDATED BALANCE SHEETS
 December 312004
    
    
    2005£000
    
    
    £000AssetsProperty, plant and equipment (Note 9)
    
    
    1,596
    
    
    
    1,910Goodwill (Note 10)
    
    
    8,014
    
    
    
    4,851Intangible assets (Note 11)
    
    
    33,211
    
    
    
    84,345Available for sale financial assets (Note 12)
    
    
    680
    
    
    
    601Other receivables (Note 14)
    
    
    7,418
    
    
    
    Non current assets
    
    
    50,919
    
    
    
    91,707Inventories (Note 13)
    
    
    49
    
    
    
    752Trade and other receivables (Note 14)
    
    
    20,355
    
    
    
    24,013Held to maturity financial assets (Note 15)
    
    
    15,000
    
    
    
    28,052Cash and cash equivalents (Note 16)
    
    
    18,323
    
    
    
    40,243Current assets
    
    
    53,727
    
    
    
    93,060Total assets
    
    
    104,646
    
    
    
    184,767LiabilitiesBorrowings (Note 17)
    
    
    (26,364
    )
    
    
    (30,938
    )Other non-current liabilities (Note 18)
    
    
    (2,467
    )
    
    
    (7,412
    )Deferred income (Note 19)
    
    
    (31,294
    )
    
    
    (26,457
    )Provisions (Note 20)
    
    
    (6,877
    )
    
    
    (4,780
    )Non current liabilities
    
    
    (67,002
    )
    
    
    (69,587
    )Borrowings (Note 17)
    
    
    (18
    )
    
    
    (33
    )Trade and other liabilities (Note 18)
    
    
    (11,237
    )
    
    
    (22,971
    )Deferred income (Note 19)
    
    
    (4,839
    )
    
    
    (5,147
    )Provisions (Note 20)
    
    
    (3,653
    )
    
    
    (4,169
    )Current liabilities
    
    
    (19,747
    )
    
    
    (32,320
    )Total liabilities
    
    
    (86,749
    )
    
    
    (101,907
    )Net assets
    
    
    17,897
    
    
    
    82,860Shareholders equityShare capital (Note 21)
    
    
    39,492
    
    
    
    47,280Share premium
    
    
    305,842
    
    
    
    393,724Other reserves (Note 23)
    
    
    154,417
    
    
    
    156,558Retained deficit
    
    
    (481,854
    )
    
    
    (514,702
    )Total shareholders equity
    
    
    17,897
    
    
    
    82,860
  F - 3




---



##### Table of Contents



CONSOLIDATED CASH FLOW STATEMENTS
 Year ended December 312004
    
    
    2005£000
    
    
    £000Cash flow from operating activities(Loss)/profit before tax
    
    
    (27,411
    )
    
    
    (34,432
    )Depreciation
    
    
    2,327
    
    
    
    921Loss on disposal of tangible fixed assets
    
    
    836
    
    
    
    12Amounts written off goodwill
    
    
    
    
    
    
    6,371Amortisation and disposal of intangible fixed assets
    
    
    2,664
    
    
    
    3,983Amounts written off investments
    
    
    (12
    )
    
    
    Option charge
    
    
    728
    
    
    
    1,217Interest receivable
    
    
    (2,933
    )
    
    
    (3,892
    )Interest payable
    
    
    2,821
    
    
    
    5,490Exchange (gain)
    
    
    (366
    )
    
    
    (511
    )(21,346
    )
    
    
    (20,841
    )Changes in working capital(Increase) in inventories
    
    
    
    
    
    
    (703
    )Decrease/(increase) in receivables
    
    
    (16,178
    )
    
    
    7,914(Decrease)/increase in liabilities
    
    
    355
    
    
    
    (133
    )(Decrease)/increase in provisions
    
    
    4,260
    
    
    
    (1,807
    )(Decrease)/increase in deferred income
    
    
    35,299
    
    
    
    (4,529
    )Cash (used in)/generated from operations
    
    
    2,390
    
    
    
    (20,099
    )Taxation received
    
    
    1,129
    
    
    
    4,284Interest paid
    
    
    (216
    )
    
    
    (8
    )Net cash (used in)/generated from operating activities
    
    
    3,303
    
    
    
    (15,823
    )Cash flows from investing activitiesPurchase of tangible fixed assets
    
    
    (101
    )
    
    
    (589
    )Acquisition of subsidiary undertakings net of cash acquired
    
    
    
    
    
    
    (3,104
    )Sale of tangible fixed assets
    
    
    3,250
    
    
    
    Purchase of intangible fixed assets
    
    
    (30,841
    )
    
    
    (16,570
    )Sale of investment
    
    
    12
    
    
    
    Interest received
    
    
    19
    
    
    
    710Interest received on financial assets held to maturity
    
    
    664
    
    
    
    898Net cash used in investing activities
    
    
    (26,997
    )
    
    
    (18,655
    )Cash flows from financing activitiesFinance charge on US dollar secured loan
    
    
    (372
    )
    
    
    Interest payable on US dollar secured loan
    
    
    (388
    )
    
    
    Receipt of US dollar secured loan
    
    
    27,539
    
    
    
    Repayment of sterling secured loan
    
    
    (1,485
    )
    
    
    Movement in held-to-maturity financial assets
    
    
    (6,933
    )
    
    
    (13,052
    )Issue of shares
    
    
    8,295
    
    
    
    72,958Share issue costs
    
    
    
    
    
    
    (3,996
    )Capital element of finance lease payments
    
    
    (738
    )
    
    
    (23
    )Net cash generated from financing activities
    
    
    25,918
    
    
    
    55,887Foreign exchange on cash and cash equivalents
    
    
    (48
    )
    
    
    511Movements in cash and cash equivalents in the period
    
    
    2,176
    
    
    
    21,920Cash and cash equivalents at the beginning of the period
    
    
    16,147
    
    
    
    18,323Cash and cash equivalents at the end of the period
    
    
    18,323
    
    
    
    40,243
  F - 4




---



##### Table of Contents



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
 For the period from January 1, 2004 to December 31, 2005
 Share
    
    
    Share
    
    
    Other
    
    
    Retainedcapital
    
    
    premium
    
    
    reserves
    
    
    deficit
    
    
    Total£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Balance at January 1, 2004
    
    
    38,813
    
    
    
    298,226
    
    
    
    153,092
    
    
    
    (456,201
    )
    
    
    33,930Revaluation of assets available for sale
    
    
    
    
    
    
    
    
    
    
    597
    
    
    
    
    
    
    
    597Net income recognised directly in equity
    
    
    
    
    
    
    
    
    
    
    597
    
    
    
    
    
    
    
    597Loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,653
    )
    
    
    (25,653
    )Total recognised income and expense for
the period
    
    
    
    
    
    
    
    
    
    
    597
    
    
    
    (25,653
    )
    
    
    (25,056
    )Issue of equity share capital
    
    
    679
    
    
    
    7,616
    
    
    
    
    
    
    
    
    
    
    
    8,295Equity share options charge
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    
    
    
    
    728Balance at December 31, 2004
    
    
    39,492
    
    
    
    305,842
    
    
    
    154,417
    
    
    
    (481,854
    )
    
    
    17,897Revaluation of assets available for sale
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Net income recognised directly in equity
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,848
    )
    
    
    (32,848
    )Total recognised income and expense for
the period
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    (32,848
    )
    
    
    (32,927
    )Issue of equity share capital
    
    
    7,788
    
    
    
    91,903
    
    
    
    
    
    
    
    
    
    
    
    99,691Expenses on issue of share capital
    
    
    
    
    
    
    (4,021
    )
    
    
    
    
    
    
    
    
    
    
    (4,021
    )Shares to be issued
    
    
    
    
    
    
    
    
    
    
    1,034
    
    
    
    
    
    
    
    1,034Equity share options charge
    
    
    
    
    
    
    
    
    
    
    1,217
    
    
    
    
    
    
    
    1,217Exchange loss on translation of
overseas subsidiaries
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )Balance at December 31, 2005
    
    
    47,280
    
    
    
    393,724
    
    
    
    156,558
    
    
    
    (514,702
    )
    
    
    82,860
  F - 5




---



##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 1. History and operations
  2. Accounting policies and basis of preparation
   Basis of preparation
    Accounting policies
 Basis of consolidation
  F - 6




---



##### Table of Contents



Share-based payments
   Intangible assets
  Goodwill
 Internally-generated intangible assets  product research and development
  Purchased intangibles
 Impairment of assets
 Employee benefits
 F - 7




---



##### Table of Contents



Investments
  Loans and receivables
 Held-to-maturity investments
 Available-for-sale financial assets
  Cash and cash equivalents
 Investments in subsidiary undertakings
 Revenue recognition
 Property, plant and equipment
 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 - 8




---



##### Table of Contents



Finance and operating leases
 Inventories
 Taxation
     Foreign currencies
  F - 9




---



##### Table of Contents



Financial instruments
 3. Summary
of differences between IFRS and US Generally Accepted Accounting Principles
  Reconciliation of Net loss for the period to US GAAP
 Year ended December 312004
    
    
    2005Notes
    
    £000
    
    
    £000Loss under IFRS
    
    
    
    
    (25,653
    )
    
    
    (32,848
    )Adjustments in respect of purchase accounting for Ionix Pharmaceuticals Ltd:Write-off: in-process research and development capitalised
    
    i
    
    
    
    
    
    
    (9,781
    )
    
    
    
    (9,781
    )Adjustments in respect of purchase accounting for Cita NeuroPharmaceuticals
Inc:Write-off: in-process research and development capitalised
    
    ii
    
    
    
    
    
    
    (31,546
    )
    
    
    
    (31,546
    )Adjustments in respect of purchase accounting for Vernalis Group plc:
    
    iiiWrite back pre-acquisition fair value adjustment in depreciation
    
    
    
    
    117
    
    
    
    117Amortisation of discount arising on other creditors
    
    iv
    
    
    (486
    )
    
    
    (162
    )Amortisation in respect of pre-acquisition intangibles
    
    
    
    
    1,431
    
    
    
    1,349Amortisation of acquired developed product
    
    
    
    
    (5,291
    )
    
    
    (5,291
    )(4,229
    )
    
    
    (3,987
    )Adjustments in respect of purchase accounting for Ribotargets Holdings plc:
    
    vImpairment charge on reduced goodwill asset
    
    
    
    
    
    
    
    
    1,556Amortisation of acquired developed product
    
    
    
    
    (60
    )
    
    
    (60
    )
    
    
    1,556Other US GAAP differences:In process Research and Development capitalised
    
    vi
    
    
    (300
    )
    
    
    (798
    )Share option charge
    
    vii
    
    
    728
    
    
    
    1,443Other differences
    
    
    
    
    186
    
    
    
    24614
    
    
    
    669Net loss under US GAAP
    
    
    
    
    (29,328
    )
    
    
    (75,937
    )Loss per share under US GAAP
    
    
    
    
    (19.9
    )p
    
    
    (37.6
    )pOrdinary shares used in computing Net loss per ordinary share (000s)
    
    
    
    
    147,388
    
    
    
    202,174
 F - 10




---



##### Table of Contents



Reconciliation of shareholders funds to US GAAP
 December 312004
    
    
    2005Notes
    
    £000
    
    
    £000Shareholders funds under IFRS
    
    
    
    
    17,897
    
    
    
    82,860Adjustments in respect of purchase accounting for Ionix Pharmaceuticals
Limited:
    
    iIncrease in fair value for shares issued as initial consideration
    
    
    
    
    
    
    
    
    1,287Contingent consideration
    
    
    
    
    
    
    
    
    (1,034
    )Impact of loss in the period
    
    
    
    
    
    
    
    
    (9,781
    )
    
    
    
    (9,528
    )Adjustments in respect of purchase accounting for Cita
NeuroPharmaceuticals Inc:
    
    iiIncrease in fair value for shares issued
    
    
    
    
    
    
    
    
    339Impact of loss in the period
    
    
    
    
    
    
    
    
    (31,546
    )
    
    
    
    (31,207
    )Adjustment in respect of purchase accounting for Vernalis Group plc:
    
    iiiImpact on loss for the period
    
    
    
    
    (4,229
    )
    
    
    (3,987
    )Impact of prior period losses
    
    
    
    
    (1,799
    )
    
    
    (6,028
    )Less pre-acquisition losses
    
    
    
    
    121,211
    
    
    
    121,211Less pre-acquisition reserves
    
    
    
    
    (126,496
    )
    
    
    (126,496
    )Fair value of shares issued in consideration
    
    
    
    
    46,302
    
    
    
    46,30234,989
    
    
    
    31,002Adjustment in respect of purchase accounting for Ribotargets Holdings plc:
    
    vImpact of loss for the period
    
    
    
    
    (60
    )
    
    
    1,556Impact on prior period losses
    
    
    
    
    (5,501
    )
    
    
    (5,561
    )Increase in fair value of consideration
    
    
    
    
    4,005
    
    
    
    4,005(1,556
    )
    
    
    Other US GAAP adjustments:In process research and development
    
    vi
    
    
    (600
    )
    
    
    (1,398
    )Share Option Charge
    
    vii
    
    
    
    
    
    
    226Fair value of intangible fixed assets
    
    
    
    
    144
    
    
    
    168Other differences
    
    
    
    
    48
    
    
    
    95(408
    )
    
    
    (909
    )Shareholders funds under US GAAP
    
    
    
    
    50,922
    
    
    
    72,218
 Summary of significant differences between IFRS and US GAAP
 (i) Purchase accounting for Ionix Pharmaceuticals Limited
     F - 11




---



##### Table of Contents



(ii) Purchase accounting for Cita NeuroPharmaceuticals Inc
      (iii) Adjustments in respect of purchase accounting for Vernalis Group plc
     (iv) Amortisation of discount arising on other creditors
  (v) Goodwill and other intangible assets arising from the acquisition of Ribotargets Holdings plc.
  F - 12




---



##### Table of Contents



(vi) In-process research and development and intangible amortisation
  (vii) Share option charge
   (viii) Summary balance sheet under US GAAP
 Year ended December 312004
    
    
    2005£000
    
    
    £000Property, plant and equipment
    
    
    1,362
    
    
    
    1,793Intangible fixed assets
    
    
    69,644
    
    
    
    74,735Goodwill
    
    
    4,815
    
    
    
    1,178Other non-current assets
    
    
    8,053
    
    
    
    601Net current assets
    
    
    33,809
    
    
    
    60,795Non-current liabilities, deferred income and other liabilities
    
    
    (66,761
    )
    
    
    (66,886
    )Total shareholders equity
    
    
    50,922
    
    
    
    72,216
 Recent US Accounting Pronouncements
 Inventory Costs  An Amendment of ARB No.
43, Chapter 4 (FAS 151)
  F - 13




---



##### Table of Contents



Exchanges of Nonmonetary Assets  An
Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees.
 Accounting for Conditional Asset
Retirement Obligations  an interpretation of FASB Statement No. 143
 Accounting Changes and Error Corrections  A
replacement of APB Opinion No. 20 and FASB Statement No. 3
 Accounting for Rental Costs
Incurred during a Construction Period
 Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements No. 133 and 140
 F - 14




---



##### Table of Contents



Recent International Accounting Pronouncements
 IFRS 7 Financial Instruments: Disclosures.
 Presentation of Financial Statements  Capital Disclosures
 Determining whether an Arrangement contains a Lease
 Net investment in a foreign operation
 Scope of IFRS 2
 4. Analysis of Revenues, Expenditure, Operating Results and Assets
  Year ended
    
    
    Year endedDecember 31
    
    
    December 312004
    
    
    2005£000
    
    
    £000(a) Revenues by activityProduct sales
    
    
    9,330
    
    
    
    3,602Royalties
    
    
    688
    
    
    
    110Collaborations (Note (c))
    
    
    5,177
    
    
    
    10,41915,195
    
    
    
    14,131(b) Revenues by geographic areaUnited Kingdom
    
    
    161
    
    
    
    2,178North America
    
    
    11,207
    
    
    
    8,317Rest of Europe
    
    
    3,822
    
    
    
    3,622Rest of World
    
    
    5
    
    
    
    1415,195
    
    
    
    14,131
 F - 15




---



##### Table of Contents



(c) Revenues by customer
  Year ended December 312004
    
    
    2005£000
    
    
    £000Novartis
    
    
    1,385
    
    
    
    1,145Biogen Idec
    
    
    1,110
    
    
    
    3,471Endo Pharmaceuticals Inc.
    
    
    1,327
    
    
    
    3,184Serono Inc.
    
    
    
    
    
    
    578Roche
    
    
    487
    
    
    
    Elan
    
    
    677
    
    
    
    Reckitt Benckiser
    
    
    
    
    
    
    2,000Other
    
    
    191
    
    
    
    41Total
    
    
    5,177
    
    
    
    10,419
 (d) Operating costs and expenses
  Year ended December 312004
    
    
    2005£000
    
    
    £000Wages and salaries
    
    
    7,845
    
    
    
    10,193Social Security costs
    
    
    1,062
    
    
    
    1,111Other pension costs
    
    
    621
    
    
    
    767Staff Costs
    
    
    9,528
    
    
    
    12,071Average number of employees
    
    
    131
    
    
    
    146
  (e) Key management compensation:
 Year ended December 312004
    
    
    2005£000
    
    
    £000Salaries and short-term employee benefits
    
    
    1,621
    
    
    
    2,550Post-employment benefits
    
    
    135
    
    
    
    177Termination benefits
    
    
    452
    
    
    
    Share-based payments
    
    
    443
    
    
    
    6412,651
    
    
    
    3,368
  F - 16




---



##### Table of Contents



(f) Operating loss
  Year ended December 312004
    
    
    2005£000
    
    
    £000Depreciation of property, plant and equipment (including assets under
finance leases)
    
    
    2,327
    
    
    
    921Profit (loss) on disposal of fixed assets (excluding exceptional profit)
    
    
    
    
    
    
    12Amortisation of intangible assets
    
    
    2,664
    
    
    
    3,683Restructuring costs
    
    
    1,493
    
    
    
    102Operating lease rentals:Property
    
    
    1,974
    
    
    
    1,416Plant, machinery and vehicles
    
    
    99
    
    
    
    50Auditors remuneration:Audit fees
    
    
    122
    
    
    
    166Other services
    
    
    203
    
    
    
    259325
    
    
    
    425One-off charges:Restructuring costs
    
    
    1,493
    
    
    
    102
   (g) Selling, general and administrative expenses
 Year ended December 312004
    
    
    2005£000
    
    
    £000Other
    
    
    11,321
    
    
    
    9,083Provision for vacant lease
    
    
    4,401
    
    
    
    29Goodwill impairment
    
    
    
    
    
    
    6,371Total administrative expenses
    
    
    15,722
    
    
    
    15,483
 (h) Operating result by activity
  F - 17




---



##### Table of Contents



Geographical segments
  Year ended December 31, 2004
    
    

Year ended December 31, 2005UK
    
    
    North America
    
    
    Total
    
    
    UK
    
    
    North America
    
    
    TotalPrimary reporting format - geographic
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Revenue
    
    
    15,195
    
    
    
    
    
    
    
    15,195
    
    
    
    14,131
    
    
    
    
    
    
    
    14,131Segmental operating loss
    
    
    (27,523
    )
    
    
    
    
    
    
    (27,523
    )
    
    
    (32,656
    )
    
    
    (178
    )
    
    
    (32,834
    )Interest receivable and similar income
    
    
    2,933
    
    
    
    
    
    
    
    2,933
    
    
    
    3,891
    
    
    
    1
    
    
    
    3,892Interest payable and similar charges
    
    
    (2,821
    )
    
    
    
    
    
    
    (2,821
    )
    
    
    (5,488
    )
    
    
    (2
    )
    
    
    (5,490
    )Loss on ordinary activities before taxation
    
    
    (27,411
    )
    
    
    
    
    
    
    (27,411
    )
    
    
    (34,253
    )
    
    
    (179
    )
    
    
    (34,432
    )Tax credit on loss on ordinary activities
    
    
    1,758
    
    
    
    
    
    
    
    1,758
    
    
    
    1,615
    
    
    
    (31
    )
    
    
    1,584Loss for the period
    
    
    (25,653
    )
    
    
    
    
    
    
    (25,653
    )
    
    
    (32,638
    )
    
    
    (210
    )
    
    
    (32,848
    )
  Year ended December 31, 2004
    
    

Year ended December 31, 2005UK
    
    
    North America
    
    
    Total
    
    
    UK
    
    
    North America
    
    
    TotalPrimary reporting format - geographic
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Depreciation
    
    
    2,327
    
    
    
    
    
    
    
    2,327
    
    
    
    908
    
    
    
    13
    
    
    
    921Loss on disposal of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Amortisation of intangible assets
    
    
    2,664
    
    
    
    
    
    
    
    2,664
    
    
    
    3,683
    
    
    
    
    
    
    
    3,683Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,371
    
    
    
    
    
    
    
    6,371Employee share-based payments
    
    
    728
    
    
    
    
    
    
    
    728
    
    
    
    1,215
    
    
    
    3
    
    
    
    1,218
  Year ended December 31, 2004
    
    

Year ended December 31, 2005UK
    
    
    North America
    
    
    Total
    
    
    UK
    
    
    North America
    
    
    TotalPrimary reporting format - geographic
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Segmental assets
    
    
    104,646
    
    
    
    
    
    
    
    104,646
    
    
    
    179,093
    
    
    
    5,674
    
    
    
    184,767Segmental liabilities
    
    
    (86,749
    )
    
    
    
    
    
    
    (86,749
    )
    
    
    (95,959
    )
    
    
    (5,948
    )
    
    
    (101,907
    )Capital expenditure
    
    
    501
    
    
    
    
    
    
    
    501
    
    
    
    710
    
    
    
    537
    
    
    
    1,247Purchase of intangible
    
    
    21,520
    
    
    
    
    
    
    
    21,520
    
    
    
    55,117
    
    
    
    
    
    
    
    55,117
 Business segments
  F - 18




---



##### Table of Contents



5. Interest
 Year ended December 312004
    
    
    2005£000
    
    
    £000Interest receivable and similar incomeInterest on cash, cash equivalents and held-to-maturity assets
    
    
    664
    
    
    
    1,997Exchange gains on other payable
    
    
    468
    
    
    
    Exchange gains on long term loan
    
    
    1,266
    
    
    
    Exchange gains on other receivable
    
    
    
    
    
    
    1,320Unwinding of discount on other receivable
    
    
    529
    
    
    
    531Other interest
    
    
    6
    
    
    
    442,933
    
    
    
    3,892Interest payable and similar chargesLoans repayable wholly or partly within five years
    
    
    866
    
    
    
    1,489Finance leases
    
    
    107
    
    
    
    4Exchange loss on other receivable
    
    
    686
    
    
    
    Exchange loss on long term loan
    
    
    
    
    
    
    2,987Exchange loss on other payable
    
    
    
    
    
    
    429Exchange loss on deferred consideration
    
    
    
    
    
    
    257Unwinding of discount on deferred consideration on purchase of intangible assets
    
    
    519
    
    
    
    Unwinding of discount on royalty buy-out from GSK
    
    
    571
    
    
    
    94Unwinding of discount on provision
    
    
    
    
    
    
    226Other interest payable
    
    
    72
    
    
    
    42,821
    
    
    
    5,490Net finance (charge)/ credit
    
    
    112
    
    
    
    (1,598
    )
 6. Taxation
 Analysis of tax credit in the period
 Year ended December 312004
    
    
    2005£000
    
    
    £000Research and development tax credits
    
    
    1,439
    
    
    
    1,865Prior year adjustments
    
    
    334
    
    
    
    (250
    )Withholding tax
    
    
    (15
    )
    
    
    Overseas corporation tax
    
    
    
    
    
    
    (31
    )1,758
    
    
    
    1,584
  Year ended December 312004
    
    
    2005£000
    
    
    £000Factors affecting the tax charge for the periodLoss before tax at 30 per cent
    
    
    (9,291
    )
    
    
    (10,330
    )Expenses not deductible for tax purposes
    
    
    725
    
    
    
    2,500Goodwill on consolidation
    
    
    1,320
    
    
    
    Movement on deferred tax asset not recognised
    
    
    5,976
    
    
    
    5,970Research and development tax credit received at 24 per cent of losses compared with 30
per cent tax rate
    
    
    488
    
    
    
    466150 per cent deduction for research and development expenditure not surrendered for cash
    
    
    (657
    )
    
    
    (440
    )Prior-year adjustments
    
    
    (334
    )
    
    
    250Withholding tax
    
    
    15
    
    
    
    (1,758
    )
    
    
    (1,584
    )
 F - 19




---



##### Table of Contents



Tax effect of timing differences
 Year ended December 312004
    
    
    2005£000
    
    
    £000Losses
    
    
    (124,428
    )
    
    
    (125,531
    )Excess of depreciation over tax allowances
    
    
    (5,115
    )
    
    
    (11,273
    )Short term timing differences
    
    
    (2,598
    )
    
    
    (2,661
    )Tax losses
    
    
    (132,141
    )
    
    
    (139,465
    )
  7 Loss per share
   Year ended December 312004
    
    
    2005Attributable loss (£000)
    
    
    25,653
    
    
    
    32,848Weighted average number of shares in issue (000)
    
    
    147,388
    
    
    
    202,174Loss per share (basic and diluted)
    
    
    (17.4
    )p
    
    
    (16.3
    )p
 8. Dividends
  F - 20




---



##### Table of Contents



9. Property, plant and equipment
 Shortleasehold
    
    
    Plant and
    
    
    Fixturesbuildings
    
    
    machinery
    
    
    and fittings
    
    
    Vehicles
    
    
    Total£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000GroupCostAt January 1, 2005
    
    
    4,096
    
    
    
    7,004
    
    
    
    772
    
    
    
    
    
    
    
    11,872Additions
    
    
    64
    
    
    
    425
    
    
    
    100
    
    
    
    137
    
    
    
    726Acquisitions
    
    
    9
    
    
    
    491
    
    
    
    21
    
    
    
    
    
    
    
    521Disposals
    
    
    (2
    )
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    (252
    )At December 31, 2005
    
    
    4,167
    
    
    
    7,670
    
    
    
    893
    
    
    
    137
    
    
    
    12,867DepreciationAt January 1, 2005
    
    
    (3,342
    )
    
    
    (6,209
    )
    
    
    (725
    )
    
    
    
    
    
    
    (10,276
    )Charge for the year
    
    
    (286
    )
    
    
    (600
    )
    
    
    (33
    )
    
    
    (2
    )
    
    
    (921
    )Disposals
    
    
    2
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    240At December 31, 2005
    
    
    (3,626
    )
    
    
    (6,571
    )
    
    
    (758
    )
    
    
    (2
    )
    
    
    (10,957
    )Net book value at December 31, 2005
    
    
    541
    
    
    
    1,099
    
    
    
    135
    
    
    
    135
    
    
    
    1,910CostAt January 1, 2004
    
    
    3,804
    
    
    
    8,105
    
    
    
    820
    
    
    
    
    
    
    
    12,729Additions
    
    
    292
    
    
    
    209
    
    
    
    
    
    
    
    
    
    
    
    501Disposals
    
    
    
    
    
    
    (1,310
    )
    
    
    (48
    )
    
    
    
    
    
    
    (1,358
    )At December 31, 2004
    
    
    4,096
    
    
    
    7,004
    
    
    
    772
    
    
    
    
    
    
    
    11,872DepreciationAt January 1, 2004
    
    
    (2,034
    )
    
    
    (6,561
    )
    
    
    (693
    )
    
    
    
    
    
    
    (9,288
    )Charge for the year
    
    
    (1,308
    )
    
    
    (939
    )
    
    
    (80
    )
    
    
    
    
    
    
    (2,327
    )Disposals
    
    
    
    
    
    
    1,291
    
    
    
    48
    
    
    
    
    
    
    
    1,339At December 31, 2004
    
    
    (3,342
    )
    
    
    (6,209
    )
    
    
    (725
    )
    
    
    
    
    
    
    (10,276
    )Net book value at December 31, 2004
    
    
    754
    
    
    
    795
    
    
    
    47
    
    
    
    
    
    
    
    1,596
  Plant and machineryDecember 312004
    
    
    2005£000
    
    
    £000Cost
    
    
    600
    
    
    
    137Aggregate depreciation
    
    
    (587
    )
    
    
    (2
    )Net book value
    
    
    13
    
    
    
    135
   December 31, 2004
    
    
    December 31, 2005£000
    
    
    £000Contracted for but not provided
    
    
    15
    
    
    
    232
 F - 21




---



##### Table of Contents



10. Goodwill
 Year ended December 31, 2005£000CostAt January 1, 2005
    
    
    17,223Additions through business combinations
    
    
    3,208At December 31, 2005
    
    
    20,431Aggregate impairmentAt January 1, 2005
    
    
    9,209Impairment charge for the year
    
    
    6,371At December 31, 2005
    
    
    15,580Net book value at December 31, 2005
    
    
    4,851
 Year ended December 31, 2004£000CostAt January 1, 2004 and December 2004
    
    
    17,223Aggregate impairmentAt January 1, 2004 and December 2004
    
    
    9,209Net book value at December 31, 2005
    
    
    8,014
     F - 22




---



##### Table of Contents



11. Intangible Assets
 Year ended December 31, 2005Assets in use
    
    
    Assets not yet in use
    
    
    Total£000
    
    
    £000
    
    
    £000CostAt January 1, 2005
    
    
    37,408
    
    
    
    600
    
    
    
    38,008Additions through business combinations
    
    
    
    
    
    
    41,327
    
    
    
    41,327Additions separately acquired
    
    
    12,992
    
    
    
    798
    
    
    
    13,790Disposals
    
    
    
    
    
    
    (300
    )
    
    
    (300
    )At December 31, 2005
    
    
    50,400
    
    
    
    42,425
    
    
    
    92,825Aggregate amortisationAt January 1, 2005
    
    
    4,797
    
    
    
    
    
    
    
    4,797Charge for the period
    
    
    3,683
    
    
    
    
    
    
    
    3,683At December 31, 2005
    
    
    8,480
    
    
    
    
    
    
    
    8,480Net book value at December 31, 2005
    
    
    41,920
    
    
    
    42,425
    
    
    
    84,345
 Year ended December 31, 2004Assets in use
    
    
    Assets not yet in use
    
    
    Total£000
    
    
    £000
    
    
    £000CostAt January 1, 2004
    
    
    16,188
    
    
    
    300
    
    
    
    16,488Additions separately acquired
    
    
    21,220
    
    
    
    300
    
    
    
    21,520At December 31, 2004
    
    
    37,408
    
    
    
    600
    
    
    
    38,008Aggregate amortisationAt January 1, 2004
    
    
    2,133
    
    
    
    
    
    
    
    2,133Charge for the period
    
    
    2,664
    
    
    
    
    
    
    
    2,664At December 31, 2004
    
    
    4,797
    
    
    
    
    
    
    
    4,797Net book value at December 31, 2004
    
    
    32,611
    
    
    
    600
    
    
    
    33,211
    Additions through business combinations
    
    £000V3381
    
    
    16,084V1512
    
    
    15,462V1003
    
    
    9,78141,327
 Additions separately acquired
    
    £000Pin1
    
    
    631Apokyn®
    
    
    12,992Continuous sub-cutaneous infusion of apomorphine
    
    
    16713,790
  F - 23




---



##### Table of Contents



12. Available-for-sale financial assets
 Quoted companiesDecember 31, 2004
    
    
    December 31, 2005£000
    
    
    £000At January 1
    
    
    83
    
    
    
    680Revaluation (deficit)/surplus transfer to equity
    
    
    597
    
    
    
    (79
    )At December 31
    
    
    680
    
    
    
    601
  December 312004
    
    
    2005£000
    
    
    £000Listed securities- Equity securities  Australia
    
    
    45
    
    
    
    47- Equity securities  United States
    
    
    635
    
    
    
    554680
    
    
    
    601
   13. Inventories
 December 31Group
    
    2004
    
    
    2005£000
    
    
    £000Raw materials
    
    
    
    
    
    
    466Finished goods
    
    
    49
    
    
    
    28649
    
    
    
    752
 14. Trade and other receivables
 December 312004
    
    
    2005£000
    
    
    £000Other receivables
    
    
    7,418
    
    
    
    Non current trade and other receivables
    
    
    7,418
    
    
    
    Trade receivables
    
    
    860
    
    
    
    2,292Interest receivable
    
    
    122
    
    
    
    524Research and development tax credits
    
    
    6,433
    
    
    
    3,996Other receivables
    
    
    8,263
    
    
    
    12,969Prepayments and accrued income
    
    
    4,677
    
    
    
    4,232Current trade and other receivables
    
    
    20,355
    
    
    
    24,013Total trade and other receivables
    
    
    27,773
    
    
    
    24,013
   F - 24




---



##### Table of Contents



15. Held-to-maturity financial assets
  16. Cash and cash equivalents
 December 312004
    
    
    2005£000
    
    
    £000Cash and cash equivalentsCash at bank and in hand
    
    
    1,309
    
    
    
    1,812Short-term bank deposits
    
    
    17,014
    
    
    
    38,43118,323
    
    
    
    40,243
 17. Borrowings
 December 312004
    
    
    2005£000
    
    
    £000US dollar secured loan
    
    
    26,364
    
    
    
    30,839Obligations under finance leases
    
    
    
    
    
    
    99Non-current borrowings
    
    
    26,364
    
    
    
    30,938Obligations under finance leases
    
    
    18
    
    
    
    33Current borrowings
    
    
    18
    
    
    
    33Total borrowings
    
    
    26,382
    
    
    
    30,971Borrowings included above are repayable as follows:Under one year
    
    
    18
    
    
    
    33Over one and under two years
    
    
    
    
    
    
    Over two and under five years
    
    
    26,364
    
    
    
    30,938Beyond 5 years, by instalments
    
    
    
    
    
    
    26,382
    
    
    
    30,971
   December 312004
    
    
    2005£000
    
    
    £000Not later than one year
    
    
    13
    
    
    
    28Later than one year but not more than five
    
    
    
    
    
    
    More than five years
    
    
    
    
    
    
    Future finance charges on finance leases
    
    
    13
    
    
    
    28Present value of finance lease liabilities
    
    
    18
    
    
    
    132
 F - 25




---



##### Table of Contents



18. Trade and other payables
 December 312004
    
    
    2005£000
    
    
    £000Royalty buy out from GSK (a)
    
    
    2,467
    
    
    
    2,788Deferred consideration
    
    
    
    
    
    
    4,624Non current trade and other liabilities
    
    
    2,467
    
    
    
    7,412Trade payables
    
    
    3,134
    
    
    
    3,975Taxation and social security payable
    
    
    226
    
    
    
    301Other payables (b)
    
    
    72
    
    
    
    3,626Accruals
    
    
    5,227
    
    
    
    7,825Royalty buy out from GSK (a)
    
    
    2,578
    
    
    
    Deferred consideration of acquisitions
    
    
    
    
    
    
    7,244Current trade and other liabilities
    
    
    11,237
    
    
    
    22,971Total trade and other liabilities
    
    
    13,704
    
    
    
    30,383
 
 a)
    
    The royalty payment to GlaxoSmithKline (GSK) relates to the fair value of payments
conditionally due under the agreement of December 2000 to buy out royalties due to GSK on
sales of Frova®. The Group is committed to making one further annual payment of $5 million,
the first having been made in September 2002. A fifth payment of $5 million is due 90 days
after cumulative global sales exceed $300 million. During 2005, an exchange loss of £0.4
million and an implicit interest charge of £0.1 million have been recognised in the income
statement. The weighted average period cannot be calculated due to the payments being
conditional on future events. The directors estimate that this will not be before 2007.b)
    
    Included within other liabilities (and other receivables) is £3,592,000 (CAD$7,204,000)
relating to tax-assisted finance that was completed by Cita NeuroPharmaceuticals Inc. on
December 23, 2004. This arrangement unwound on January 6, 2006. Also included within other
liabilities is £34,000 (2004: £58,000) in relation to money-purchase pension contributions
payable.
 19. Deferred income
  20. Provisions
 Restructuring
    
    
    Onerous leaseProvision
    
    
    provision
    
    
    Returns and rebates
    
    
    Total£000
    
    
    £000
    
    
    £000
    
    
    £000GroupAt January 1, 2005
    
    
    130
    
    
    
    7,438
    
    
    
    2,962
    
    
    
    10,530On acquisition
    
    
    324
    
    
    
    
    
    
    
    113
    
    
    
    437Utilised during the year
    
    
    (130
    )
    
    
    (1,229
    )
    
    
    (1,113
    )
    
    
    (2,472
    )Amortisation of discount
    
    
    
    
    
    
    226
    
    
    
    
    
    
    
    226Movements on exchange
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    228At December 31, 2005
    
    
    324
    
    
    
    6,435
    
    
    
    2,190
    
    
    
    8,949
 F - 26




---



##### Table of Contents



December 312004
    
    
    2005£000
    
    
    £000Current
    
    
    3,653
    
    
    
    4,169Non-Current
    
    
    6,877
    
    
    
    4,78010,530
    
    
    
    8,949
 Restructuring provision
  Onerous lease provision
   Returns and rebates provision
   21. Share capital
 December 31, 2004
    
    
    December 31, 2005Number
    
    
    £000
    
    
    Number
    
    
    £000AuthorisedNew Ordinary Shares of 5 pence each
    
    
    285,858,071
    
    
    
    14,293
    
    
    
    450,858,071
    
    
    
    22,543Deferred shares of 95p each
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    33,375,891
    
    
    
    31,70746,000
    
    
    
    
    
    
    
    54,250Allotted, called up and fully paidNew Ordinary Shares of 5 pence each
    
    
    155,700,385
    
    
    
    7,785
    
    
    
    311,463,549
    
    
    
    15,573Deferred shares of 95p each
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    33,375,891
    
    
    
    31,70739,492
    
    
    
    
    
    
    
    47,280
 F - 27




---



##### Table of Contents



Allotted, called up
    
    
    
    
    
    
    Allotted, called upAuthorised
    
    
    and fully paid
    
    
    Authorised
    
    
    and fully paidNumber of shares
    
    
    Number of shares
    
    
    £000
    
    
    £000At January 1 2005Equity capital:Ordinary shares of 5p each
    
    
    285,858,071
    
    
    
    155,700,385
    
    
    
    14,293
    
    
    
    7,785Deferred shares of 95p each
    
    
    33,375,891
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    31,707Total share capital at
January 1, 2005
    
    
    319,233,962
    
    
    
    189,076,276
    
    
    
    46,000
    
    
    
    39,492AllotmentsEquity capital:Ordinary shares of 5p each
    
    
    165,000,000
    
    
    
    155,763,164
    
    
    
    8,250
    
    
    
    7,788Total allotments for the
year ended December 31,
2005
    
    
    165,000,000
    
    
    
    155,763,164
    
    
    
    8,250
    
    
    
    7,788At December 31, 2005Equity capital:Ordinary shares of 5p each
    
    
    450,858,071
    
    
    
    311,463,549
    
    
    
    22,543
    
    
    
    15,573Deferred shares of 95p each
    
    
    33,375,891
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    31,707Total share capital at
December 31, 2005
    
    
    484,233,962
    
    
    
    344,839,440
    
    
    
    54,250
    
    
    
    47,280
 Allotments
    Rights and restrictions attaching to the Ordinary shares.
   Income
  Capital
  Attendance and voting at general meetings
  Form
  F - 28




---



##### Table of Contents



Class rights
  22. Share-based payments
 Potential issues of ordinary shares
  Exercise price
    
    
    
    
    2004
    
    
    2005Year of grant
    
    £
    
    
    Exercise period
    
    Number
    
    
    Number1992 Scheme20 October 1995
    
    
    16.39
    
    
    October 1998  October 2005
    
    
    152
    
    
    
    Executive Scheme16 December 1996
    
    
    42.00
    
    
    December 2000-December 2006
    
    
    2,460
    
    
    
    1,20216 December 1996
    
    
    42.00
    
    
    December 2001-December 2006
    
    
    1,579
    
    
    
    1,20215 December 1997
    
    
    20.30
    
    
    December 2000-December 2007
    
    
    4,647
    
    
    
    3,72415 December 1997
    
    
    20.30
    
    
    December 2000-December 2007
    
    
    4,001
    
    
    
    3,07830 September 1998
    
    
    8.00
    
    
    September 2003-September 2008
    
    
    8,750
    
    
    
    6,25030 September 1998
    
    
    8.00
    
    
    September 2001-September 2008
    
    
    8,750
    
    
    
    6,2501July 1999
    
    
    4.40
    
    
    July 2002  July 2009
    
    
    15,000
    
    
    
    12,5001July 1999
    
    
    4.40
    
    
    July 2004  July 2009
    
    
    15,000
    
    
    
    12,50026 January 2000
    
    
    6.00
    
    
    January 2003  January 2010
    
    
    7,500
    
    
    
    26 January 2000
    
    
    6.00
    
    
    January 2005  January 2010
    
    
    5,000
    
    
    
    Bonus Scheme31 July 1998
    
    
    1.00
    
    
    July 1998  July 2005
    
    
    1,608
    
    
    
    31 July 1998
    
    
    1.00
    
    
    July 2000  July 2005
    
    
    3,537
    
    
    
    1 July 1999
    
    
    1.00
    
    
    July 2001  July 2006
    
    
    719
    
    
    
    45726 January 2000
    
    
    1.00
    
    
    January 2002  January 2007
    
    
    10,000
    
    
    
    17 July 2000
    
    
    1.00
    
    
    July 2002  July 2007
    
    
    11,000
    
    
    
    4,00013 December 2000
    
    
    1.00
    
    
    December 2002  December 2007
    
    
    2,500
    
    
    
    13 February 2001
    
    
    1.00
    
    
    February 2003  February 2008
    
    
    2,500
    
    
    
    6 January 2003
    
    
    1.00
    
    
    January 2005  January 2010
    
    
    12,500
    
    
    
    Option Deed23 April 2003
    
    
    1.00
    
    
    April 2003  April 2013
    
    
    2,670,071
    
    
    
    2,670,071Share Option Plan23 April 2003
    
    
    0.59
    
    
    April 2006  April 2013
    
    
    1,982,900
    
    
    
    1,982,9003 October 2003
    
    
    0.835
    
    
    October 2006  October 2013
    
    
    2,799,488
    
    
    
    2,166,13830 September 2004
    
    
    0.88
    
    
    September 2007  September 2014
    
    
    378,000
    
    
    
    372,00029 October 2004
    
    
    0.835
    
    
    October 2007 October 2014
    
    
    618,922
    
    
    
    618,92213 April 2005
    
    
    0.6925
    
    
    April 2008- April 2015
    
    
    
    
    
    
    3,975,39521 December 2005
    
    
    0.6275
    
    
    December 2008  December 2015
    
    
    
    
    
    
    1,194,000SAYE Plan29 October
    
    
    0.71
    
    
    December 2007  June 2008
    
    
    482,543
    
    
    
    473,469
 F - 29




---



##### Table of Contents



Number ofShares granted but
    
    
    Share price on
    
    
    Fair value (% ofnot vested on
    
    
    grant date
    
    
    share price on
    
    
    Fair valueAward
    
    Grant date
    
    January 1, 2005
    
    
    £
    
    
    grant date)
    
    
    £Bonus Scheme
    
    6 January 2003
    
    
    12,500
    
    
    
    0.85
    
    
    
    65.8
    %
    
    
    6,991Option deed
    
    23 April 2003
    
    
    2,670,071
    
    
    
    0.59
    
    
    
    59.2
    %
    
    
    932,602Share option plan
    
    23 April 2003
    
    
    1,982,900
    
    
    
    0.59
    
    
    
    53.4
    %
    
    
    624,732Share option plan
    
    3 October 2003
    
    
    2,116,138
    
    
    
    0.835
    
    
    
    53.3
    %
    
    
    941,798Share option plan
    
    30 September 2004
    
    
    378,000
    
    
    
    0.88
    
    
    
    53.5
    %
    
    
    177,692Share option plan
    
    29 October 2004
    
    
    618,922
    
    
    
    0.835
    
    
    
    53.2
    %
    
    
    274,938Share option plan
    
    13 April 2005
    
    
    3,990,395
    
    
    
    0.6925
    
    
    
    52.4
    %
    
    
    1,447,995Share option plan
    
    21 December 2005
    
    
    1,194,000
    
    
    
    0.6275
    
    
    
    49.5
    %
    
    
    370,871SAYE plan
    
    29 October 2004
    
    
    482,543
    
    
    
    0.835
    
    
    
    60.9
    %
    
    
    245,380
 Expected dividend
    
    
    
    
    
    
    
    
    
    
    Performanceyield
    
    
    Expected volatility
    
    
    Risk free rate
    
    
    conditionAward
    
    Grant date
    
    Expected term
    
    
    (note (b))
    
    
    (note (c))
    
    
    (note (d))
    
    
    (note (e))Bonus Scheme
    
    6 January 2003
    
    6 years
    
    
    0
    %
    
    
    75
    %
    
    
    4.31
    %
    
    NoneOption deed
    
    23 April 2003
    
    6 years
    
    
    0
    %
    
    
    76
    %
    
    
    4.17
    %
    
    MarketShare option plan
    
    23 April 2003
    
    See note (a) below
    
    
    0
    %
    
    
    76
    %
    
    
    4.17
    %
    
    MarketShare option plan
    
    3 October 2003
    
    See note (a) below
    
    
    0
    %
    
    
    75
    %
    
    
    4.60
    %
    
    MarketShare option plan
    
    30 September 2004
    
    See note (a) below
    
    
    0
    %
    
    
    76
    %
    
    
    4.78
    %
    
    MarketShare option plan
    
    29 October 2004
    
    See note (a) below
    
    
    0
    %
    
    
    75
    %
    
    
    4.68
    %
    
    MarketShare option plan
    
    13 April 2005
    
    See note (a) below
    
    
    0
    %
    
    
    73
    %
    
    
    4.65
    %
    
    MarketShare option plan
    
    21 December 2005
    
    See note (a) below
    
    
    0
    %
    
    
    68.4
    %
    
    
    4.25
    %
    
    MarketSAYE plan
    
    29 October 2004
    
    See note (a) below
    
    
    0
    %
    
    
    82
    %
    
    
    4.58
    %
    
    Non- market
 
 a)   i)
    
    5 per cent of participants exercise per annum in years
one to ten, providing that the options are in the
money (irrespective of the level of gain) to allow for
good leavers in the first three years and all other
leavers in subsequent years. The performance test must
have been satisfied. If the test has not been satisfied
at the date of leaving the awards lapse.
 ii)
    
    40 per cent of participants exercise after three years
if a gain of 30 per cent is available. If this gain is
not available these individuals refrain from exercising
until such a gain can be made.
 iii)
    
    25 per cent of the remainder exercise in years four,
five and six and so on using a reducing balance
methodology providing that a gain of 20 per cent is
available. As with the initial 40 per cent of
individuals, if the required gain is not possible, these
individuals refrain from exercising until such a gain
can be made.
 iv)
    
    Any remaining options are exercised at maturity
providing they are in the money. Any awards that are
underwater therefore lapse at maturity.
  b)
    
    The dividend yield of 0 per cent in all cases reflects the absence of dividends and of a
clear dividend policy statement at the relevant dates of grant.
 c)
    
    Expected volatility is a measure of the amount by which a share price is expected to
fluctuate during a period. A standard approach to calculating volatility has been used based
on a calculation of the standard deviation of the natural logarithm of share price movements.
 F - 30




---



##### Table of Contents



d)
    
    UK Gilt rates prevalent on the grant date and commensurate with the term of each award (six
years for the share option plan and deed and three years for the SAYE).
 e)
    
    The share price performance indicators attached to the option deed and share option plan are
market conditions dependent on the market price of the Companys ordinary shares. Those
attached to the SAYE Plan are not.
  2004
    
    
    2005Weighted average
    
    


    
    
    Weighted averageexercise price
    
    
    
    
    
    
    exercise priceNumber
    
    
    £
    
    
    Number
    
    
    £Outstanding at 1 January
    
    
    10,025,529
    
    
    
    1.07
    
    
    
    9,049,127
    
    
    
    0.895Granted
    
    
    1,479,465
    
    
    
    0.81
    
    
    
    5,195,395
    
    
    
    0.68Forfeited
    
    
    (1,737,927
    )
    
    
    2.00
    
    
    
    (740,464
    )
    
    
    1.14Exercised
    
    
    (717,940
    )
    
    
    0.585
    
    
    
    
    
    
    
    Outstanding at 31 December
    
    
    9,049,127
    
    
    
    0.895
    
    
    
    13,504,058
    
    
    
    0.80Exercisable at 31 December
    
    
    538,053
    
    
    
    2.02
    
    
    
    51,163
    
    
    
    8.86
  Weighted average
    
    
    
    
    
    
    Weighted average
    
    
    Weighted averageDecember 31, 2005
    
    exercise price
    
    
    
    
    
    
    remaining life
    
    
    remaining lifeRange of exercise prices
    
    £
    
    
    Number of shares
    
    
    Expected years
    
    
    Contractual years£0.585 - £0.88
    
    
    0.71
    
    
    
    10,782,824
    
    
    
    4.33
    
    
    
    8.33£1.00
    
    
    1.00
    
    
    
    2,674,528
    
    
    
    3.25
    
    
    
    7.25£4.40 - £42.00
    
    
    9.61
    
    
    
    46,706
    
    
    
    2.92
    
    
    
    2.92
 Weighted average
    
    
    
    
    
    
    Weighted average
    
    
    Weighted averageDecember 31, 2004
    
    exercise price
    
    
    
    
    
    
    remaining life
    
    
    remaining lifeRange of exercise prices
    
    £
    
    
    Number of shares
    
    
    Expected years
    
    
    Contractual years£0.585 - £0.88
    
    
    0.75
    
    
    
    6,261,853
    
    
    
    4.34
    
    
    
    8.34£1.00
    
    
    1.00
    
    
    
    2,714,435
    
    
    
    4.17
    
    
    
    8.17£4.40 - £42.00
    
    
    9.54
    
    
    
    72,839
    
    
    
    4.05
    
    
    
    4.05
  F - 31




---



##### Table of Contents



23. Other reserves
 Merger
    
    
    Other
    
    
    Revaluation
    
    
    Options
    
    
    Translation
    
    
    Shares toreserve
    
    
    reserve
    
    
    reserve
    
    
    reserve
    
    
    reserve
    
    
    be issued
    
    
    Total£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000At January 1, 2004
    
    
    101,985
    
    
    
    50,776
    
    
    
    
    
    
    
    331
    
    
    
    
    
    
    
    
    
    
    
    153,092Revaluation of assets
available for sale
    
    
    
    
    
    
    
    
    
    
    597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    597Equity share options charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    
    
    
    
    
    
    
    
    728At December 31, 2004
    
    
    101,985
    
    
    
    50,776
    
    
    
    597
    
    
    
    1,059
    
    
    
    
    
    
    
    
    
    
    
    154,417Revaluation of assets
available for sale
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )Equity share options charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,217
    
    
    
    
    
    
    
    
    
    
    
    1,217Exchange loss on
translation of overseas
subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )Shares to be issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,034
    
    
    
    1,034At December 31, 2005
    
    
    101,985
    
    
    
    50,776
    
    
    
    518
    
    
    
    2,276
    
    
    
    (31
    )
    
    
    1,034
    
    
    
    156,558
       24. Shareholders equity
   F - 32




---



##### Table of Contents



25. Commitments and contingencies
 (a) Operating lease commitments
  Vehicles,
    
    
    
    
    
    
    Vehicles,plant and
    
    
    
    
    
    
    plant andProperty
    
    
    equipment
    
    
    Property
    
    
    equipment2004
    
    
    2004
    
    
    2005
    
    
    2005£000
    
    
    £000
    
    
    £000
    
    
    £000Commitments under non-cancellable operating leases:Within one year
    
    
    2,290
    
    
    
    67
    
    
    
    2,461
    
    
    
    50Later than one year and less than five years
    
    
    9,162
    
    
    
    147
    
    
    
    9,598
    
    
    
    90After five years
    
    
    18,161
    
    
    
    
    
    
    
    15,742
    
    
    
    
  (b) Litigation
  (c) Financial commitments and contingencies
  26. Financial instruments related disclosure
   Interest rate risk
  F - 33




---



##### Table of Contents



Liquidity risk
  Foreign currency risk
   Credit risk
    Interest rate risk profile
  December 31, 2004
    
    
    
    
    
    
    December 31,2005Floating
    
    
    Fixed
    
    
    
    
    
    
    Floating
    
    
    FixedRate
    
    
    Rate
    
    
    Total
    
    
    Rate
    
    
    Rate
    
    
    Total£000
    
    
    £000
    
    
    £000l
    
    
    £000
    
    
    £000
    
    
    £000Financial liabilitiesUS dollar secured loan (i)
    
    
    
    
    
    
    26,711
    
    
    
    26,711
    
    
    
    
    
    
    
    31,112
    
    
    
    31,112Finance leases (ii)
    
    
    
    
    
    
    18
    
    
    
    18
    
    
    
    132
    
    
    
    
    
    
    
    132
    
    
    
    26,729
    
    
    
    26,729
    
    
    
    132
    
    
    
    31,112
    
    
    
    31,244Financial assetsSterling cash at bank and in hand
    
    
    (83
    )
    
    
    
    
    
    
    (83
    )
    
    
    1,027
    
    
    
    
    
    
    
    1,027Euro cash at bank and in hand
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    48
    
    
    
    
    
    
    
    48US dollar cash at bank and in hand
    
    
    1,387
    
    
    
    
    
    
    
    1,387
    
    
    
    131
    
    
    
    
    
    
    
    131Canadian dollar cash at bank and in hand
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606
    
    
    
    
    
    
    
    606Sterling short-term bank deposits (iii) (iv) (v)
    
    
    13,295
    
    
    
    
    
    
    
    13,295
    
    
    
    18,822
    
    
    
    11,092
    
    
    
    29,914Euro short-term investments (iii) (iv)
    
    
    1,264
    
    
    
    
    
    
    
    1,264
    
    
    
    877
    
    
    
    
    
    
    
    877US dollar short-term bank deposits (iii) (iv)
    
    
    2,455
    
    
    
    
    
    
    
    2,455
    
    
    
    7,639
    
    
    
    
    
    
    
    7,639Sterling heldto-maturity financial assets (vi)
    
    
    
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    
    
    
    
    27,761
    
    
    
    27,761US dollar held-to-maturity financial assets (vii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    292
    
    
    
    29218,323
    
    
    
    15,000
    
    
    
    33,323
    
    
    
    29,150
    
    
    
    39,145
    
    
    
    68,295
 F - 34




---



##### Table of Contents



i)
    
    The US dollar secured loan is for a term of five years from August 31, 2004, and is secured
against all royalty and milestone income receivable by Vernalis in respect of the licence deal
with Endo. The weighted average interest rate is 5 per cent fixed for the term of the loan.ii)
    
    At December 31, 2004 the finance leases were all in sterling at
fixed rates of interest. The weighted average interest rate and
period remaining on these liabilities at December 31, 2004 was 9.2
per cent and two months. At December 31, 2005 the finance leases
were all in US dollars at variable rates of interest. The weighted
average interest rate and period remaining on these liabilities at
December 31, 2005 was 5.26 per cent and four years.iii)
    
    Short-term bank deposits are used to maintain a positive bank balance
in sterling, US dollar and euro.iv)
    
    The floating-rate short-term bank deposits are invested in a money
market managed fund with a weighted average maturity of less than 90
days by reference to seven-day LIBID and three-month LIBID days and
are repayable within 48 hours.v)
    
    The fixed-rate short-term bank deposits are placed with a range of banks and building
societies at fixed terms with a weighted average maturity of 75 days and a weighted average
fixed rate of 4.55 per cent at December 31, 2005.vi)
    
    The fixed-rate sterling held-to-maturity financial assets are placed with a range of banks
and building societies at fixed terms with a weighted average maturity of 225 days and a
weighted average fixed rate of 4.74 per cent at December 31, 2005.vii)
    
    The fixed-rate US dollar held-to-maturity financial assets are placed with Bank of America at
fixed terms with a weighted average maturity of 353 days and a weighted average fixed rate of
4.38 per cent at December 31, 2005.
  Borrowing facilities
  Foreign currency exposure
  Fair value of derivative financial instruments
  Fair value of non-derivative financial instruments
  F - 35




---



##### Table of Contents



27. Acquisitions
    Ionix Acquisition
    Carrying values
    
    
    Fair valuepre-acquisition
    
    
    adjustments
    
    
    Fair value£000
    
    
    £000
    
    
    £000AssetsTangible fixed assets
    
    
    759
    
    
    
    (283
    )(1)
    
    
    476Intangible fixed assets
    
    
    
    
    
    
    9,781
    (2)
    
    
    9,781Non-current assets
    
    
    759
    
    
    
    9,498
    
    
    
    10,257Trade and other receivables
    
    
    751
    
    
    
    
    
    
    
    751Cash and cash equivalents
    
    
    406
    
    
    
    
    
    
    
    406Current assets
    
    
    1,157
    
    
    
    
    
    
    
    1,157Total assets
    
    
    1,916
    
    
    
    9,498
    
    
    
    11,414LiabilitiesCurrent liabilities
    
    
    
    
    
    
    Trade and other payables
    
    
    (291
    )
    
    
    
    
    
    
    (291
    )Total liabilities
    
    
    (291
    )
    
    
    
    
    
    
    (291
    )Net assets acquired
    
    
    1,625
    
    
    
    9,498
    
    
    
    11,123Goodwill
    
    
    
    
    
    
    
    
    
    
    926Consideration
    
    
    
    
    
    
    
    
    
    
    12,049Consideration satisfied by:Shares issued
    
    
    
    
    
    
    
    
    
    
    11,080Cash
    
    
    
    
    
    
    
    
    
    
    96912,049
 
 (1)
    
    Disposal of unwanted property, plant and equipment(2)
    
    Purchase price allocation to separately identifiable intangible fixed assets
  F - 36




---



##### Table of Contents



£000Licence for V1003
    
    
    9,781
   £000Cash consideration
    
    
    969Cash acquired
    
    
    (44
    )Deposits acquired
    
    
    (362
    )563
 Acquisition of Cita
    Carrying values
    
    
    Fair valuepre-acquisition
    
    
    adjustments
    
    
    Fair value£000
    
    
    £000
    
    
    £000AssetsTangible fixed assets
    
    
    45
    
    
    
    
    
    
    
    45Intangible fixed assets
    
    
    3,443
    
    
    
    28,103
    (1)
    
    
    31,546Non-current assets
    
    
    3,488
    
    
    
    28,103
    
    
    
    31,591Trade and other receivables
    
    
    3,820
    
    
    
    
    
    
    
    3,820Cash and cash equivalents
    
    
    189
    
    
    
    
    
    
    
    189Current assets
    
    
    4,009
    
    
    
    
    
    
    
    4,009Total assets
    
    
    7,497
    
    
    
    28,103
    
    
    
    35,600LiabilitiesCurrent liabilitiesTrade and other payables
    
    
    (2,196
    )
    
    
    
    
    
    
    (2,196
    )Other payables
    
    
    (3,592
    )
    
    
    
    
    
    
    (3,592
    )Provisions
    
    
    (324
    )
    
    
    
    
    
    
    (324
    )Loan
    
    
    (1,155
    )
    
    
    (128
    )(2)
    
    
    (1,283
    )Total liabilities
    
    
    (7,267
    )
    
    
    (128
    )
    
    
    (7,395
    )Net assets acquired
    
    
    230
    
    
    
    27,975
    
    
    
    28,205Goodwill
    
    
    
    
    
    
    
    
    
    
    2,282Consideration
    
    
    
    
    
    
    
    
    
    
    30,487Consideration satisfied by:Shares
    
    
    
    
    
    
    
    
    
    
    16,688Cash
    
    
    
    
    
    
    
    
    
    
    2,732Deferred consideration
    
    
    
    
    
    
    
    
    
    
    11,06730,487
 
 (1)
    
    Purchase price allocation to separately identifiable intangible fixed assets.
 F - 37




---



##### Table of Contents



(2)
    
    Repayment of loan.
   £000IPR&D  V1512
    
    
    15,462IPR&D  V3381
    
    
    16,08431,546
   £000Cash consideration
    
    
    2,732Cash acquired
    
    
    (189
    )Loan acquired repaid at completion
    
    
    1,2833,826
  Unaudited£000Revenue
    
    
    14,131Net loss
    
    
    (39,707
    )
   28. Post balance sheet events
  29. Related party transaction
  30. Explanation of transition to IFRS
 Reconciliation of equity and loss
   F - 38




---



##### Table of Contents



a)
    
    Business combinations The Group has elected not to apply IFRS 3, Business Combinations,
retrospectively to business combinations that took place prior to the transition date.
Consequently, goodwill arising on business combinations before the transition date remains at
its previous UK GAAP carrying value at the date of transition from the UK GAAP financial
statements.b)
    
    Share-based-payment transactions The Group has adopted the exemptions in IFRS 1 which allow
a first-time adopter to apply the new standard only to share options granted after November
7, 2002, that have not vested by January 1, 2005.
 Reconciliation of equity:
 December 31
 2003
    
    
    December 31
 2004Note
    
    
    £000
    
    
    £000Net assets under UK GAAP
    
    
    
    
    
    
    33,789
    
    
    
    12,875Reversal of goodwill amortisation
    
    
    c
    
    
    
    
    
    
    
    4,398Fair value of available-for-sale investments
    
    
    d
    
    
    
    
    
    
    
    680Holiday pay accrual
    
    
    a
    
    
    
    (108
    )
    
    
    (93
    )Recognition of intangible assets
    
    
    e
    
    
    
    300
    
    
    
    600Fair value of royalty buy out from GSK
    
    
    f
    
    
    
    (51
    )
    
    
    (563
    )Net assets under IFRS
    
    
    
    
    
    
    33,930
    
    
    
    17,897
 Reconciliation of loss:
 2004Note
    
    
    £000Loss under UK GAAP
    
    
    
    
    
    
    (29,209
    )Reversal of goodwill amortisation
    
    
    c
    
    
    
    4398Investment write off
    
    
    d
    
    
    
    83Share option charge
    
    
    b
    
    
    
    (728
    )Holiday accrual
    
    
    a
    
    
    
    15Recognition of intangible asset
    
    
    e
    
    
    
    300Fair value of royalty buy out from GSK
    
    
    f
    
    
    
    (512
    )Loss under IFRS
    
    
    
    
    
    
    (25,653
    )
 F - 39




---



##### Table of Contents



Reconciliation of equity at December 31, 2003 (date of transition to IFRS):
 UK GAAP
    
    
    IFRS Effect
    
    
    IFRSNote
    
    
    £000
    
    
    £000
    
    
    £000AssetsProperty, plant and equipment
    
    
    
    
    
    
    3,441
    
    
    
    
    
    
    
    3,441Goodwill
    
    
    
    
    
    
    8,014
    
    
    
    
    
    
    
    8,014Intangible assets
    
    
    e,f
    
    
    
    14,911
    
    
    
    (556
    )
    
    
    14,355Available for sale financial assets
    
    
    
    
    
    
    83
    
    
    
    
    
    
    
    83Non current assets
    
    
    
    
    
    
    26,449
    
    
    
    (556
    )
    
    
    25,893Inventories
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    49Trade and other receivables
    
    
    
    
    
    
    10,991
    
    
    
    
    
    
    
    10,991Held-to-maturity financial assets
    
    
    
    
    
    
    8,066
    
    
    
    
    
    
    
    8,066Cash and cash equivalents
    
    
    
    
    
    
    16,148
    
    
    
    
    
    
    
    16,14835,254
    
    
    
    
    
    
    
    35,254Non-current asset held for resale
    
    
    
    
    
    
    4,067
    
    
    
    
    
    
    
    4,067Current assets
    
    
    
    
    
    
    39,321
    
    
    
    
    
    
    
    39,321Total assets
    
    
    
    
    
    
    65,770
    
    
    
    (556
    )
    
    
    65,214LiabilitiesBorrowings
    
    
    
    
    
    
    (1,215
    )
    
    
    
    
    
    
    (1,215
    )Other non-current liabilities
    
    
    f
    
    
    
    (5,605
    )
    
    
    685
    
    
    
    (4,920
    )Deferred income
    
    
    
    
    
    
    (1,299
    )
    
    
    
    
    
    
    (1,299
    )Provisions
    
    
    
    
    
    
    (2,754
    )
    
    
    
    
    
    
    (2,754
    )Non current liabilities
    
    
    
    
    
    
    (10,873
    )
    
    
    685
    
    
    
    (10,188
    )Borrowings
    
    
    
    
    
    
    (270
    )
    
    
    
    
    
    
    (270
    )Trade and other payables
    
    
    a,f
    
    
    
    (14,860
    )
    
    
    12
    
    
    
    (14,848
    )Deferred income
    
    
    
    
    
    
    (4,643
    )
    
    
    
    
    
    
    (4,643
    )Provisions
    
    
    
    
    
    
    (1,335
    )
    
    
    
    
    
    
    (1,335
    )Current liabilities
    
    
    
    
    
    
    (21,108
    )
    
    
    12
    
    
    
    (21,096
    )Total liabilities
    
    
    
    
    
    
    (31,981
    )
    
    
    697
    
    
    
    (31,284
    )Net assets
    
    
    
    
    
    
    33,789
    
    
    
    141
    
    
    
    33,930EquityShare capital
    
    
    
    
    
    
    38,813
    
    
    
    
    
    
    
    38,813Share premium
    
    
    
    
    
    
    298,226
    
    
    
    
    
    
    
    298,226Other reserves
    
    
    b
    
    
    
    152,761
    
    
    
    331
    
    
    
    153,092Retained earnings
    
    
    a,b,e,f
    
    
    
    (456,011
    )
    
    
    (190
    )
    
    
    (456,201
    )Total equity
    
    
    
    
    
    
    33,789
    
    
    
    141
    
    
    
    33,930
 F - 40




---



##### Table of Contents



Reconciliation of equity at December 31, 2004:
 UK GAAP
    
    
    IFRS Effect
    
    
    IFRSNote
    
    
    £000
    
    
    £000
    
    
    £000AssetsProperty, plant and equipment
    
    
    
    
    
    
    1,596
    
    
    
    
    
    
    
    1,596Goodwill
    
    
    c
    
    
    
    3,616
    
    
    
    4,398
    
    
    
    8,014Intangible assets
    
    
    e,f
    
    
    
    33,383
    
    
    
    (172
    )
    
    
    33,211Available-for-sale financial assets
    
    
    d
    
    
    
    
    
    
    
    680
    
    
    
    680Other receivables
    
    
    
    
    
    
    7,418
    
    
    
    
    
    
    
    7,418Non current assets
    
    
    
    
    
    
    46,013
    
    
    
    4,906
    
    
    
    50,919Inventories
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    49Trade and other receivables
    
    
    
    
    
    
    20,355
    
    
    
    
    
    
    
    20,355Held-to-maturity financial assets
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    15,000Cash and cash equivalents
    
    
    
    
    
    
    18,323
    
    
    
    
    
    
    
    18,323Current assets
    
    
    
    
    
    
    53,727
    
    
    
    
    
    
    
    53,727Total assets
    
    
    
    
    
    
    99,740
    
    
    
    4,906
    
    
    
    104,646LiabilitiesBorrowings
    
    
    
    
    
    
    (26,364
    )
    
    
    
    
    
    
    (26,364
    )Other non-current liabilities
    
    
    f
    
    
    
    (2,627
    )
    
    
    160
    
    
    
    (2,467
    )Deferred income
    
    
    
    
    
    
    (31,294
    )
    
    
    
    
    
    
    (31,294
    )Provisions
    
    
    
    
    
    
    (6,877
    )
    
    
    
    
    
    
    (6,877
    )Non current liabilities
    
    
    
    
    
    
    (67,162
    )
    
    
    160
    
    
    
    (67,002
    )Trade and other payables
    
    
    a,f
    
    
    
    (11,211
    )
    
    
    (44
    )
    
    
    (11,255
    )Deferred income
    
    
    
    
    
    
    (4,839
    )
    
    
    
    
    
    
    (4,839
    )Provisions
    
    
    
    
    
    
    (3,653
    )
    
    
    
    
    
    
    (3,653
    )Current liabilities
    
    
    
    
    
    
    (19,703
    )
    
    
    (44
    )
    
    
    (19,747
    )Total liabilities
    
    
    
    
    
    
    (86,865
    )
    
    
    116
    
    
    
    (86,749
    )Net assets
    
    
    
    
    
    
    12,875
    
    
    
    5,022
    
    
    
    17,897EquityShare capital
    
    
    
    
    
    
    39,492
    
    
    
    
    
    
    
    39,492Share premium
    
    
    
    
    
    
    305,842
    
    
    
    
    
    
    
    305,842Other reserves
    
    
    b,d
    
    
    
    152,761
    
    
    
    1,656
    
    
    
    154,417Retained earnings
    
    
    a,b,c,e,f
    
    
    
    (485,220
    )
    
    
    3,366
    
    
    
    (481,854
    )Total equity
    
    
    
    
    
    
    12,875
    
    
    
    5,022
    
    
    
    17,897
 Reconciliation of loss for the year to December 31, 2004:
 UK GAAP
    
    
    IFRS Effect
    
    
    IFRSNote
    
    
    £000
    
    
    £000
    
    
    £000Revenue
    
    
    
    
    
    
    15,195
    
    
    
    
    
    
    
    15,195Cost of Sales
    
    
    
    
    
    
    (5,573
    )
    
    
    
    
    
    
    (5,573
    )Research and development expenditure
    
    
    e
    
    
    
    (21,723
    )
    
    
    300
    
    
    
    (21,423
    )Selling, general and administrative expenses
    
    
    a,b,c,d,f
    
    
    
    (19,549
    )
    
    
    3,827
    
    
    
    (15,722
    )Operating Loss
    
    
    
    
    
    
    (31,650
    )
    
    
    4,127
    
    
    
    (27,523
    )Interest receivable and similar income
    
    
    
    
    
    
    2,933
    
    
    
    
    
    
    
    2,933Interest payable and similar charges
    
    
    f
    
    
    
    (2,250
    )
    
    
    (571
    )
    
    
    (2,821
    )Loss on ordinary activities before taxation
    
    
    
    
    
    
    (30,967
    )
    
    
    3,556
    
    
    
    (27,411
    )Tax credit on loss on ordinary activities
    
    
    
    
    
    
    1,758
    
    
    
    
    
    
    
    1,758Loss for the period
    
    
    
    
    
    
    (29,209
    )
    
    
    3,556
    
    
    
    (25,653
    )
 F - 41




---



##### Table of Contents



a)
    
    Holiday pay Under IAS 19, Employee Benefits, a provision for holiday to which staff are
entitled but have not yet taken is required. This charge was not common practice under UK
GAAP.b)
    
    Option charge Under IFRS 2, Share-Based Payments, a charge is required for all
share-based payments including share options. The charge in the income statements of the
subsidiary undertakings employing the individuals awarded the options is based on the fair
value of the options at grant date. This charge was not required under UK GAAP.c)
    
    Acquisitions Under IFRS 3, Business Combinations, goodwill is deemed to have an
indefinite useful life and is not amortised. It is subject to an impairment test at each
balance sheet date and to an additional test whenever there is an indication of impairment.
Under UK GAAP, goodwill was amortised over its useful economic life and subject to an
impairment test when there was a triggering event.d)
    
    Investments Investments in an unrelated entity are within the scope of IAS 39. All such
investments held by the Group are categorised as available for sale and are measured at fair
value. Changes in fair value of an equity investment that is categorised as available for
sale are recognised in equity. Under UK GAAP such investments were held at cost less
impairment.e)
    
    Capitalisation of intangibles Under IAS 38, Intangible Assets, separately purchased
intellectual property is capitalised and subject to annual impairment tests. No impairment
charge is made unless there is evidence of a diminution in value. Amortisation shall begin
when the asset is in the condition necessary for it to be capable of operating in the manner
intended by management. Under UK GAAP full impairment was made immediately in respect of
early-stage programmes.f)
    
    Fair value of royalty buy-out from GSK Under IAS 39, Financial Instruments: Recognition
and Measurement, receivables are held at amortised cost. This charge was not common practice
under UK GAAP.g)
    
    Investment in subsidiary undertaking Under IAS 27 the carrying cost of the Companys
investment in Vernalis Group plc has been restated to the fair value of the share
consideration given. Previously under UK GAAP it had been carried at the nominal value of the shares issued in accordance with merger accounting principles.
 Explanation of principal differences between the cash flow statements presented under UK GAAP and
the cash flow statement under IFRS
  1)
    
    Under UK GAAP, net cash flow from operating activities was determined before considering cash
outflows from (a) returns on investments and servicing on finance, and (b) taxes paid. Under
IFRS, net cash flow from operating activities is determined after these items.2)
    
    Under UK GAAP, capital expenditure, financial investments and acquisitions were classified
separately, while under IFRS they are classified as investing activities.3)
    
    Under UK GAAP, movements in short-term investments were not included in cash but classified
as management of liquid resources. Under IFRS short-term investments with a maturity of 90
days or less at the date of acquisition are included in cash and cash equivalents.
 F - 42