##### Table of Contents



Vernalis plc    SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 20-F (Mark One)o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 0-20104 VERNALIS plc
(Exact name of Registrant as specified in its charter) England and Wales
(Jurisdiction of incorporation or organization) Oakdene Court, 613 Reading Road, Winnersh, Berkshire RG41 5UA, United Kingdom
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares of 5 pence each (Ordinary Shares)
American Depositary Shares each representing the right to receive two (2) Ordinary Shares Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuers class of capital or common stock
as of the close of the period covered by the report: 198,950,492 Ordinary Shares of 5 pence each Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such report(s)) and (2) has been
subject to such filing requirement for the past 90 days. Yes  þ          No  o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17  o          Item 18  þ




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Vernalis plc  
 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
    
    
    12A
    
    History and Development of the Company
    
    
    12B
    
    Business Overview
    
    
    15C
    
    Research Programs
    
    
    18D
    
    Commercial Collaborations
    
    
    19E
    
    Principal Markets in which Vernalis Competes
    
    
    26F
    
    Revenues
    
    
    27G
    
    Seasonality of the Companys Business
    
    
    27H
    
    Marketing Channels and Sales Methods
    
    
    27I
    
    Patents, Licenses and Proprietary Rights
    
    
    27J
    
    Competition
    
    
    30K
    
    Material Effects of Government Regulation
    
    
    30L
    
    Organizational Structure
    
    
    32M
    
    Property, Plant and Equipment
    
    
    32ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    33ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    47ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    63ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    64ITEM 9.
    
    THE OFFER AND LISTING
    
    
    65ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    66ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    84ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    84PART IIITEM 13.
    
    DEFAULTS, DIVIDEND ARREARS AND DELINQUENCIES
    
    
    85ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    85ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    85ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    85ITEM 16B.
    
    CODE OF ETHICS
    
    
    85ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    85ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES
    
    
    86ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    86PART IIIITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    87ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    87ITEM 19.
    
    EXHIBITS
    
    
    87SIGNATURES
    
    
    90EX-4.1(O)EX-4.5(D)EX-4.5(E)EX-12EX-13




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




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Vernalis plc PRESENTATION OF FINANCIAL INFORMATION: AVAILABLE INFORMATION The Company furnishes The Bank of New York, as Depositary, with annual reports containing
Consolidated Financial Statements and an opinion thereon by independent public accountants. Such
financial statements are prepared on the basis of UK GAAP reflecting the merger between the Company
and Vernalis Group. The annual reports contain reconciliation to US GAAP of net income and
shareholders equity. Under US GAAP the combination of the Company and Vernalis Group has been
accounted under purchase accounting as an acquisition of Vernalis Group by the Company. The
Company also furnishes the Depositary with half-yearly reports prepared in conformity with UK GAAP,
which contain unaudited interim consolidated financial information. Upon receipt thereof, the
Depositary mails all such reports to recorded holders of American Depositary Receipts (ADRs)
evidencing American Depositary Shares (ADSs). The Company also furnishes the Depositary with all
notices of shareholders meetings and other reports and communications that are made generally
available to shareholders meetings and other reports and communications that are made generally
available to shareholders of the Company. The Depositary makes such notices, reports and
communications available for inspection by recorded holders of ADRs and mails to all recorded
holders of ADRs notices of shareholders meetings received by the Depositary. The Groups consolidated financial statements are reported in English pounds sterling. In this
Annual Report on Form 20-F, references to US dollars or $ are to US currency and references to
pounds sterling, £, pence or p are to UK currency. Solely for the convenience of the
reader, this Annual Report contains translations of certain pound sterling amounts into US dollars
at specified rates. These translations should not be construed as representations that the pound
sterling amounts actually represent such US dollar amounts or could be converted into US dollars at
the rate indicated or at any other rate. Unless otherwise stated, the translations of pounds
sterling into US dollars have been made at the noon buying rate in New York City for cable
transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New
York (the Noon Buying Rate) in effect on December 31, 2004, which was $1.9160 to £l.00. FORWARD-LOOKING STATEMENTS Cautionary Statement for Purposes of the Safe Harbor Provisions of the US Private Securities
Litigation Reform Act of 1995.This Annual Report (particularly material under Item 4B Information
on the Company, Item 4C Research Programs, Item 4D Commercial Collaborations, Item 5
Operating and Financial Review and Prospects  Financial Review, and  Trend Information) may
contain forward-looking statements that reflect the Groups current expectations regarding future
events, including the clinical development and regulatory clearance of the Groups products,
including that of frovatriptan for menstrually-related migraine (MRM), the Groups ability to
find partners for the development and commercialization of its products and/or any new partnership
arrangement(s) on the Groups liquidity and results of operations, as well as the Groups working
capital requirements and future capital raising activities. Forward-looking statements involve
risks and uncertainties. Actual events could differ materially from those projected herein and
depend on a number of factors, including the success of the Groups research strategies, the
applicability of the discoveries made therein, and the successful and timely completion of clinical
studies, including with respect to frovatriptan and the Groups other products, the uncertainties
related to the regulatory process, the ability of the Group to identify and agree beneficial terms
with suitable partners for the commercialization and/or development of frovatriptan and other
products, as well as the achievement of expected synergies from such transactions, the acceptance
of frovatriptan and other products by consumers and medical professionals, the ability of the Group
to obtain additional financing for its operations and the market conditions affecting the
availability and terms of such financing, the successful integration of completed mergers and
acquisitions and achievement of expected synergies from such transitions, and the ability of the
Group to identify and consummate suitable strategic and business combination transactions and the
risk described under Item 3D Risk Factors below. ii




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##### Table of Contents



Vernalis plc 
 PART I 
 ITEM 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2.     OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3.     KEY INFORMATION
 
  A

Selected Financial Data The selected financial data and other information presented below under Item 3A represents
financial data of the Group and its consolidated subsidiaries reflecting the merger with Vernalis
Group (under UK merger accounting). Under UK GAAP, the merger of British Biotech plc and Vernalis
Group plc was accounted for as a merger of equals (pooling of interests). Under US GAAP the
transaction was accounted for as the acquisition of Vernalis Group plc by British Biotech plc using
purchase accounting. Under purchase accounting, the costs of the investment is calculated at the
market value of the shares issued together with incidental costs and the assets and liabilities of
the acquired entity are recorded at fair value. The selected financial data set forth below as of December 31, 2004, the transition period ended
December 31, 2003, and the four years ended April 30, 2003, have been derived from the Consolidated
Financial Statements of the Group, which have been audited by its independent auditors,
PricewaterhouseCoopers LLP (PricewaterhouseCoopers for the years ended April 30, 2002, 2001 and
2000). PricewaterhouseCoopers LLP and PricewaterhouseCoopers were independent auditors to both the
Company and Vernalis Group prior to their merger in 2003. This financial data should be read in
conjunction with, and are qualified in their entirety by reference to, the Consolidated Financial
Statements of the Group and Notes thereto included elsewhere in this report. The Group prepares its Consolidated Financial Statements in accordance with UK GAAP, which differ
in certain respects from US GAAP. A description of the significant differences and reconciliations
of net income and shareholders equity, in accordance with US GAAP, are set forth in Note 3 of the
Notes to the Consolidated Financial Statements. Consolidated Statement of Operations Data: Amounts in Accordance with UK GAAP Period EndedYears ended April 30
    
    
    
    
    
    
    December 31
    
    
    Year ended December 312000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2003
    
    
    2004
    
    
    2004£
    
    
    £
    
    
    £
    
    
    £
    
    
    £
    
    
    £
    
    
    $Revenues
    
    
    7,560
    
    
    
    4,616
    
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195
    
    
    
    29,114Research and
development
expenditure
    
    
    (43,605
    )
    
    
    (43,291
    )
    
    
    (38,152
    )
    
    
    (30,512
    )
    
    
    (26,890
    )
    
    
    (24,387
    )
    
    
    (46,725
    )Net interest income
    
    
    6,432
    
    
    
    4,199
    
    
    
    2,783
    
    
    
    2,803
    
    
    
    1,770
    
    
    
    683
    
    
    
    1,309Net loss
    
    
    (40,414
    )
    
    
    (44,369
    )
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
    
    
    (29,209
    )
    
    
    (55,964
    )Net loss per
Ordinary share
    
    
    (62.5)p
    
    
    
    (64.3)p
    
    
    
    (38.6)p
    
    
    
    (43.1)p
    
    
    
    (24.9)p
    
    
    
    (19.8)p
    
    
    
    (38.0)cOrdinary shares
used in computing
Net loss per
Ordinary share
(000s)
    
    
    64,702
    
    
    
    69,021
    
    
    
    70,175
    
    
    
    71,010
    
    
    
    137,219
    
    
    
    147,388
    
    
    
    147,388
 Consolidated Statement of Operations: Amounts in Accordance with US GAAP Period EndedYears ended April 30
    
    
    
    
    
    
    December 31
    
    
    Year ended December 312000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2003
    
    
    2004
    
    
    2004£
    
    
    £
    
    
    £
    
    
    £
    
    
    £
    
    
    £
    
    
    $Net loss
    
    
    (25,397
    )
    
    
    (28,844
    )
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )
    
    
    (29,328
    )
    
    
    (56,192
    )Net loss per
Ordinary share
    
    
    (76.3)p
    
    
    
    (74.6)p
    
    
    
    (52.4)p
    
    
    
    (66.0)p
    
    
    
    (28.0)p
    
    
    
    (19.9)p
    
    
    
    (38.1)c
 1




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Vernalis plc Consolidated Balance Sheets: Amounts in Accordance with UK GAAP At April 30
    
    
    At December 312000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2003
    
    
    2004
    
    
    2004£
    
    
    £
    
    
    £
    
    
    £
    
    
    £
    
    
    £
    
    
    $Cash and other
investments
    
    
    104,655
    
    
    
    83,022
    
    
    
    62,982
    
    
    
    48,454
    
    
    
    24,214
    
    
    
    33,323
    
    
    
    63,847Property, plant and
equipment
    
    
    30,352
    
    
    
    15,691
    
    
    
    10,245
    
    
    
    11,564
    
    
    
    7,508
    
    
    
    1,596
    
    
    
    3,058Intangible fixed assets
and investments
    
    
    10,452
    
    
    
    8,502
    
    
    
    25,752
    
    
    
    29,794
    
    
    
    23,008
    
    
    
    36,999
    
    
    
    70,890Total assets
    
    
    132,260
    
    
    
    99,461
    
    
    
    104,736
    
    
    
    101,853
    
    
    
    65,770
    
    
    
    99,740
    
    
    
    191,102Long-term debt
    
    
    (3,802
    )
    
    
    (9,559
    )
    
    
    (22,227
    )
    
    
    (24,773
    )
    
    
    (8,119
    )
    
    
    (60,285
    )
    
    
    (115,506
    )Total liabilities
    
    
    (22,269
    )
    
    
    (26,432
    )
    
    
    (41,434
    )
    
    
    (48,277
    )
    
    
    (31,981
    )
    
    
    (86,865
    )
    
    
    (166,433
    )Total shareholders funds
    
    
    128,458
    
    
    
    89,939
    
    
    
    63,302
    
    
    
    53,576
    
    
    
    33,789
    
    
    
    12,875
    
    
    
    24,668Share capital
    
    
    35,060
    
    
    
    35,161
    
    
    
    35,221
    
    
    
    36,895
    
    
    
    38,813
    
    
    
    39,492
    
    
    
    75,667
 Selected Balance Sheet information in Accordance with US GAAP At April 30
    
    
    At December 312000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2003
    
    
    2004
    
    
    2004£
    
    
    £
    
    
    £
    
    
    £
    
    
    £
    
    
    £
    
    
    $Cash and marketable
securities
    
    
    21,674
    
    
    
    18,990
    
    
    
    4,445
    
    
    
    24,868
    
    
    
    16,148
    
    
    
    18,323
    
    
    
    35,107Short-term deposits
    
    
    54,000
    
    
    
    45,746
    
    
    
    45,969
    
    
    
    19,138
    
    
    
    8,106
    
    
    
    15,000
    
    
    
    28,740Total shareholders funds
    
    
    95,183
    
    
    
    70,772
    
    
    
    53,389
    
    
    
    55,491
    
    
    
    71,320
    
    
    
    50,922
    
    
    
    97,566
 Dividends No dividend has been paid by the Company in the three fiscal years up to and including fiscal 2003
and the transition period ended December 31, 2003, and the fiscal year ended December 31, 2004. Exchange Rates The Consolidated Financial Statements of the Group which form part of this Annual Report are
presented in English pounds sterling (£ or pounds). The following table sets forth, for the fiscal years and dates indicated, certain information
concerning the noon buying rate in New York City for pounds expressed in US dollars ($ or dollars)
per £1.00 as certified for customs purposes by the Federal Reserve Bank of New York (the Noon
Buying Rate). Months Highest
    
    Months LowestMonth
    
    Exchange Rate
    
    Exchange RateNovember 2004
    
    
    1.9073
    
    
    
    1.8323December 2004
    
    
    1.9482
    
    
    
    1.9125January 2005
    
    
    1.9058
    
    
    
    1.8647February 2005
    
    
    1.9249
    
    
    
    1.8570March 2005
    
    
    1.9292
    
    
    
    1.8657April 2005
    
    
    1.9197
    
    
    
    1.8733
 2




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Vernalis plc Years ended April 30
    
    Period End
    
    Average
    
    High
    
    Low2000
    
    
    1.55
    
    
    
    1.58
    
    
    
    1.65
    
    
    
    1.552001
    
    
    1.43
    
    
    
    1.46
    
    
    
    1.56
    
    
    
    1.402002
    
    
    1.46
    
    
    
    1.43
    
    
    
    1.48
    
    
    
    1.372003
    
    
    1.60
    
    
    
    1.55
    
    
    
    1.65
    
    
    
    1.43Eight months ended December 31, 2003
    
    
    1.78
    
    
    
    1.64
    
    
    
    1.78
    
    
    
    1.57Year ended December 31, 2004
    
    
    1.916
    
    
    
    1.8356
    
    
    
    1.9482
    
    
    
    1.7544
 On April 29, 2005 the noon buying rate for pounds was £1.00 = $1.9122 Principal Accounting Policies The Consolidated Financial Statements of the Group which form part of this Annual Report have been
prepared in accordance with applicable Accounting Standards in the United Kingdom. A summary of the
principal Group accounting policies, which have been applied consistently, is set forth in Note 2
of Notes to the Consolidated Financial Statements. The Group is required to adopt International
Financial Reporting Standards in 2005 and is currently assessing the impact of this on aligning its
accounting policies. 
  B

Capitalisation and Indebtedness Not applicable. 
  C

Reasons for the Offer and Use of Proceeds Not applicable. 
  D

Risk Factors Prospective investors and shareholders should be aware that any investment in the Group involves a
high degree of risk and should be made only by those with the necessary expertise to appraise the
investment. In addition to the other information in this document, the following risk factors
should be considered in evaluating whether to make or hold an investment in the Group. Additionally, some risks may be unknown to Vernalis and other risks, currently believed to be
immaterial, could turn out to be material. Any or all of these factors could have a material and
adverse effect on the Groups operational results, financial condition and prospects. Furthermore,
the trading price of Vernalis shares could decline, possibly rapidly, resulting in the loss of all
or part of any investment therein.  1.

For the foreseeable future, the Group will be highly dependent on the success of frovatriptan
in the marketplace. The discovery of any adverse reactions to frovatriptan could have a
material adverse effect on the cash position and income of the Group. In addition, the intense
competition to which frovatriptan is subject could impede growth in frovatriptans market
share.Frovatriptan is the Groups only approved product. As such the Groups future is highly
dependent on the sales of frovatriptan. The discovery of adverse reactions, including those
which might result in individual or class warnings or contraindications, or its temporary or
permanent withdrawal from the market, could considerably undermine the financial state of the
Group.Frovatriptan is one of seven triptans currently marketed as an acute treatment for migraine.
The Companys principal competitors for frovatriptan include some of the largest and most
well-funded pharmaceutical companies in the world, including GlaxoSmithKline, Merck, Pfizer and
Astra Zeneca. Sumatriptan, marketed under the name Imitrex® and developed by GlaxoSmithKline,
was the first triptan approved for the acute treatment of migraine, and remains the dominant
product in the United States and worldwide.The Group may not be able to increase or maintain the market share of frovatriptan in light of
such competition which, in turn, could have a significant adverse effect on the Groups
revenue. 3




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Vernalis plc  2.

Failure by the Group either by itself or through its licensees, for any reason, to achieve
and sustain the level of sales of frovatriptan 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, Menarini.
In North America the sales and marketing of frovatriptan is now undertaken by Endo.If the Group or Menarini, in respect of Europe or Endo, in respect of the North American
market, does not exercise sufficient efforts in marketing and sales of frovatriptan, or
otherwise does not achieve the sales anticipated by the Group, this could reduce revenue and
royalties payable to the Group and have a material adverse effect on the cash position and the
income (and any resulting profitability) of the Group.Various situations might arise with respect to Endo, Elan (during the transitional services
period), Menarini, or any of their respective subsidiaries or affiliates which could have an
adverse effect on the sales and marketing of frovatriptan. These include a direct or indirect
sale or proposed sale to a third party or an assignment or proposed assignment of respective
licences in frovatriptan to a third party or the commencement of insolvency proceedings in
respect of those entities.3.

The Group may experience delay or failure to achieve approval for new menstrually-related
migraine (MRM) indication for frovatriptan.The Group is working towards obtaining approval for the use of frovatriptan for the
preventative treatment for MRM. Frovatriptan is currently in Phase III clinical trials in
respect of approval for this new indication. Although an initial clinical study into the
efficacy of frovatriptan for prophylaxis of MRM has demonstrated a highly statistically
significant improvement in the number of patients who are headache free during the
perimenstrual period, unfavourable results from the current Phase III trials or failure to
achieve FDA approval for the new indication for frovatriptan or restriction of the label by the
FDA could adversely affect the anticipated sales potential and, therefore income from the
product.4.

Vernalis ability to repay Endo $50 million loan by August 2009 particularly if approval for
frovatriptan in the MRM indication is not obtainedThe $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
frovatriptan licence agreement and 50 per cent of the $40 million MRM milestone 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 frovatriptan licence agreement until the loan is
repaid in full.5.

The Group has a history of operating losses and negative cash flow and may never become
profitable.Vernalis is an early stage biotechnology company that has a history of operating losses. No
assurance can be given that the operations of the Group will become profitable. These losses
have arisen mainly from the costs incurred in research and development of its products and
general administrative costs. For the year ended December 31, 2004, Vernalis pre-tax losses
were £31.0 million. The Groups cash and short term investments amounted to approximately £33.3
million as at December 31, 2004. 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 frovatriptan 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 frovatriptan 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 develop any additional products and any other products it may develop
may not generate revenues. 4




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Vernalis plc  6.

Additional funding may be required to give the Group time to reach profitability. Raising
such additional funding could entail restrictions on the rights of holders of Ordinary Shares.
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 frovatriptan;

The ability to enter into collaborations to support its research and development programs;

The amount, and timing, of milestone payments the Group receives from its collaborators;

The rate of progress and cost of the Groups research activities;

The costs of preparing, filing, prosecuting, maintaining and enforcing patent claims
and their 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.7.

The Group may be unable to retain and attract certain important employees which could weaken
the Groups scientific and management capabilities.Following the merger of British Biotech plc and Vernalis Group plc, the Group has reduced the
number of its staff from 271 to 130 in a cost saving exercise. As a result, the Group has
limited capacity to provide duplicate cover for key activities. Incentivisation of such
employees to remain with the Group following the uncertainties of the post-merger redundancy
program remains key to the Groups success. The loss of 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 frovatriptan in the USA, in pursuance of its co-promotion rights under
the agreement with Endo.8.

The Group may experience difficulties managing its growth. The Groups failure to meet its
growth or development challenges could have a material adverse effect on its operations.Notwithstanding the programme of redundancy following the merger of British Biotech plc and
Vernalis Group plc, the Group plans significant growth in all areas of its operations as it
expands its business either through organic growth or through mergers and acquisitions. As the
Group has exercised its option under the agreement with Endo to co-promote frovatriptan in the
USA, 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. 5




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Vernalis plc  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.  9.

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.  10.

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.  11.

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. 6




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Vernalis plc  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.12.

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.13.

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.14.

Technological changes could overtake the Group.The biotechnology and pharmaceutical industries are subject to rapid technological change which
could affect the success of the Groups drugs or make them obsolete. The field of biotechnology
is 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. 7




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Vernalis plc  15.

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.  16.

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.17.

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.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. 8




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Vernalis plc  18.

Foreign exchange rate fluctuations may adversely affect the Groups results of operations and
financial condition.The Group records its transactions and prepares its financial statements in pounds sterling,
but a substantial proportion of the Groups income from sales of frovatriptan and collaborative
agreements is received in US dollars or Euros including payments from Endo under the agreement
for frovatriptan comprising two milestone payments each of $15 million payable in August 2005
and August 2006 and a further payment of $40 million conditional on obtaining FDA approval to
market frovatriptan as a short-term prophylaxis of MRM. In addition, as at December 31, 2004,
the Group has a US$10 million denominated liability to GlaxoSmithKline and a loan outstanding
to Endo for US$50 million agreed at the time of the frovatriptan licensing agreement and also
incurs a proportion of its expenditure in US dollars, relating primarily to the clinical trials
that it conducts in the United States. 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 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.19.

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, Elan (for the transitional services),
Menarini, Roche, Serono S.A., Oscient Pharmaceuticals Corp (of which Genesoft is a subsidiary),
Biogen Idec and Novartis Institutes for Biomedical Research.The Groups business will rely significantly on these strategic partners. If the relationship
with any one of these partners (or their co-partners) is adversely affected, the Groups
results of operations may be adversely impacted.As the Group is unable to provide for all of its research, development, manufacturing,
marketing or sales needs, the Group is also dependent on third party contractors and their
services and upon their effort and skill in providing those services.The Group cannot guarantee that:  

Existing collaborative arrangements or 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.  If the Group is unable to continue with any of the existing collaborations and, following
negotiations with the relevant partners, terminates a collaboration, no assurance can be given
that this will not have a negative impact on the reputation of the Group or its ability to
secure additional collaborations in the future. The termination of any agreements with third
party contractors or their failure to perform their obligations under such agreements could
have a disruptive effect on the Groups business.20.

The Group is dependent on single sources of supply for frovatriptan and some of its
components.The Group currently depends on single sources of supply for components it needs to conduct its
research and development activities and for some of the raw materials used to manufacture
frovatriptan. These suppliers may be unwilling or unable to meet the Groups future needs.
Replacing one of these suppliers or finding additional suppliers could take a long time. For
example, if circumstances required the Group to locate either an alternative supplier for the
raw materials used to manufacture frovatriptan or an alternative secondary manufacturer,
manufacture and delivery to the marketplace of frovatriptan could be interrupted. Similarly, if
the Group had to interrupt its research programmes in order to locate an alternative supplier
of essential components, the Group could be forced to delay pre-clinical or clinical trials.
Any of these events would adversely affect the Groups programmes and projected revenues. 9




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Vernalis plc  21.

If the Group fails to maintain its computer hardware, software and related infrastructure,
market acceptance would be delayed and revenues lost.The Groups research and development 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.22.

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 the Companys goal to participate further in the consolidation of the
biotechnology sector. The Groups competitors may also pursue business combinations and bid for
companies that the Group views as potential partners in a business combination. As a result,
the Group may be unable to locate or enter into business combinations with partners that are
the most suitable to its product platform and business strategy, which would limit the
synergies created by a business combination. 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 Vernalis, diluting existing shareholdings.23.

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 the Groups business
and prospects. The Groups product pipeline may not result in any meaningful benefits to the
Group. Due to the limited operating history referred to above, the Group may have difficulty
accurately forecasting its revenue. In addition, because the number of product candidates to
which the Group can devote development effort is limited by the availability of financial and
scientific resources, the Group is exposed to the risk that the delay or failure of individual
product development programs will adversely affect the content and delivery over time of the
Groups product development pipeline.24.

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 financial period ending December 31, 2003, Vernalis
closing share price ranged from 57 pence to 84 pence and from January 1 to December 31, 2004
ranged from 47.5 pence to 97 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 frovatriptan;

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, Medicines & Healthcare Products Regulatory Agency or European Medicines
Evaluation Agency approving or denying new drug applications;

Patent or proprietary rights developments;

Public concern as to the safety or ethical implications of biotechnology products;

Ability to raise additional funds to, amongst other things, repay its US$50 million
loan to Endo, and to fund research and development projects;

Sales of substantial amounts of the Groups shares by existing shareholders;

Price and volume fluctuations in the stock market at large that do not relate to the
Groups operating performance;

Changes in financial estimates by securities analysts, comments by securities analysts,
or the Groups failure to meet analysts expectations;

Actual or anticipated variations in periodic operating results;

New products or services introduced or announced by the Group or its competitors;

Changes in the market valuations of other similar companies;

Announcements by the Group of significant acquisitions, strategic partnerships, joint
ventures or capital commitments; and 10




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Vernalis plc  

Additions or departures of key personnel.  25.

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.26.

Competition regulation may have an impact on the way the Group conducts its business and its
dealings with private counter-parties and government collaborators.The Groups activities will be subject to several competition law regimes such as those of the
European Union, the US and the UK. Article 81(1) of the EC Treaty prohibits agreements between
undertakings which have as their object, or effect, the restriction, prevention or distortion
of competition within the European Union and which may affect trade between member states. The
UK has a similar system of competition law.Agreements restricting competition within the meaning of Article 81(1) are void in whole or in
part. The European Commission may impose fines of up to 10 per cent of the respective worldwide
turnover in the preceding business year on parties entering into such agreements. Persons who
have suffered loss by reason of the anti-competitive restrictions may claim damages against
those parties. Agreements satisfying certain criteria are automatically exempt from the
application of Article 81(1) by virtue of the fact that they do not have an appreciable effect
on competition or fall within a block exemption. Prior to May 1, 2004, parties to an agreement
not covered by a block exemption could apply to the European Commission for an individual
exemption under Article 81(3). Since May 1, 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 Vernalis has, or a member of the Group has, entered into or the Group
may enter into, for example with collaborators and licensees, contain provisions which might be
said 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) exemption criteria are not met, provisions of any agreement that restrict
competition under Article 81(1), including those relating to the exclusivity rights, may be
unenforceable, which could have a material adverse effect on that company. The relevant company
could also potentially be subject to fines and/or claims for damages in relation to any
anti-competitive arrangements which it enters.The Groups activities will also be subject to the EC rules on State aid. Article 87(1) of the
EC Treaty prohibits any aid granted by a Member State or through State resources which distorts
or threatens to distort competition by 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 minimus threshold and, if it finds that a
State aid has been granted or altered without prior notification, it is entitled to require the
Member State in question to suspend the aid pending the outcome of its decision. If the
European Commission finds that the aid is incompatible with the common market, it will
generally require repayment of the aid with interest.Certain arrangements that a member of the Group has entered into or the Group may enter into,
for example with Governmental collaborators, may involve benefits which might be said to be
State aid under Article 87(1). The relevant company will determine on a case-by-case basis
whether the effect of any arrangement is to grant or alter aid 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. 11




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27.

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.28.

The Group may face product liability claims. In addition, the Group may become subject to
shareholders action.The Group in carrying out its activities will potentially face contractual and statutory
claims, or other types of claim. In addition, the Group is exposed to potential product
liability risks that are inherent in the research and development, pre-clinical study, clinical
trials, manufacturing, marketing and use of 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.29.

The Group may be subject to special interest groups and adverse public opinion.Government bodies and regulatory agencies require that potential pharmaceutical products are
subject to pre-clinical studies, including animal testing, prior to conducting human trials.
Vernalis arranges for such work either directly or through its collaborators. Such work can be
subject to adverse public opinion and has attracted the attention of special interest groups,
including those of animal rights activists. Such special interest groups have targeted Vernalis
in the past but this has not had a significant impact on Vernalis operations to date. There
can, however, be no assurance that such groups will not, in the future, focus on the Groups
activities or those of its licensees or collaborators, or that any such public opinion would
not adversely affect the Groups operations.The pharmaceutical industry is frequently subject to adverse publicity on many topics,
including corporate governance or accounting issues, product recalls and research and discovery
methods, as well as to political controversy over the impact of novel techniques and therapies
on humans, animals and the environment. Adverse publicity about the Group, its collaborators,
its products, or any other part of the industry may hurt the Groups public image, which could
harm its operations, cause its share price to decrease or impair its ability to gain market
acceptance for its products. 
 ITEM 4.     INFORMATION ON THE COMPANY 
  A

History and Development of the Company The Company was founded in 1986 as British Bio-technology Limited and re-registered in 1989 as
British Biotech plc, a public limited company under the laws of England with registered number
2304992. In April 2003, British Biotech acquired RiboTargets Holdings plc, a privately-held,
research-oriented biotechnology company, and in September 2003 it completed a merger with Vernalis
Group plc, a publicly-listed biotechnology company engaged in the discovery, development and
commercialization of drugs for the treatment of diseases related to the central nervous system. On
October 1, 2003, following this merger, British Biotech plc re-registered as Vernalis plc, which is
the Groups parent company. The Company is listed on the London Stock Exchange (referenced VER) and
on the NASDAQ National Market System in the United States (referenced VNLS), following an initial
public offer of its shares in July 1992. The Group does not have an agent in the United States. 12




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Vernalis plc The Group is principally engaged in pharmaceutical research and development and the exploitation of
its one marketed product, frovatriptan, this work being undertaken by Vernalis Development Ltd, and
Vernalis (R&D) Ltd (formerly Vernalis (Oxford) Ltd and formerly British Biotech Pharmaceuticals
Ltd), all of which are wholly-owned subsidiaries of the parent. The companies are currently
conducting research and development of new pharmaceutical products with a focus on cancer and
disorders of the central nervous system. Vernalis currently has one marketed product, frovatriptan,
which is approved as an acute treatment for migraine, five products (including frovatriptan for the
prevention of MRM) in clinical development and three main programs of drug discovery. For
additional information see Items 4 B and C. Business Overview and Research Programs. Vernalis principal executive offices are located at Oakdene Court, 613 Reading Road, Winnersh,
Berkshire, RG41 5UA, United Kingdom (telephone number: +44-118-977-3133) from where the management
of clinical development activities is undertaken. Certain research and development activities are
conducted at the Companys additional facilities in Cambridge, UK, and, in collaboration with other
companies, at other locations. As part of the post-merger restructuring the headcount of the
combined companies was substantially reduced and at December 31, 2004, Vernalis employed 124
full-time employees. Of these, 49 were PhDs or held other post-graduate qualifications. Frovatriptan was launched in the United States in June 2002 and, until May 2004, was marketed as
Frova by a combined sales force from Elan and its co-promotion partner UCB. In May 2004 Vernalis
reacquired the North American rights to frovatriptan from Elan and until August 2004 received the
revenue from all US sales of Frova. In August 2004, Vernalis licensed frovatriptan to Endo
Pharmaceuticals. Under the terms of the licence agreement, 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 a $40
million milestone payment to Vernalis if approval for MRM is achieved as well as various milestone
payments to Vernalis upon the achievement of certain sales thresholds. 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 MRM indication is obtained. Under the terms of the agreement, Vernalis was granted
an option to establish its own speciality neurology sales force to co-promote frovatriptan in the
US alongside Endo. In February 2005, Vernalis exercised this option, and Endo will provide funding
for a Vernalis sales team of up to 25 specialty neurology sales representatives for up to five
years, beginning January 1, 2006. This sales team has the opportunity to market other prospective
central nervous system products in addition to frovatriptan, and will form the basis of Vernalis
commercial operations in North America for the future sale of pharmaceuticals. Vernalis continues
to receive royalty and milestone payments and payments for supply from Menarini in respect of
frovatriptan in Europe. The Group has incurred net losses since foundation and expects to continue
to incur losses as its research and development programs progress. Other than frovatriptan, there
can be no assurance that any of the Groups products will be approved for sale in the US, UK,
Europe or elsewhere, or that any of those other products, if approved, or frovatriptan, will
perform to the Groups expectations. Important Events Since April 30, 2004  

On May 19, 2004 Vernalis completed the re-acquisition of the North American rights to its marketed product frovatriptan
from Elan Corporation.

On June 23, 2004 Vernalis entered into an agreement with Biogen Idec to advance Vernalis adenosine A2A
receptor antagonist programme.

On August 9, 2004 Novartis exercised its option under an agreement executed on December 18, 2003 to licence exclusive
worldwide rights to Hsp90 (therapeutic cancer target).

On August 17, 2004 Vernalis completed an agreement to licence North American rights for frovatriptan to Endo
Pharmaceuticals Inc.

On September 3, 2004 frovatriptan was granted approval in Canada for the treatment of acute migraine.

On September 16, 2004 Vernalis signed an agreement with SK Chemicals Co granting them exclusive distribution rights to
frovatriptan in the Korean market.

On September 27, 2004 frovatriptan was launched in Italy.

On October 18, 2004 frovatriptan was launched in Spain.

In October 2004 recruitment started in a confirmatory Phase III frovatriptan efficacy study for the short-term
prophylaxis of migraine.

On December 6, 2004 frovatriptan was launched in Greece. 13




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Vernalis plc Results and Dividends The turnover of the Group during the 12-month period to December 31, 2004 was £15,195,000 (eight
months to December 31, 2003: £8,631,000). The loss after taxation during the 12-month period to
December 31, 2004 amounted to £29,209,000 (eight months to December 31, 2003: £34,219,000). The
Directors do not recommend the payment of a dividend (eight months to December 31, 2003: nil). Important Events Since Year End  

On January 19, 2005 Vernalis collaborator, Serono, started a
Phase I clinical study of a selective inhibitor of matrix
metalloprotease inhibitor 12.

On February 24, 2005 Vernalis exercised its option under its
agreement with Endo Pharmaceuticals Inc. to co-promote
frovatriptan in the US.

On March 21, 2005 shareholders approved the Placing and Open
Offer announced on February 24, 2005. This raised net funds
of approximately £27.6 million by way of a fully underwritten
Placing and Open Offer of 43,250,107 new ordinary shares
representing approximately 27.8 per cent of Vernalis
existing issued ordinary share capital. Trading in the new
shares commenced on March 22, 2005, bringing the total number
of shares in issue to 198,950,492.

On March 31 2005 Vernalis acquired the intellectual property
rights, know how and associated assets related to an emerging
oncology target, Pin1, from Pintex Pharmaceuticals Inc.
Pintex received initial cash payments on signature and
transfer of know how. Vernalis will issue Pintex with a
maximum of 1.5 million new ordinary shares should a drug
candidate progress into human clinical trials, which is not
expected before 2008. Vernalis will make an additional cash
milestone payment to Pintex on marketing approval, bringing
total cash payments to $6.5m, but has no royalty obligations
to Pintex for any resultant products and, should a drug
candidate reach the market, the total cash liability to
Pintex would be $6.5 million. Principal Capital Expenditures Since April 30, 2001 The purchase of tangible fixed assets, comprising laboratory, leasehold improvements and computing
equipment, amounted to £218,000 in fiscal 2004, £180,000 in the transition period, £1,310,000 in
fiscal 2003 and £2,623,000 in fiscal 2002. In addition, a provision of £283,000 in fiscal 2004 and
£500,000 in the transition period in respect of the leasehold property at Abingdon and Winnersh
respectively. These are expected to be utilised at the end of the respective leases. Expenditure on
fixed asset investments, relating to the purchase of shares in businesses with which Vernalis
collaborates, was £nil in fiscal 2004, £nil in the transition period, £nil in fiscal 2003 and
£1,406,000 in fiscal 2002. Expenditure on intangible fixed assets, representing payments made to
third parties to acquire licenses to develop their intellectual property, was £30,541,000 in fiscal
2004, was nil in the transition period, £3,227,000 in fiscal 2003 and £2,447,000 in fiscal 2002. In fiscal 2004, the Oxford property was sold and proceeds of £3,250,000 were received. In the
transition period no significant amounts were raised by the sale of fixed assets. In fiscal 2003,
£222,000 was raised from the sale of plant and machinery to Evotec OAI. In fiscal 2002, £7,264,000
was raised through the transfer of pre-clinical facilities to OSI Pharmaceuticals, Inc. Principal Capital Expenditures in Progress. There are no significant capital expenditure programs in existence at this time. In the near
future, there will continue to be some expenditure on new laboratory equipment, at similar levels
to fiscal 2004. It will be necessary to fit out the currently vacant Granta Park Phase II property
in order to sublet the property. Such expenditure is to be funded from existing cash reserves. 14




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Vernalis plc 
  B

Business Overview Business Strategy Vernalis is an R&D-based biotechnology company, with a marketed product, a pipeline of drug
candidates in clinical development and late-stage research programs. The Company has an experienced
internal discovery team and a development group that has undertaken international drug development
successfully and achieved regulatory approvals in the United States and Europe. Vernalis strategy
is to build a sustainable, self-funding, R&D-driven biotechnology company through organic growth
and by pursuing opportunities to merge with or acquire other biotechnology companies. To execute
its strategy, the Company aims to progress its portfolio of clinical development products and
research programs itself and in collaboration with other companies and maximise revenue
opportunities from its marketed product, frovatriptan. In addition, in February 2005 Vernalis
exercised its option to co-promote frovatriptan alongside Endo, with Endo providing funding for a
speciality neurology Vernalis sales team for up to five years, beginning January 1, 2006. This
sales team has the opportunity to market other prospective central nervous system products in
addition to frovatriptan, and will form the basis for Vernalis commercial operations in North
America for the future sale of pharmaceuticals. Medical Focus Vernalis is primarily focused on developing products to fight disorders of the central nervous
system and cancer. The Company has considerable scientific and clinical experience in these fields
and is currently engaged in the research and development of new pharmaceutical products to meet
medical needs in these areas. Marketed Product and Product Development Programs This section summarises the Groups marketed product and product development programs. Frovatriptan Frovatriptan is a selective 5-HT1B/1D receptor agonist that was developed by Vernalis as an acute
oral treatment for migraine headache and its associated symptoms. It is one of a class of drugs
called triptans, a number of which are already approved for this indication. These drugs are
currently available only by prescription. Vernalis is currently conducting further studies to
develop the compound as a prophylactic oral treatment for MRM, a form of migraine suffered by over
50 per cent of female migraineurs. None of the triptan class of drugs is currently approved for
prophylactic use in migraine. Frovatriptan was licensed from SmithKline Beecham, the discoverer of the compound, in 1994, when
SmithKline Beecham had completed most of the pre-clinical development work required to initiate
human clinical trials. Vernalis completed the outstanding pre-clinical work and in January 1995
began a series of Phase I clinical trials. In January 1996, Vernalis began a series of Phase II
clinical trials in over 1,600 migraineurs. In March 1997, Vernalis began a series of Phase III clinical trials in over 3,000 migraineurs in a
total of 17 countries. During the course of the clinical development program Vernalis also
conducted further pre-clinical studies and carried out the necessary development work on the
chemistry and manufacturing process for the compound. A new drug application was filed in the
United States in January 1999 and a marketing authorization application in Europe in February 1999. In November 2001, the FDA granted marketing approval for frovatriptan in the US for the acute
treatment of migraine. Elan and its co-promotion partner UCB Coprom L.P. (UCB) launched
frovatriptan in the US during June 2002, under the trademark FrovaTM. In the US, migraineurs are
treated primarily by neurologists and primary care physicians (PCPs), so the marketing program for
frovatriptan in the US is directed mainly towards these two groups of prescribers. In January 2001 frovatriptan was approved throughout the then 15 member states via the mutual
recognition procedure, with France acting as the reference member state. The products European
licensee, Menarini, launched frovatriptan in the first European market, Germany, during November
2002. Menarini has also launched frovatriptan in The Republic of Ireland (March 2003) the United
Kingdom (April 2003), Austria (November 2003), The Netherlands (April 2004), Italy (September
2004), Spain (October 2004) and Greece (December 2004). A repeat use mutual recognition procedure was completed by Menarini in December 2004 to include the
new EU accession countries as well as Iceland and Norway. Frovatriptan has also been approved in 5
Central American countries, Bulgaria and Romania and is expected to be launched in further of these
in 2005. In September 2004, frovatriptan was granted approval in Canada for the treatment of acute
migraine. The approval follows a successful dialogue with the Canadian Health Authorities regarding
the product label, a necessary step prior to initiation of the national pricing approval. Frovatriptan is approved in an additional 18 European territories, as well as in 5 Central American
countries and is expected to be launched in further of these in 2005. In September 2004,
frovatriptan was granted approval in Canada for the treatment of acute migraine. The approval
follows a successful dialogue with the Canadian Health Authorities regarding the product label, a
necessary step prior to initiation of the national pricing approval. 15




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Vernalis plc In May 2004, Vernalis reacquired the North American rights to frovatriptan from Elan for a total of
$50 million, payable in instalments. This figure was subsequently re-negotiated to $44 million and
inventory was purchased for $4.5 million. Both these sums were paid in full to Elan during the
year. From May 2004 until August 2004, Vernalis was solely responsible for marketing frovatriptan in
North America. In August 2004, Vernalis licensed frovatriptan to Endo Pharmaceuticals. Under the terms of the
licence agreement, 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 a $40 million milestone payment to
Vernalis if MRM approval is achieved as well as various milestone payments to Vernalis 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 make royalty payments to Vernalis
which will be tiered from 20 per cent or higher if FDA approval of the MRM indication is obtained. In February 2005 Endo re-launched frovatriptan with an expanded sales force and a revised marketing
focus on the benefits of a long duration of action. Also in February 2005, Vernalis exercised its option to co-promote frovatriptan alongside Endo, and
Endo will fund the Vernalis sales team of up to 25 specialty neurology sales representatives for up
to five years, beginning January 1, 2006. This sales team has the opportunity to market other
prospective central nervous system products in addition to frovatriptan, and will establish
Vernalis commercial operations in North America for the future sale of pharmaceuticals. In September 2004, Vernalis signed an agreement with SK Chemicals Co., Ltd of Korea, granting them
exclusive distribution rights for frovatriptan in the Korean market. Vernalis received an upfront
fee on signature and is due a further payment on receipt of Korean marketing authorisation, in
addition to revenues from future product supply. SK will be responsible for managing and funding
the regulatory approval process and the subsequent marketing of the product in Korea. Vernalis intends to seek other pharmaceutical partners to realise frovatriptans commercial
potential, including the new proposed MRM indication (see below) in territories not licensed to
Endo, Menarini and SK Chemicals. Frovatriptan  clinical development in MRM Vernalis is conducting additional clinical studies of frovatriptan that, if successful, may enhance
the commercial potential of the drug. The Company is currently conducting further studies to develop frovatriptan as a prophylactic oral
treatment for MRM, a form of migraine suffered by over 50 per cent of female migraineurs. In the
United States this represents approximately 13 million women. None of the triptan class of drugs is
currently approved for prophylactic use in migraine. Frovatriptans long half-life (approximately
26 hours) makes it ideally suited to this novel application. In October 2002, Vernalis reported positive preliminary results from a study conducted at 36
clinics in the US and involving more than 500 menstrual migraine sufferers. Patients were evaluated
over three menstrual cycles over the course of which each patient received all three dose regimens
 placebo, 2.5mg frovatriptan once daily and 2.5mg frovatriptan twice daily. During each cycle
they took the treatment for a total of six days commencing two days before the expected onset of
their headache. The results showed that both once- and twice-daily dose regimens of frovatriptan
were highly effective in reducing the incidence, severity and duration of MRMs compared with
placebo. By the intention-to-treat analysis, 51 per cent of patients were completely headache-free
during the six-day period when they took 2.5mg frovatriptan twice daily and 40 per cent were
headache-free at a once-daily dose of 2.5mg, compared with only 26 per cent on placebo. The results
of the study were presented to the American Academy of Neurology in the US in April 2003, and have
been published in key scientific journals, including the July 2004 edition of Neurology. Two further trials are required to complete the data package for a supplemental New Drug Approval
application in the US to permit frovatriptan to be marketed as a short-term prophylaxis for MRM.
The first, a long-term safety study in 550 patients, is fully recruited and is expected to complete
in H2 2005. An interim analysis of six month safety data from this study will be announced in Q2
2005. The second, a 600 patient study to confirm the efficacy observed in the initial clinical
study commenced in Q4 2004. Recruitment is ongoing and is expected to complete in H2 2005. If the
positive initial results are confirmed, these studies should lead to regulatory submissions in the
US and Europe in H1 2006. On FDA approval of the MRM indication, Endo will make an additional
payment of $40 million to Vernalis. It is expected that the requirements to submit applications to
extend European licenses will be broadly similar to those in the United States. See also below,
Item 4K Material Effects of Government Regulation. 16




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Vernalis plc V10153 V10153 is a recombinant protein designed to prevent and dissolve blood clots, with potential to
improve the treatment of thrombolytic diseases such as Acute Myocardial Infarction (AMI) stroke, or
deep vein thrombosis (DVT). The drug has been designed in such a way that it only becomes active in
the presence of newly-formed or forming blood clots. This may be important in helping to overcome
the major drawback of existing thrombolytic agents, that of internal bleeding. Conditions such as
stroke may be under-treated because of this risk, particularly intracranial haemorrhage. A Phase I study of V10153 was completed in 1999, showing it to be well tolerated in healthy
volunteers. In 2001, the Companys contractor, DSM Biologics Company Inc., produced sufficient
compound to allow initiation of a Phase II proof-of-concept study in 2002. In March 2002, the FDA gave clearance for this study to proceed in AMI patients. It was managed by
The Thrombolysis In Myocardial Infarction (TIMI) Study Group in the United States and was designed
to test the ability of V10153, administered at doses up to 10mg/kg, to dissolve clots and restore
blood flow in the coronary arteries of heart attack patients. The study also evaluated the safety
of treatment with V10153, especially with respect to bleeding. The study has now been completed. V10153 was well tolerated throughout the dose range of 110mg/kg
to patients with AMI. Full restoration of blood flow was observed in blocked coronary arteries in
around 40 per cent of patients after 60 minutes following doses of 5mg/kg and greater. This is
comparable to the efficacy reported for currently marketed thrombolytic therapies using a similar
experimental protocol. The next stage in development of V10153 is to conduct a Phase II study in approximately 150
patients with acute ischemic stroke which is expected to start in H1 2005. Vernalis wishes to
retain the full value of this product and plans to undertake these trials alone. In parallel, work
is being undertaken to improve the production process prior to manufacturing material for Phase III
studies. V140 V140 (alphadolone acetate) is a GABAA agonist targeted at the treatment of pain in cancer patients.
It was in-licensed from Monash University, Melbourne, Australia and has been administered to man in
an open label pilot study conducted in Australia under the Clinical Trial Notification (CTN)
Scheme. In this study, indications of analgesic efficacy were seen in patients who received a
single dose of V140 after orthopaedic knee surgery. No sedative side effects were seen in this
study. V140 presents an opportunity to be used alongside, or as a replacement for, current opiate-based
pain therapies. Preliminary pre-clinical studies indicate that V140 is capable of providing an
improved profile over current therapies since it is expected to produce non-sedating analgesia. An initial Phase I clinical programme to evaluate V140s safety and pharmacokinetic properties in
single and multiple dose studies found the compound to be safe and well tolerated in single and
multiple doses. Subject to the satisfactory completion of further pre-clinical studies it is
intended to evaluate V140 in a Phase II proof-of concept trial, which is expected to start later in
2005. This will investigate the opiate-sparing and analgesic efficacy and safety in patients
undergoing elective total knee replacement surgery. V2006 V2006 is an adenosine A2A receptor antagonist. Vernalis initiated research in 1998 to assess the
potential of selective adenosine A2A receptor antagonists in the chronic treatment of Parkinsons
disease, a debilitating and progressive movement disorder that affects approximately one per cent
of the population over 65 or about 1.5 million people in the United States. Adenosine is a brain
chemical that plays an important role in motor co-ordination and movement control. Vernalis
believes that by using selective adenosine A2A receptor antagonists to restore the imbalance of
neurotransmitters caused by the loss of dopamine, it may provide a novel approach to treat the
symptoms of Parkinsons disease and to slow or stop the progression of the disease. In particular,
A2A receptor antagonists may be able to restore function in Parkinsons disease patients without
inducing unwanted side effects such as nausea and dyskinesia (uncontrolled movements). V2006 is the first development compound from this research programme. An initial Phase I study of
V2006, a single ascending dose study in healthy male volunteers designed to investigate the drugs
safety and pharmacokinetics, has been successfully completed. The drug was shown to be safe and
well tolerated in a single and rising dose study, achieving potentially therapeutic concentrations
at the lowest dose tested. The long plasma half-life (18 hours) of V2006 in normal subjects would
be consistent with a simple, once-daily dosing regimen. The Phase I programme for V2006 continues,
with the goal to begin a Phase II proof-of-concept study in H2 2005. 17




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Vernalis plc In June 2004 Vernalis entered into an agreement with Biogen Idec, giving them exclusive worldwide
rights to develop and commercialise V2006. At the time of signing, Vernalis received a $10 million
licence fee, with Biogen Idec also making a $6 million investment in new Vernalis shares. Biogen
Idec are funding all the clinical development with Vernalis receiving a series of further payments
of up to $100 million if programme milestones are met, and double-digit royalties on commercial
sales of collaboration products. Vernalis retains the right to co-promote the product in the United
States. Metalloenzyme Inhibitors In October 2000, Vernalis entered into a research collaboration with Serono to identify new
metalloenzyme inhibitor compounds for clinical development for the treatment of inflammatory
diseases. Following successful completion of the research collaboration, all further activities
will be conducted by Serono. In January 2005 Serono started a Phase I clinical trial of a selective inhibitor of MMP-12 (matrix
metalloprotease inhibitor 12). This is the first compound to enter the clinic resulting from the
research collaboration, and, under the terms of the agreement, Vernalis received a milestone
payment. The Phase I trial is being performed in healthy volunteers, with a primary objective of
elucidating the safety, tolerability and pharmacokinetic properties of the compound. Serono will
conduct and fund all development activities associated with any programme that enters the clinic,
with Vernalis receiving milestone payments and royalties upon successful commercialization of any
product. Other clinical products 
  C

Research programs This section summarises the Groups main research programs. The Groups aim is to conduct
approximately half of the research programs under collaboration agreements. Obesity: 5-HT2C receptor agonists Vernalis is investigating the potential use of selective 5-HT2C receptor agonists to treat obesity
and related disorders. In 1999, Vernalis partnered its 5-HT2C programme with Roche, the worlds
leading pharmaceutical company in sales of prescription treatments for obesity. Vernalis scientists discovered that 5-HT2C is a key receptor for controlling satiety. This was a
significant finding since it is known that 5-HT2C receptors are present in high density in the
brain (in particular in areas that control eating) but not in the cardiovascular system. Hence,
adverse effects seen with older obesity drugs (due to their non-selective activity across a variety
of 5-HT receptors) may be avoided with a selective 5-HT2C receptor agonist. A development candidate has been selected by Roche which is currently undergoing pre-clinical
studies. If pre-clinical testing is successful, further development would be undertaken by Roche. Depression: A2A receptor antagonists Recent pre-clinical research by Vernalis suggests that adenosine, and specifically the adenosine
A2A receptor subtype, may be a novel target for the discovery of a new class of antidepressant
drugs. Transgenic animals with the A2A receptor gene deleted have shown a pattern of activity in
pre-clinical models of depression that appears to be predictive of antidepressant activity in
humans. Vernalis has also synthesised selective adenosine A2A receptor antagonists that show
activity in pre-clinical models of depression and we are currently working to optimise the
selectivity and pharmacokinetic properties of the most promising compounds. In June 2004, Biogen
Idec acquired option rights over Vernalis entire A2A antagonist research programmes. Cancer: Hsp90 inhibitors The scientific rationale for Hsp90 as a therapeutic cancer target is based on the hypothesis that
many of the signalling proteins that behave aberrantly in cancer cells require Hsp90 as a chaperone
molecule to ensure that they are maintained in an active form. Inhibition of Hsp90 results in
interference in multiple signalling pathways that mediate cancer growth and cell survival. Vernalis has been optimizing small molecule compounds which inhibit the ATPase function of Hsp90
and has filed patent applications in this area. The project is in the lead optimization phase and
is scheduled to identify a pre-clinical development candidate in 2H 2005. 18




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Vernalis plc In December 2003, Vernalis formed a new research collaboration with the Novartis Institutes for
BioMedical Research, Inc. (Novartis) in Cambridge, Massachusetts to investigate inhibitors of a
target implicated in the progression of a range of cancers. Under the terms of the agreement
Vernalis provided elements of its ongoing oncology research to Novartis for an initial six month
evaluation period. In August 2004, Novartis chose to exercise its option to license exclusive
worldwide rights to Hsp90, with the companies conducting a joint research program under which
Novartis will provide research funding to Vernalis over an initial three-year period. Novartis is
responsible for funding and conducting the pre-clinical and clinical development of product
candidates, and for commercialization. Novartis paid Vernalis an initial fee under the license
agreement of $1.5 million and made an equity investment of £5 million. Obesity: CB1 antagonists The objective of this research program is to develop potent and selective cannabinoid CB1 receptor
antagonists for the treatment of obesity. Currently, two cannabinoid receptors have been described:
the CB1 receptor, which is distributed widely in the central nervous system and is also present in
the periphery (e.g. in the gastrointestinal tract); and the CB2 receptor, which is generally
localised in the periphery (e.g. immune cells). Clinical studies with Sanofis compound rimonabant,
support the hypothesis that CB1 receptor antagonists have potential utility for the treatment of
obesity. A focused medicinal chemistry programme has rapidly identified novel, selective CB1
receptor antagonists with oral efficacy in pre-clinical feeding models. Infection: metalloenzyme inhibitors In the field of anti-infectives, Vernalis has identified several metalloenzymes not present in
mammalian cells that are essential for the survival of pathogenic bacteria. In August 2002, Vernalis entered into a collaboration with GeneSoft Pharmaceuticals Inc (now part
of Oscient Pharmaceuticals Corp.) to discover and develop novel anti-infectives based on Vernalis
proprietary anti-bacterial PDF and other metalloenzyme inhibitors. In October 2003 Vernalis
peptide deformylase inhibitor research programme in the antibiotic field was out-licensed to
Oscient in its entirety. Under this out-licensing agreement, Oscient has assumed responsibility for
all further research and development, with Vernalis receiving milestone and royalty payments if
products progress through development and to market. Cancer: Pin1 In March 2005, Vernalis acquired the intellectual property rights, know how and associated assets
related to an emerging cancer target Pin1 from Pintex Pharmaceuticals Inc., a privately held US
Company. Pin1 over expression is observed in a number of cancer indications and Vernalis will aim
to capitalise on its success with Hsp90 through utilising its structure based drug design suite of
technologies to discover development candidates against this target. Depression: Identification of novel gene targets In August 2004 Vernalis entered into a research and development option agreement with ChemGenex
Pharmaceuticals which was formed in 2004 from the merger of AGT BioSciences of Melbourne, Australia
and ChemGenex Therapeutics of Menlo Park, California USA. Research is focused upon the discovery
and validation of novel genes and proteins involved in depression and anxiety utilising genomic and
proteomic technologies. The product of these genes being able to be used as a target for drug
discovery, or as therapeutic agents. Biodefence research: metalloenzyme inhibitors As part of the UK Governments biodefence initiative, Vernalis has entered into an agreement with
the Defence, Science and Technology Laboratory (DSTL) in Porton Down, UK, to investigate the
efficacy of selected Vernalis metalloenzyme inhibitors against anthrax lethal toxin and botulin
toxin. 
  D

Commercial Collaborations The following section describes the Groups existing commercial collaborators and the commercial
agreements with respect to the Groups principal research and development programs and marketed
products. SmithKline Beecham (frovatriptan) Frovatriptan is the Companys most advanced program and the Companys only currently marketed
product. Vernalis originally licensed frovatriptan from SmithKline Beecham in 1994. In 1998,
SmithKline Beecham waived its option to commercialise the compound and worldwide marketing rights
passed to Vernalis in return for a residual royalty payable to SmithKline Beecham on future
worldwide sales of frovatriptan. During 2000, in connection with SmithKline Beechams merger with
Glaxo Wellcome plc, Vernalis made two important amendments to the 1994 agreement: 19




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Vernalis plc  

in July 2000, SmithKline Beecham assigned to Vernalis all of
SmithKline Beechams patents covering frovatriptan (with no
substantive changes in the royalty arrangements); and

in December 2000, SmithKline Beecham waived all of its rights to
royalties on sales of frovatriptan in return for a series of five
$5 million cash payments by Vernalis. The first 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 will be made in September 2005, with the final $5
million payment being conditional upon total sales exceeding £300
million. Elan (frovatriptan) A license agreement was in place between Vernalis and Elan under which Elan was marketing
frovatriptan in North America. This agreement was terminated in May 2004. Vernalis signed the original license agreement with Elan in 1998 granting Elan exclusive marketing
rights for frovatriptan in the United States, Canada and Mexico. On signing, Elan paid Vernalis a
fee of $7.5 million and made a $10 million investment in Vernalis Group ordinary shares at a
negotiated price of £6.25 per share. Elan subsequently paid Vernalis a further $7.5 million in 1999
when the FDA formally accepted Vernalis frovatriptan New Drug Application (NDA) for review, and a
further $15 million in the fourth quarter of 2001 following FDA marketing approval. Under the terms
of the 1998 license agreement, Vernalis could have potentially received three additional milestone
payments exceeding $30 million in total on achievement by Elan of agreed sales targets for
frovatriptan. In addition, Elan would pay Vernalis a royalty based on its net sales of
frovatriptan. In December 2000, Vernalis entered into a new financing agreement with Elan under
which Elan made a $10 million loan to Vernalis and a further equity investment of £4.96 million.
Following that investment, Elan held 2,943,396 Ordinary Shares, representing approximately 6.7 per
cent of Vernalis Groups issued share capital, which was subsequently sold in July 2002. Elan no
longer has any shareholding in Vernalis. In the first quarter of 2002 Elan appointed UCB as its co-promotion partner for frovatriptan in the
US market. The co-promotion agreement was between Elan and UCB and Vernalis had no contractual
relationship directly with UCB. In conjunction with the appointment of UCB, Vernalis agreed to
revised commercial arrangements with Elan. Under the new terms, Elan forgave the full amount of its
loan to Vernalis, including accrued interest, and accelerated a $5.4 million sales milestone
payment due under the restated 1998 license agreement to 30 days following the US launch. In
return, Vernalis would have received royalties at a reduced rate on US sales up to a pre-determined
level during the launch phase and early years of marketing of frovatriptan. At the end of an
initial three-year period following the US launch of frovatriptan, Elan would have had an option to
extend the reduced royalty period by up to four years by making an additional lump sum payment to
Vernalis. This payment replaced the second sales milestone payment due under the 1998 license
agreement. Thereafter, or if Elan elected not to the make the lump sum payment, the royalty rate due to
Vernalis would have reverted to the previous levels. The third sales milestone payment was not
affected by the new agreement. This was a payment of $15 million from Elan to Vernalis, which would
have been triggered when the net sales of frovatriptan by Elan and UCB in North America had
exceeded $100 million in any 12-month period. Elan made its first royalty payment to Vernalis in
August 2002 and payments were subsequently received on a quarterly basis (prior to the agreement
for the reacquisition of North American rights). For additional information on frovatriptan, see
above under Item 4B Business Overview. In March 2004, Vernalis announced that it has entered into an agreement to reacquire in their
entirety the North American rights for frovatriptan from Elan for a total of $50 million payable
over 21 months. The transaction was completed in May 2004. This figure was subsequently
renegotiated to $44 million and inventory was purchased for $4.5 million. Both these sums were
paid in full to Elan during the year. Endo (frovatriptan) In August 2004, Vernalis licensed the North American rights to frovatriptan to Endo
Pharmaceuticals. Under the terms of the licence agreement, 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 a $40
million milestone payment to Vernalis if MRM approval is achieved as well as various milestone
payments to Vernalis 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
make royalty payments to Vernalis which will be tiered from 20 per cent if FDA approval of the MRM
indication is obtained. In 2004, net sales of frovatriptan in the US amounted to $33.3 million and in February 2005 Endo
re-launched the product with an expanded sales force and a revised marketing focus on the benefits
of a long duration of action. Also in February 2005, Vernalis exercised its option to co-promote
frovatriptan alongside Endo, and Endo will substantially fund the Vernalis sales team of up to 25
speciality neurology sales representatives for up to five years, beginning January 1, 2006. This
sales team has the opportunity to market other prospective central nervous system products in
addition to frovatriptan, and will establish Vernalis commercial operations in North America for
the future sale of pharmaceuticals. 20




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Vernalis plc The license previously granted by Vernalis to Menarini in respect of Europe and certain Central
American countries remains in place (see below). Menarini (frovatriptan) Vernalis has also signed a license agreement with Menarini granting Menarini exclusive marketing
rights for frovatriptan in the European Union, Eastern Europe and specified countries in Central
America. Under this agreement Vernalis will supply Menarini with the finished packed product ready
for sale. Vernalis receives revenue on supply of product and also from royalties. SK Chemicals (frovatriptan) In September 2004, Vernalis signed an agreement with SK Chemicals Co., Ltd of Korea, granting them
exclusive distribution rights for frovatriptan in the Korean market. Vernalis received an upfront
fee on signature and is due a further payment on receipt of Korean marketing authorisation, in
addition to revenues from future product supply. SK will be responsible for managing and funding
the regulatory approval process and the subsequent marketing of the product in Korea. Potential Additional Marketing Partners (frovatriptan) Vernalis is exploring opportunities to generate further revenues by selecting marketing partners
for frovatriptan in other geographic areas not covered by its existing marketing agreements. Diosynth and Evotec OAI (frovatriptan) Vernalis also has agreements in place with Diosynth Limited and Evotec OAI, with respect to the
manufacture and supply of the bulk active pharmaceutical ingredient in frovatriptan. This bulk
active is used by PDMS Limited to produce finished product that is supplied by Vernalis to
Menarini. Pharmaceutical Development & Manufacturing Services Ltd (PDMS) (frovatriptan) Vernalis has an agreement with PDMS Limited (by novation from Galen Limited who disposed of the
tableting and packaging business to PDMS) for tableting and packaging of frovatriptan, which is
supplied as finished product to Menarini. Following the reacquisition of the North American rights
to frovatriptan from Elan, Vernalis took assignment of an agreement under which PDMS supplied
tableting and packaging services with regard to North America. This agreement has novated to Endo
as part of the re-licensing of the rights to frovatriptan in North America. DSM Biologics Company Inc. (V10153) Vernalis had a series of agreements with DSM Biologics, the most recent being January 1, 2003, all
of which concern the supply of V10153 for clinical trials. This agreement terminated in June 2004
and Vernalis is currently seeking a new supplier of V10153 to fulfil its requirements for future
clinical trials. Monash University (V140) In October 2002, Vernalis was granted an exclusive license to develop and commercialise the
compound alphadolone (V140) for all human and animal prophylactic and therapeutic analgesic
indications from Monash University and Professor Colin Goodchild (Victoria, Australia). In return
for an exclusive license, Vernalis will pay Monash and Professor Goodchild success milestones and
royalties upon the sale of product. Following completion of an initial Phase 1 clinical programme,
further pre-clinical studies are being undertaken with a view to evaluating V140 in a Phase II
proof-of-concept trial. Roche (5-HT2C receptor) In December 1999, Vernalis signed an agreement with Roche to collaborate on Vernalis research
program directed toward selective 5-HT2C agonists as potential anti-obesity agents. Under the terms of this agreement, Vernalis received funding for an initial two-year joint research
program with Roche. Vernalis also received a license fee on signature of the agreement and three
subsequent milestone payments from Roche. The first was received in November 2000 on the selection
of VR-1065 as the first lead development compound. The second was received in June 2001, when this
compound was confirmed as the first clinical development candidate. The third was received in May
2002 when this compound entered Phase I studies. The pharmacokinetic data on VR 1065 observed in
the Phase I trial did not meet the criteria for progression to Phase II. 21




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Vernalis plc In February 2002, Vernalis and Roche entered into a further two-year research collaboration to
support the objective of bringing further product candidates into Phase I clinical trials. In an
amendment to the agreement made as of February 1, 2004, Roche agreed to an extension to the
collaboration until September 30, 2004, in order to continue pre-clinical development. Under the
terms of the amendment agreement, Vernalis received additional research funding for the period of
the new research collaboration. The research collaboration under the February 2002 agreement was
subsequently further extended until February 28, 2005 at each parties own research cost. The
research collaboration has now expired. Roche is currently characterising and evaluating molecules synthesised under the collaboration for
classification as lead candidate compounds. Roche has exclusive worldwide rights to develop, manufacture and market all the product candidates
coming out of the program for the treatment of obesity and related eating disorders, and will also
fund and conduct all aspects of the development program for each compound it elects to take into
development for this indication. Biogen Idec (V2006) In June 2004, Vernalis entered into an agreement with Biogen Idec to advance research into
Vernalis adenosine A2A receptor antagonist program, which targets Parkinsons disease and other
central nervous system disorders. Under the agreement, Biogen Idec received exclusive worldwide rights to develop and commercialise
Vernalis lead compound, V2006, which has completed an initial Phase I clinical study in healthy
volunteers. In addition, Biogen Idec has the right to develop one back-up compound to V2006 and
receives option rights over Vernalis A2A antagonist research program. Initially, the collaboration
will focus on completing the Phase I program for V2006, with the goal to begin Phase II proof of
concept studies of V2006 in Parkinsons disease patients in H2 2005. Biogen Idec paid Vernalis an initial license fee of $10 million, and will make a series of further
payments if program milestones are met, as well as royalties on commercial sales of collaboration
products. Biogen Idec made an immediate investment of $6 million through subscription in Vernalis
ordinary shares and committed to purchase up to an additional $4 million should Vernalis undergo a
fundraising. In March 2005, Biogen Idec took up 1,363,186 shares at 70 pence per share in the
Placing and Open Offer. Excluding royalties, total potential payments to Vernalis could exceed $100
million. Vernalis is responsible under the collaboration for the completion of certain Phase I clinical
trials. Vernalis has engaged Dr. Reddys Laboratories Inc. in respect of the manufacture of V2006
to complete such clinical trials. Biogen Idec will fund future development under the
collaboration. Vernalis retained an option to co-promote collaboration products in the United States. Novartis Institutes for Biomedical Research, Inc. (Hsp90) In December 2003, Vernalis formed a research collaboration with the Novartis Institutes for
BioMedical Research, Inc., (Novartis) in Cambridge, MA, USA, to investigate inhibitors of a target
implicated in the progression of a range of cancers. Under that agreement with Novartis, Vernalis
provided elements of its ongoing oncology research to Novartis for an initial six-month evaluation
period. In August 2004 Novartis exercised its option under the December 2003 agreement to take an exclusive
licence of Vernalis rights to Hsp90 (therapeutic cancer target). The companies will conduct a
joint research programme under which Novartis will provide research funding to Vernalis over an
initial three-year period. In addition, Novartis is responsible for funding and conducting the
preclinical and clinical development of product candidates, and for commercialisation. Novartis paid Vernalis a signature fee of $1.5 million and will pay a series of further payments
upon achievement of development milestones for each product candidate that Novartis takes into
development. Vernalis will also receive royalties on commercial sales of collaboration products. In
addition, Novartis made an equity investment of approximately £5 million through the subscription
for 7,106,344 new Vernalis ordinary shares. In the event that two product candidates from the collaboration reach the market, total payments to
Vernalis from Novartis could exceed $75 million, excluding royalties. 22




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Vernalis plc Pintex Pharmaceuticals Inc (Pin1) In March 2005 Vernalis acquired the intellectual property rights, know how and associated assets
related to an emerging oncology target, Pin1, from Pintex Pharmaceuticals Inc. Pintex received
initial cash payments on signature and transfer of know how. Vernalis will issue Pintex with a
maximum of 1.5 million new ordinary shares should a drug candidate progress into human clinical
trials, which is not expected before 2008. Vernalis will make an additional cash milestone payment
to Pintex on marketing approval, bringing total cash payments to $6.5m, but has no royalty
obligations to Pintex for any resultant products and, should a drug candidate reach the market, the
total cash liability to Pintex would be $6.5 million. Serono S.A. (MEIs: inflammation) In October 2000, Vernalis and Serono S.A. signed a two-year agreement to jointly research, develop
and commercialise metalloenzyme inhibitors for the treatment of various inflammatory diseases.
Under the terms of the agreement, Vernalis received from Serono an up-front payment of $5 million. The agreement with Serono covered BB-2827, BB-76163 and research activities. The clinical
development, manufacture and commercialization of BB-2827, a collagenase inhibitor with potential
application in rheumatoid arthritis, and the pre-clinical research of BB-76163, an aminopeptidase
inhibitor, with potential application in multiple sclerosis, were terminated in 2001. In October 2002, the term of the research agreement was extended, terminating in October 2003,
subject to the exercise by Serono of its option of develop and commercialise certain compounds from
the research agreement on terms whereby Vernalis receive milestone and royalty payments. In January 2005 Serono started a phase I clinical trial of a selective inhibitor of MMP-12 (matrix
metalloprotease inhibitor-12); the first compound to enter the clinic resulting from the research
collaboration between Vernalis and Serono. Under the terms of the agreement Vernalis is entitled
to receive a milestone payment. Serono will conduct and fund all development activities associated
with the programme, with Vernalis receiving milestone payments and royalties upon successful
commercialisation of any product. Oscient Pharmaceuticals Corp. (MEIs: infection) In August 2002, Vernalis signed agreements with GeneSoft Pharmaceuticals Inc. (now part of the
Oscient Pharmaceuticals Corp group) for a broad-based collaboration to discover and develop novel
anti-infective drugs based on Vernalis proprietary bacterial metalloenzyme inhibitors. The
collaboration combined Vernalis novel targets, chemistry and clinical development with GeneSofts
experience in antibiotic lead optimization and clinical expertise. GeneSoft made an initial payment to Vernalis in August 2002 of $4 million. Upon initiation of the
initial Phase I study of the lead compound, BB-83698, in October 2002, Vernalis received a further
payment from GeneSoft of $1 million and one million shares of convertible-preferred stock
(representing approximately 3.45 per cent of GeneSofts outstanding equity as of the date of the
transaction, on a fully-diluted basis). In September 2003, the parties terminated the August 2002 agreements and replaced them with a new
Research Agreement relating to four anti-infective projects in respect of Vernalis proprietary
bacterial metalloenzyme inhibitors, and a new agreement relating to the development and
commercialization of BB-83698. Under the revised September 2003 arrangements, GeneSoft will
conduct all further research and development at no cost to Vernalis and Vernalis may receive
milestone and royalty payments (dependent on progression of development and sales respectively). On February 2, 2004 the shareholders of Genesoft Pharmaceuticals Inc. approved its merger with
Oscient Pharmaceuticals Corp. (formerly Genome Therapeutics Corp.), a NASDAQ quoted company. As a
result of the merger, the Groups holding in Genesoft has been exchanged for 424,118 shares in
Oscient. Of these, 93,141 shares will remain in escrow and will not be made available to the
Company for up to 18 months from February 2004 In September 2004, Vernalis agreed with Oscient, subject to certain pre-conditions which have not
yet been met, to assign certain patent rights to Oscient and to terminate certain other patent
rights licenced to Oscient. To date, this agreement is not effective. 23




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Vernalis plc Chroma Therapeutics Limited (BB-76163) On November 24, 2003, Vernalis entered into an agreement with Chroma Therapeutics Limited under
which Vernalis granted Chroma an exclusive license covering BB-76163 for use in cancer. Vernalis
was paid a small sum on signature and will receive royalties if Chroma progresses development and
sells product. Institute of Cancer Research (Hsp90 inhibitors) Vernalis entered into a research collaboration and option agreement with the Institute of Cancer
Research (ICR) and Cancer Research Ventures Ltd, now Cancer Research Technologies Ltd (CRT) in
March 2002 in respect of the discovery and evaluation of Hsp90 inhibitors. In August 2004, Vernalis exercised its option to enter into an exclusive licence with ICR and CRT
under which Vernalis is licensed to develop and commercialize the results of the collaboration.
The research programme with ICR, under the research collaboration agreement, terminated in October
2004. Vernalis is now developing the results of the research programme with ICR under its collaborator
and sub-licence agreement with Novartis (see earlier), subject to payment to CRT of 25% of
sub-licence income and royalties on sales of product. Autogen Research (ChemGenex) In August 2004, Vernalis entered into a research and development option agreement with Autogen
Research Pty Ltd pursuant to which Vernalis funds research into the discovery and validation of
genes and proteins involved in depression and anxiety. Under the agreement Vernalis initially
funded research for a period of 6 months, such period extendable for a further 6 months at Vernalis
option. Vernalis extended its right to fund a further 6 months of research in February 2005.
Under the agreement, Vernalis has the exclusive option to negotiate a license and collaboration
agreement. Rhinopharma In February 2005, Vernalis assigned certain patents and licensed exclusively its know how relating
to its phosphodiesterase inhibitor research programme, previously abandoned, to Rhinopharma Limited
in Canada to research, develop and commercialise phosphodiesterase inhibitors for treating allergic
or inflammatory disorders. If Rhinopharma is successful, Vernalis will receive milestones and
royalties on sales from Rhinopharma. Other collaborations ImmunoGen Inc. (BB-10901) In May 2000, Vernalis and ImmunoGen Inc., entered into a collaboration to develop and commercialise
ImmunoGens huN901-DM1, subsequently re-named as BB-10901, targeted at the treatment of small cell
lung cancer. Under the agreement, Vernalis was granted exclusive rights to apply for regulatory approval and
commercialise BB-10901 in Europe and Japan. Upon signature of the agreement, Vernalis paid $1.5
million for its rights to BB-10901. On January 7, 2004, the parties entered into a termination agreement under which Vernalis
relinquished all rights to this product. Vernalis will not undertake any further development beyond
the completion of certain ongoing clinical studies. MethylGene Inc. (MG98) In February 2002, Vernalis signed an agreement with MethylGene Inc., a privately-held Canadian
biopharmaceuticals company, granting Vernalis the European development and commercialization rights
for MG98, MethylGenes leading experimental anti-cancer drug. Under the License, Development and Commercialization Agreement, Vernalis made an initial research
and development payment to MethylGene of $1.7 million, to be followed by milestone payments of up
to $12.8 million based on successful regulatory approval and commercialization for MG98 in Europe.
MethylGene would also receive undisclosed royalties on sales. In addition, under a separate Stock
Purchase Agreement, Vernalis made an equity investment of $2 million in the private stock of
MethylGene. On November 25, 2003, the parties entered into a termination agreement under which Vernalis
relinquished all rights to this product. Vernalis will not undertake any further development beyond
the completion of one ongoing clinical study. 24




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Vernalis plc Eli Lilly & Company (VML 670) In 1998 Vernalis signed an agreement with Lilly for Vernalis to develop an early development stage
drug discovered by Lilly, VML 670, in one or more indications, including as a treatment for sexual
dysfunction experienced by people taking a class of drug for depression called SSRIs. An initial Phase IIa study with the product in treatment emergent sexual dysfunction met some
secondary end-points but failed to meet its primary end-point. The study data have been provided to
Lilly. Vernalis will not undertake any further development. The agreement was terminated on April
26, 2004. Vernalis is currently seeking opportunities to license this project to third parties. Roche (A2A receptor) In May 2002, Vernalis entered into a collaboration with Roche to discover and develop new drugs for
the treatment of depression. Under the terms of this agreement, Roche had an option to license
worldwide rights to develop, manufacture and commercialise compounds arising from Vernalis
adenosine A2A antagonist research program in depression. Roches option terminated in June 2003 and
Vernalis resumed control over its A2A antagonist programs, which are targeted at a range of
indications including Parkinsons disease and depression. In June 2004 Biogen Idec entered into an
agreement to advance research into V2006, the A2A program being investigated for Parkinsons
disease. Biogen Idec also has the rights to one back up compound as well as option rights over
Vernalis entire A2A research programs. AstraZeneca (Anti-infectives) On October 17, 2003 Vernalis signed a research agreement with AstraZeneca. Under the agreement,
AstraZeneca used Vernalis structure-based drug discovery (SBDD) technology to investigate a number
of proprietary AstraZeneca compounds against certain anti-infective drug targets. The work under
this agreement is now completed. Merlion Pharmaceuticals In April 2003 MerLion Pharmaceuticals Pte Ltd., a Singapore-based drug discovery company, and
Vernalis entered into a two-year research agreement to discover and develop new classes of
anti-bacterial ribosomal inhibitors from natural sources. The research term expired in April 2004
and no further research or development is taking place under the agreement. OSI Pharmaceuticals, Inc. (MEIs) In August 2001, Vernalis transferred part of its pre-clinical research facilities to OSI
Pharmaceuticals, Inc. (OSI) for consideration of £8.7 million in cash. In addition, Vernalis and
OSI entered into an agreement whereby OSI acquired rights to screen Vernalis metalloenzyme
inhibitor (MEI) and other chemical libraries. The agreement with OSI expired in November 2003. Schering-Plough Limited (MMPI) In September 1999, Vernalis and Schering-Plough Limited (Schering-Plough) signed an agreement to
develop and commercialise Vernaliss MMPIs, including marimastat and BB-3644, for the treatment of
cancer. The parties have now ceased all collaborative efforts and the agreement between the parties
was terminated in March 2003. Tanabe Seiyaku In November 1996, Vernalis signed a development and license agreement with Tanabe Seiyaku (Tanabe)
to develop and market marimastat in the territories of Japan, China (including Hong Kong), Taiwan
and Indonesia. Tanabe has taken the results of Vernalis and Schering-Ploughs (an ex-licensee in
North America and Europe) clinical trials into account and has now decided to discontinue
development in Japan. DevCo Pharmaceuticals Limited (Lexipafant) In March 2000, Vernalis and DevCo Pharmaceuticals Limited (DevCo) announced that they had signed an
agreement to develop the platelet activating factor (PAF) antagonist, lexipafant, for prophylaxis
of certain serious neurological and renal complications experienced by patients undergoing cardiac
surgery. The terms of the agreement grant DevCo exclusive rights to develop, manufacture and sell lexipafant
for the treatment of human disease other than in the fields of oncology and ophthalmology. DevCo
will undertake all development and, if lexipafant is brought to market, pay Vernalis a royalty on
sales. 25




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Vernalis plc R&D Systems Europe Limited Following the sale in July 1993 of British Bio-technology Products Ltd (now known as R&D Systems
Europe Ltd) to Techne Corporation, a joint biological research agreement was entered into between
Vernalis, R&D Systems Europe Ltd and Techne Corporation. Under the terms of this agreement, R&D
Systems Europe Ltd paid Vernalis research fees for the exclusive rights to develop, manufacture and
sell products to the basic research reagent or diagnostic markets arising from biological molecules
developed by Vernalis. Royalties are payable to Vernalis on any products developed by R&D Systems
Europe Ltd from such biological molecules. The agreement was terminated on December 31, 1999,
however, royalties continue to be paid in respect of the sale by R&D Systems Europe Ltd of research
reagents and diagnostic kits that arose from the biological molecules supplied by Vernalis. External Consultation Establishing a network of collaborations and external consultation is fundamental to the operation
of the Companys business. Under some of its commercial collaborations joint committees of the
Company and the relevant collaborative partner are established to assess findings and determine
action. The Company consults widely with experts to challenge and verify important decisions for
each of its major projects 
  E

Principal Markets in which Vernalis Competes The Groups continuing revenues have been derived primarily from:  (i)

licensing and collaborative research and development agreements, including from Endo, Elan
and SK Chemicals with respect to frovatriptan; Novartis with respect to Hsp90 and Biogen Idec
with respect to the A2A receptor antagonist research program;(ii)

royalties from Elan and from Menarini for sales of frovatriptan by those companies in the
United States and in Europe respectively, and sales revenues from Menarini for supply of
finished frovatriptan product for European markets; and(iii)

government research grants. The licensing and collaborative research and development revenues include royalties received in
respect of sales of frovatriptan, research support fees, milestone payments, and exercise of option
fees and licensing fees. Currently, frovatriptan is licensed to Endo Pharmaceuticals for sales in
North America, Menarini for sales in Europe and certain countries in Central America and SK
Chemicals in Korea. Other licensing arrangements may be made in the future to cover territories
outside of these areas. Frovatriptan is also in clinical development as a prophylactic treatment
for MRM. Vernalis other development and research programs are in therapeutic markets with significant
growth potential: cancer, thrombosis, depression and obesity. The Groups losses have fluctuated and are expected to fluctuate from year to year due to a number
of factors, including, but not limited to:  

the introduction of frovatriptan into new markets;

completion of the restructuring of the commercial arrangements for the sale of frovatriptan in North America

frovatriptans performance, in terms of market share, in the countries in which it is marketed;

the approval or not of frovatriptan as a prophylactic treatment for MRM;

establishment of the US commercial infrastructure;

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. 26




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Vernalis plc The production and potential marketing of Vernalis products and its ongoing research and
development activities are subject to regulation by numerous governmental authorities in the US
(including the FDA), the UK and Europe and by regulatory agencies in other countries where Vernalis
intends to test or market products it may develop. The uncertainties involved in the regulatory
approval process could significantly affect the Groups operational results and its ability to
achieve profitability. 
  F

Revenues The geographical analysis of revenue, under UK GAAP, based on origin of payment for fiscal years
2004, the transition period ended December 31, 2003, fiscal years 2003 and 2002 is as follows: Eight monthsYear ended
    
    
    Year ended
    
    
    ended
    
    
    Year endedApril 30
    
    
    April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000United Kingdom
    
    
    602
    
    
    
    90
    
    
    
    49
    
    
    
    161United States
    
    
    
    
    
    
    420
    
    
    
    2,937
    
    
    
    11,207Rest of World
    
    
    14,164
    
    
    
    8,633
    
    
    
    5,645
    
    
    
    3,82714,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195
 The analysis of revenue by category is: Eight monthsYear ended
    
    
    Year ended
    
    
    ended
    
    
    Year endedApril 30
    
    
    April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Product sales and royalties
    
    
    799
    
    
    
    2,097
    
    
    
    2,592
    
    
    
    10,018Collaborations
    
    
    13,967
    
    
    
    7,046
    
    
    
    6,039
    
    
    
    5,17714,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195
 
  G

Seasonality of the Companys Business The Company does not consider its business to be materially affected by seasonal variations. 
  H

Marketing Channels and Sales Methods In November 2001, the FDA granted marketing approval for frovatriptan in the US for the acute
treatment of migraine. Elan and its co-promotion partner UCB launched frovatriptan in the United
States during June 2002, under the trademark Frova. In May 2004 Vernalis reacquired the rights to
frovatriptan from Elan and subsequently licensed the product to Endo Pharmaceuticals in a
transaction that was completed in August 2004. Frovatriptan has been relaunched by Endo with an
expanded sales force and a revised marketing focus on the benefits of the products long duration
of action. In February 2005, Vernalis exercised its option to co-promote frovatriptan in the US
alongside Endo, and Endo will substantially fund the Vernalis sales team of up to 25 speciality
neurology sales representatives for up to five years beginning January 1, 2005. Vernalis has also signed a license agreement with Menarini granting Menarini exclusive marketing
rights for frovatriptan in the European Union, Eastern Europe and specified countries in Central
America. Under this agreement Vernalis supplies Menarini with the finished packed product ready for
sale. In September 2004, Vernalis signed an agreement with SK Chemicals Co., Ltd of Korea, granting them
exclusive distribution rights for frovatriptan in the Korean market. SK Chemicals are responsible
for managing and funding the regulatory approval process and the subsequent marketing of the
product in Korea. Vernalis is exploring opportunities to generate further revenues by selecting marketing partners in
other geographic areas not covered by existing marketing agreements with Endo, Menarini and SK
Chemicals. 
  I

Patents, Licenses and Proprietary Rights Vernalis pursues a policy of seeking to obtain patent protection for its inventions in the UK, the
US, Europe, Japan and in selected other countries and defends its patents forcefully. Item 3D of
this document sets out the key risk factors, including those relating to Vernalis intellectual
property and its ability to protect its patents. Vernalis also relies upon trade secrets, know how,
continuing technological innovations and licensing opportunities to develop and maintain its
competitive position. 27




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Vernalis plc Certain products and processes currently being developed or considered for development by Vernalis
are in the area of biotechnology. The number of patent filings by biotechnology firms in major
jurisdictions is particularly high and the outcome of such applications is generally uncertain and
involves complex legal and factual questions. To date, no consistent international policy has
emerged regarding the breadth of claims allowed in biotechnology patents. Accordingly, there can be
no assurance that the Group will develop products or processes that are patentable, that patent
applications made by the Group, or made by parties who have agreed to license their inventions to
the Group, will result in patents being issued or that, if issued, the claims allowed will be
sufficiently broad to protect what Vernalis believes to be its proprietary rights or that such
patents will prevent others from developing similar or functionally equivalent products or
processes. In addition, there can be no assurance that products or processes covered by such patents, or any
other products or processes developed by the Group or licensed to the Group, will not infringe
patents owned by third parties or be subject to claims of patent infringement by these parties. In
such a situation, Vernalis may have to obtain a license, defend an infringement action in court or
challenge the scope or validity of any infringed or allegedly infringed patents. There can also be
no assurance that such required licenses will be available to the Group at all, or if available,
that such licenses will be on terms acceptable to the Group or that Vernalis will prevail in any
patent litigation. Failure to obtain a license or prevail in any patent litigation relating to any
technology that Vernalis may require to commercialise its products or processes may have a material
adverse impact on the Group. Litigation may also be necessary to enforce any patents granted to Vernalis or to determine the
scope and validity of third party patents. Patent litigation is time consuming and expensive. There
can be no assurance that Vernalis will have, or will devote, the necessary resources to conduct
patent litigation. International policy with regard to the breadth of claims allowed in chemical
patents is better defined than that of biological entities and is therefore of greater certainty,
but there can be no assurance that patent applications made by or licensed to the Group will result
in patents being issued or that, if issued, the patents will provide the right to exclude
competitors with similar technology. The Group maintains an active policy of filing patent applications. Vernalis normally commences its
patent filing process by filing in the UK, which filing is generally followed by a filing under the
Patent Co-operation Treaty (PCT). The PCT allows for multi-jurisdictional filings to be made under
the same application. The countries normally covered by the various applications and designated
under the PCT system are the UK, the US, Canada, Japan and European countries that are parties to
the European Patent Convention (EPC) or the PCT. Applications in respect of additional countries
are filed in certain cases. A PCT application fragments during its pendency into a number of
national and regional (for example, EPC) applications. An EPC application matures on grant into a
European patent, which, if appropriate action is taken, can be regarded as a bundle of national
rights equivalent to a collection of national patents in the countries designated. The time taken to research and develop medicinal products reduces the marketing time protected by a
product patent or patents, and can therefore reduce the period available to the developer in which
to recoup its investment through sales. In 1992, the European Union introduced Regulation 1768/92
creating a Supplementary Protection Certificate (SPC) for authorised products. While this does
not constitute an extension to the patent from which a product derives, it does confer certain
rights of a similar nature in respect of the product(s) derived from the patent after that patent
has expired. The period during which the SPC is effective depends on calculations based upon the date of the
application for the patent and the grant of the first marketing authorization for a product derived
from the patent with an upper limit of five years. It may be possible to extend the patent expiry
date of some or all issued patents by up to five years in European Community countries by applying
for supplementary patent protection. There is a similar arrangement in the United States, where the
term of extension is equal to the time that the FDA review extends beyond the patent issue date,
provided that the extension does not exceed 14 years from the date of FDA approval. There can be no assurance that patents will be granted on pending applications made by the Group or
parties that have licensed their inventions to the Group or that any issued patents will provide
significant proprietary protection or commercial advantage or will not be infringed or designed
around by others. Since publication of inventions or discoveries in scientific or patent literature
often lags behind actual invention or discovery, Vernalis cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or that it was the first
to file applications for such inventions. There can be no assurance that Vernalis patents or
patent applications will not become involved in opposition proceedings instituted by third parties.
If such proceedings were initiated against Vernalis rights, the defence of such rights could
involve substantial costs and the outcome cannot be anticipated. If patents are issued to other
parties that contain valid claims that are interpreted to cover any of Vernalis products, there
can be no assurance that the Group would be able to obtain licenses to such patents at a reasonable
cost, if at all, or be able to develop or obtain alternative technology. Competitors or potential
competitors may have filed applications for, may have received patents covering, or may obtain
additional patents and proprietary rights that may relate to, compounds or processes competitive
with those of Vernalis. 28




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Vernalis plc Vernalis also relies upon unpatented proprietary technology, and no assurance can be given that
others will not independently develop substantially equivalent proprietary technology and
techniques, or otherwise gain access to the Groups proprietary technology or disclose such
technology, or that the Group can meaningfully protect its rights to its unpatented proprietary
technology, secrets and know how. It is Vernalis policy generally to require its consultants, outside scientific collaborators,
sponsored researchers and other advisers to execute confidentiality agreements prior to the
commencement of consulting or other relationships with the Group. Employees have a similar
confidentiality provision in their employment contracts. These agreements provide that all confidential information developed or made known to the
individual during the course of the individuals relationship with the Group is to be kept
confidential and not disclosed to third parties except in specific, limited circumstances. Vernalis
also requires signed confidentiality or material transfer agreements from any person who is to
receive confidential data or proprietary material from Vernalis. In the case of consultants, the
agreements generally provide that all inventions conceived by the individual while rendering
services to the Group shall be assigned to Vernalis as the exclusive property of Vernalis. Similar
provisions are contained in Vernalis employment contracts, and provisions of many national laws
provide that intellectual property rights created during the course of employment belong to the
employer. There can be no assurance, however, that these agreements and provisions will provide
meaningful protection or adequate remedies for the Groups intellectual property rights, trade
secrets or other confidential information in the event of unauthorised use or disclosure. Summarised below is the status of the outstanding patents and patent applications on the Companys
four most advanced programmes. The Company is dependent on the patents set out below and, in
particular, the patents in relation to frovatriptan, currently its only marketed
product.  (a)

Frovatriptan Frovatriptan is the single enantiomer form of a racemic compound. Vernalis owns composition of
matter patents covering the racemic compound and the single enantiomer form. Patents covering the
compound have been issued in the United States, Europe, Japan and a number of other countries with
a priority date of 1991, and will expire in 2012. Patents covering the single enantiomer form have
been issued in the United States, Europe and Japan with a priority date of 1992 and will expire in
2013. An application has been filed to extend the term of one of the issued US patents to 2015. The
Company has applied in fourteen European Countries for Supplementary Protection Certificates
(SPCs) on patents covering the compound and several of these applications have now been
granted. A process patent covering the manufacturing process for the single enantiomer form of
frovatriptan has been issued in the United States with a priority date of 1998 and is due to expire
in 2019. Applications are pending in Europe and Japan.  (b)

V2006 V2006 is currently protected by 22 national/regional patent applications filed in July 2003,
including applications in the United States, Europe and Japan, that are based on an earlier
international application that covers the molecule both generically and specifically, and which has
a priority date of January 10, 2001.  (c)

V10153 Four patent families relate to V10153. Of the three families that protect plasminogen mutants, all
have been issued with US, European and Japanese patents, and two with European patents, the third
European case considered by the European Patent Office to be in a state of allowance. These patents
are due to expire between 2010 and 2014. A further family protecting V10153 in association with a
tissue plasminogen activator (tPA) has been issued with US and European patents due to expire
in 2017 and 2015 respectively; the corresponding Japanese application is still pending.  (d)

V140 Vernalis is responsible for the prosecution of the V140 patent portfolio licensed from Monash
University. This includes a pending European application for the use of V140 in analgesia, and a
corresponding US patent due to expire in 2016. National/regional applications, including
applications in the United States, Europe and Japan, have been filed for the use of V140 in
neuropathic pain, based on an earlier international application that is entitled to a priority date
of August 28, 2001. An international (PCT) patent application has been filed, with a priority date
of October 2003, for the use of V140 to reduce or reverse opioid tolerance in the treatment of
pain. 29




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Vernalis plc 
  J

Competition The biotechnology and pharmaceutical industries are characterised by rapidly evolving technology
and intense competition. Vernalis competitors include major pharmaceutical, chemical and
specialised biotechnology companies, many of which have financial, technical and marketing
resources significantly greater than those of the Group. In addition, many biotechnology companies
have formed collaborations with large, established companies to support research, development and
commercialization of products that may be competitive with those of the Group. Academic
institutions, governmental agencies and other public and private research organizations are also
conducting research activities and seeking patent protection and may commercialise products on
their own or through collaborations. Vernalis is aware of certain products manufactured or under
development by competitors that are used for the prevention or treatment of certain diseases and
health conditions targeted by the Group for product development. The existence of these products,
or other products or treatments of which the Group is not aware, or products or treatments that may
be developed in the future, may adversely affect the marketability of products developed by the
Group. Frovatriptan is the Groups only marketed product. Frovatriptan is one of seven triptans currently
approved for the acute treatment of migraine. Frovatriptan was launched in the USA in the second
quarter of 2002, where it is marketed by Endo Pharmaceuticals as Frova®. In Europe, frovatriptan
is marketed by Menarini in Italy, Germany, Austria, Ireland, Spain, Greece, Holland and the UK. In
Germany, where frovatriptan is marketed as Allegro®, the drugs share of the overall triptan market
is approximately 10 per cent. Frovatriptan is approved in an additional 18 European territories, as
well as 5 Central American countries and is expected to be launched in further of these in 2005.
Frovatriptan faces intense competition from large, well-funded pharmaceutical companies.
Sumatriptan, marketed under the name Imitrex® and developed by GlaxoSmithKline, was the first
triptan approved for the acute treatment of migraine, and remains the dominant product in the
United States and worldwide, with annual sales in excess of $1 billion. Five other triptans are on
the market, including Zomig® (zolmitriptan), originally from Astra-Zeneca (now marketed by
Medpointe), Maxalt® (rizatriptan) from Merck, Amerge®/Naramig® (naratriptan), a follow-up compound
to Imitrex® from GlaxoSmithKline, Axert® (almotriptan) from Johnson & Johnson and Relpax® from
Pfizer. None of the triptans is currently approved for prophylactic use in migraine. There are also a number of new approaches to the treatment of migraine that are in research and
development by other companies. Vernalis products under development are expected to address a broad range of markets. Vernalis
competition will be determined in part by the potential indications for which the Groups products
are developed, and ultimately approved, by regulatory authorities. In addition, the first
pharmaceutical product to reach the market in a therapeutic or preventive area is often at a
significant competitive advantage relative to later entrants to the market. Accordingly, the
relative speed with which Vernalis or its collaborative partners can develop products, complete
clinical trials and approval processes, and supply commercial quantities of the products to the
market are expected to be important competitive factors. The Groups competitive position will also
depend on its ability to attract and retain qualified scientific and other personnel (current
retention rates remain at normal levels), develop effective proprietary products, develop and
implement production and marketing plans, obtain and maintain patent protection and secure adequate
capital resources. Vernalis expects its products, if approved for sale, to compete primarily on the
basis of product efficacy, safety, patient convenience, reliability, value and patent position. The biotechnology sector, both in the United States and Europe, has recently been characterised by
rapid consolidation as biotechnology companies strive to combine their forces to address the
shortage of equity and debt financing due, in part, to the difficult global trading environment. 
  K

Material Effects of Government Regulation The international pharmaceutical industry is highly regulated by numerous governmental authorities
in the US, the UK, Europe, and by regulatory agencies in other countries where Vernalis intends to
test or market products it may develop. National regulatory authorities administer a wide range of
laws and regulations governing the testing, approval, manufacturing, 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. The national regulatory authorities have high standards of technical appraisal. Consequently, the
introduction of new pharmaceutical products generally entails a lengthy development and approval
process. Of particular importance is the requirement that products be authorised or registered
prior to marketing and such authorization or registration be maintained. Of particular significance
in the US are the US Food and Drug Administration (FDA) requirements covering research and
development, testing, manufacturing, quality control, labelling and marketing of drugs for human
use. A pharmaceutical product cannot be marketed in the US until it has been approved by the FDA,
and then can only be marketed for the indications and claims approved by the FDA. 30




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Vernalis plc As a result of these requirements, the length of time, the level of expenditure and the laboratory
and clinical information required for approval of a New Drug Application (NDA) or a product license
application are substantial and can require a number of years, although recently revised
regulations are designed to reduce the time for approval of new products. In Europe, two systems
for the registration of pharmaceutical products are in operation, the centralised procedure and the
mutual recognition procedure. In the centralised system, review of the proposed new product is
co-coordinated by the European Medicines Evaluation Agency (EMEA) located in London and, if the
product is found to meet the criteria for marketing authorization, a European Marketing
Authorization is granted which is valid throughout the EU. In the mutual recognition procedure, the
initial review is undertaken by the national health authority of one of the EU member states and,
if this country considers the product acceptable for marketing authorization, the other EU member
states are asked to recognise this approval and issue their own authorization. The mutual
recognition procedure thus results in a national authorization in each member state. However,
irrespective of the procedure followed, the technical requirements for marketing authorization are
the same. For European countries that are outside the EU, national marketing authorization
procedures with similar technical standards exist. Vernalis anticipates that the introduction of
new products will continue to require substantial effort, time and expense in order to comply with
regulatory requirements. No new drug is permitted to be sold in developed countries without extensive data on its quality,
safety and efficacy first being obtained, organised and submitted to governmental regulatory
authorities. The development stage of this process may be divided into two parts: (i) pre-clinical,
and (ii) clinical development. Included in pre-clinical development are the development of
processes for manufacturing the product candidate, toxicology studies and other activities such as
pharmacology and drug metabolism studies. Clinical trials run until, and in some cases after, the
product is marketed and cover several, sometimes overlapping, phases. In Phase I trials, a small number of healthy human volunteers are exposed to a product candidate.
Typically, the volunteers are administered single or multiple doses, following which the effects of
the candidate drug are closely monitored. The way the body deals with the product candidate from
administration to elimination (pharmacokinetics) is also studied. Phase II trials involve the first
studies on patients and explore the doses required to produce the desired benefits. Safety and
pharmacokinetic information is also collected. Phase III trials typically involve larger numbers of
patients and geographically dispersed test sites. The trials in this Phase may compare the new
agent with other available treatments. In Phase III trials, costs are significantly higher than in
earlier Phases due to the larger number of patients and longer duration of trial. In respect of
Vernalis portfolio, this would be particularly true in the case of frovatriptan for the prevention
of MRM. The clinical protocols, which detail the objectives of the study and the parameters to be used to
monitor safety and efficacy, must be approved by the national regulatory authorities. Further, each
clinical study must be conducted under the auspices of an independent institutional review board,
also known in Europe as an ethic committee, at the institution where the study will be conducted.
The institutional review board considers, among other things, the scientific appropriateness of the
study, the safety of human subjects and the potential liability of the institution. The
institutional review board is also responsible for monitoring the approved protocols in active
trials. The institutional review board may require changes in a protocol and it may decide not to
permit a study to be initiated or completed. This process can be conducted in parallel with the
regulatory approval process, but may add considerable time and expense to the early regulatory
review process. After completion of clinical trials of a new drug, marketing approval must be obtained in each
country in which the product will be sold. The data generated in each of the clinical trial phases,
together with data from the pre-clinical studies and the development of the manufacturing process,
forms the basis of the regulatory dossier that is submitted to the regulatory authorities for
review and approval to market the drug. In the United States, this dossier is called the New Drug
Application. In Europe it is called the Marketing Authorization Application. This dossier will also
be used to establish the text of the product label, which forms the basis of the marketing platform
and often requires negotiation between the licensing authority and the sponsor company. In addition to the forms of regulation referred to above, the prices of pharmaceutical products in
many countries are controlled by law. In some countries, such as France and Japan, the prices of
individual products are regulated. By contrast, in the UK, prices are controlled by reference to
limits upon the overall profitability, measured by the rate of return on capital employed, of sales
of products supplied under the UK National Health Service. The permitted rate of return on capital
employed for each pharmaceutical company is determined through negotiations with the UK Department
of Health under the 1999 Pharmaceutical Price Regulation Scheme. If a companys actual rate of
return exceeds the agreed rate, it is required to negotiate either a repayment of past profits that
the Department of Health considers to be excessive or future price reductions. There is no
assurance that the current arrangements will continue in the future. Governments may also influence the price of pharmaceutical products through their control of
national healthcare organizations, which may bear a large part of the cost of supply of such
products to consumers. In the US and Germany, indirect pressure can be exerted on prices by
government funded or private medical care plans. 31




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Vernalis plc Vernalis is unable to predict whether, or to what extent, its business may be affected by
legislative and regulatory developments relating to specific pharmaceutical products or the pricing
of such products, or to its overall business. The uncertainties involved, or any adverse regulatory
developments, could significantly affect the Groups operational results and its ability to achieve
profitability. 
  L

Organisational Structure Within the Group, Vernalis plc is the holding company listed on the London Stock Exchange and
quoted on NASDAQ. The three principal operating subsidiaries during the fiscal year were Vernalis (R&D) Limited
(formerly Vernalis (Oxford) Limited and formerly British Biotech Pharmaceuticals Limited), Vernalis
Research Limited and Vernalis Development Limited (all covering research, development and
commercialization of pharmaceutical products). On December 31, 2003, Vernalis (Cambridge) Limited
assigned all of its trade and assets to Vernalis (R&D) Limited. On July 31, 2004 Vernalis Research
Limited assigned all of its trade and assets to Vernalis (R&D) Limited. At December 31, 2004, the Company had the following principal wholly owned subsidiary undertakings: Subsidiary Undertaking
    
    Nature of business
    
    IncorporationVernalis (R&D) Limited (previously Vernalis (Oxford)
Limited, which was previously British Biotech
Pharmaceuticals Limited)
    
    R&D
    
    England & Wales (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
    
    USAVernalis (Cambridge) Limited (previously RiboTargets Limited)
    
    R&D
    
    E&WVernalis Group Limited
    
    Holding company
    
    E&W- Vernalis Development Limited (previously Vernalis Limited)
    
    R&D
    
    E&W- Vernalis Research Limited
    
    R&D
    
    E&W
 
  M

Property, Plant and Equipment Vernalis headquarters are in Winnersh and Vernalis has research and development facilities in both
Winnersh and Cambridge. The complete schedule of Vernalis offices and laboratory facilities is:- ApproximateProperty
    
    Description
    
    Title
    
    Location
    
    area (m2)Oakdene Court
    
    Office and laboratory facilities
    
    Leasehold
    
    Winnersh
    
    
    4,400Granta Park (Building I)
    
    Office and laboratory facilities
    
    Leasehold
    
    Cambridge
    
    
    2,608Granta Park (Building II)
    
    Office and laboratory facilities  unoccupied
    
    Leasehold
    
    Cambridge
    
    
    2,4184-10 The Quadrant
    
    Offices and laboratory facilities, unoccupied
    
    Leasehold
    
    Oxford
    
    
    1,944
 These properties are believed to be in good condition. Vernalis has a continuing program of
repair and improvement considered appropriate to meet the needs of the Group. Vernalis currently operates from the sites at Winnersh, Berkshire and Granta Park (Building I),
Cambridge. The lease of the premises at Winnersh expires in 2017, with the option to terminate
early in 2012. The leases for the premises at Cambridge expire in 2019 and 2023. These premises
provide adequate facilities for the operations of Vernalis in the short term. Manufacturing of
clinical trial supplies and commercial supplies of frovatriptan is subcontracted to third party
manufacturers who comply with nationally and internationally accepted quality standards, including
good manufacturing practice, good laboratory practice and good clinical practice. The Company has
no plans to establish its own manufacturing capability in the foreseeable future. Granta Park, Building I is currently operating at close to full capacity. Building II is currently
unoccupied and the Company is reviewing options for this site. The Company has entered into a
guarantee of the obligations of Vernalis (Cambridge) Limited in respect of the lease of Granta
Park, Building I and will be required to enter into a guarantee of the obligations of Building I
and II in respect of securing the consent of the landlord to the assignment of the benefit of the
lease from Vernalis (Cambridge) Limited to Vernalis (R&D) Limited as part of the assignment of
assets between the two companies. The Company is actively looking to sub-let 4-10 The Quadrant, previously leased by Celltech. The
leases of the premises expire in 2015 and 2016 respectively. 32




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Vernalis plc In July 2003, Vernalis disposed of its leasehold interest in a fourth neighbouring building in
Oxford, Harrow House. Vernalis operations in Oxford have ceased and all operations at the Oxford
site are now closed. The Company sold its freehold properties (Thames Court, Brook House and
Cherwell House together with the car parks) in Oxford in October 2004 for a total sale price of
£3.3 million plus VAT, and the mortgage was repaid. 
 ITEM 5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTS This operating and financial review discusses the operating results and financial condition of
Vernalis for the fiscal year ended December 31, 2004 (fiscal 2004), for the transition period ended
December 31, 2003 (transition period) and for the two years ended April 30, 2002 and April 30, 2003
(fiscal 2002 and 2003 respectively). The Groups financial results for the periods prior to
September 2003, reflect the merger between the Company and Vernalis Group which was accounted for
as a merger of equals (pooling of interests) in accordance with the principles of merger
accounting that have been adopted under UK GAAP. In contrast, under U.S. GAAP, the transaction has
been accounted for as an acquisition of Vernalis Group by the Company using purchase accounting.
A description of the significant differences and reconciliations of net income and shareholders
equity, prepared in accordance with US GAAP, are set forth in Note 3 of the Notes to the
Consolidated Financial Statements. Business Overview Vernalis is engaged in pharmaceutical research and development. The Groups only marketed product
is frovatriptan. Frovatriptan is a selective 5-HT1B/1D receptor agonist developed as an acute oral
treatment for migraine headache and its associated symptoms. Vernalis is currently conducting
further studies to develop the compound as a prophylactic oral treatment for MRM. Frovatriptan was launched in the United States in June 2002 by Elan, frovatriptans original US
licensee (which co-promoted the product with UCB). In May 2004, Vernalis terminated its agreement
with Elan and reacquired the North American rights to frovatriptan for a total consideration of $50
million payable in instalments over 21 months up to December 31, 2005. This figure was subsequently
reduced to $44 million following renegotiation of the consideration in August 2004 and was settled
in full during the year. In August 2004 Vernalis licensed frovatriptan to Endo Pharmaceuticals Inc., in a transaction that
will pay Vernalis $60 million in upfront and anniversary payments, $40 million on approval of
frovatriptan for MRM and up to $255 million in sales milestones. In addition, Endo has extended a
$50 million interest bearing 5-year loan facility. The agreement also contained an option for
Vernalis to elect to co-promote frovatriptan which Vernalis exercised in February 2005. Menarini,
frovatriptans European licensee, has launched frovatriptan in Germany (November 2002), Austria
(November 2003), The Republic of Ireland (March 2003), the United Kingdom (April 2003), The
Netherlands (April 2004), Italy (September 2004), Spain (October 2004) and Greece (December 2004).
Frovatriptan has achieved a share of the oral triptan migraine market of approximately 10 per cent
in Germany. Frovatriptan is expected to be launched in additional European and Central American
countries in 2005. In September 2004 frovatriptan was granted approval in Canada for the treatment
of acute migraine. The approval follows a successful dialogue with the Canadian Health Authorities
regarding the product label, a necessary step prior to initiation of the national pricing approval. The Group has four products in development, in addition to frovatriptan for the prevention of MRM.
V10153 is a recombinant protein designed to prevent and dissolve blood clots, with potential to
improve the treatment of thrombolytic diseases such as stroke, acute myocardial infraction (AMI) or
deep vein thrombosis (DVT). V140 (alphadolone acetate) is a GABAA agonist targeted at the treatment
of pain in cancer payments. V2006 is an adenosine A2A receptor antagonist targeted at the chronic
treatment of Parkinsons disease. MMPI, a selective inhibitor of MMP-12 (matrix metalloprotease
inhibitor-12), is targeted at finding potential treatments for inflammatory diseases. The Group also maintains a number of collaboration agreements. For additional information and the
current status of these collaborations, see Item 4D, Information on the Company  Commercial
Collaborations. In recent years, Vernalis has kept its product portfolio and commercial collaborations under
constant review with a view towards focusing available resources to frovatriptan and a selected
number of products in development. Consequently, the Group has discontinued or restructured a
number of other research and development projects and collaborations. Financial Overview The Group has made losses since its foundation. As at December 31, 2004, the Groups accumulated
losses were £485,220,000 as compared to £456,011,000 to December 31, 2003, £421,792,000 at April
30, 2003 and to £390,595,000 at April 30, 2002. 33




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Vernalis plc The Groups key financial objective is the enhancement of its liquidity position in order to fund
the promotion of frovatriptan in its existing markets and its introduction into new markets, its
development for MRM, as well as research and development for the Groups other products in
development. The following are the most critical aspects of the Groups operating results and
financial condition and the most significant challenges the Group is facing in order to achieve its
financial objectives.  

The Groups cash and other investments as at December 31, 2004
amounted to £33.3 million. Following the successful completion of
a Placing and Open Offer of shares in February 2005, raising net
funds of approximately £27.6 million, the Company believes it has
sufficient funds for the foreseeable future.

The Group has derived revenue from collaborations with other
pharmaceutical companies and, since the launch of frovatriptan in
2002, through milestone and royalty payments received from Elan
and Menarini and payments for the supply of finished product from
Menarini relating to sales of frovatriptan. Following the
re-acquisition of the North American rights on frovatriptan in May
2004, the Group earned direct sales revenue from the sales of
frovatriptan in the United States, until August 2004.

In August 2004, Vernalis licensed Frovatriptan to Endo
pharmaceuticals. Under the terms, 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 MRM 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 frovatriptan in order to repay this loan. The Groups losses have fluctuated and are expected to fluctuate from year to year due to a number
of factors, including, but not limited to:  

the introduction of frovatriptan into new markets;

completion of the restructuring of the commercial arrangements for the sale of frovatriptan in North America;

frovatriptans performance, in terms of market share, in the countries in which it is marketed;

the approval or not of frovatriptan as a prophylactic treatment for MRM;

establishment of the US commercial infrastructure;

commencement or termination of other collaborative research and development agreements;

the timing of milestone payments under those agreements, the timing of product option and licensing fees;

the time and cost required for clinically developed products to obtain regulatory approval;

competitive technological developments;

additional government-imposed regulation and control;

changes in healthcare systems which affect reimbursement, pricing or availability of drugs and market acceptance of
drugs;

government grants;

the level of interest income; and

variations in the level of expenditures relating to research and clinical development programs. Major Recent Transactions The acquisition of RiboTargets On April 22, 2003, the Company acquired RiboTargets Holdings plc. The acquisition of RiboTargets
has been accounted for under purchase accounting. The Companys intangible assets increased to
£28.7 million (2002: £23.8 million) due to the addition of £8.2 million of goodwill arising on the
acquisition, which is being written off through the statement of operations in three years (under
UK GAAP). The amortisation charge for fiscal 2004 amounted to £2,756,000 for goodwill. Other reserves increased to £50.8 million (2002: £30.7 million) as a result of the issue of 33
million ordinary shares in connection with the transaction. A total of £14.8 million of cash and
short-term investments (net of expenses of acquisition) was included in the assets of RiboTargets
For fiscal 2002, RiboTargets had reported a net loss of £7.7 million on total revenues of £2.2
million. RiboTargets had net assets at that date of £4.3 million, with net cash and cash
equivalents and short-term deposits of £4.3 million. 34




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##### Table of Contents



Vernalis plc The merger with Vernalis Group The merger between the Company and Vernalis Group was completed on November 4, 2003. Under UK GAAP,
the merger was accounted as a merger of equals (pooling of interests), while under US GAAP the
merger was accounted for as an acquisition of Vernalis Group by the Company using purchase
accounting (under purchase accounting, the cost of the investment is calculated at the market
value of the shares issued together with the incidental costs and the assets and liabilities of the
acquired entity are recorded at fair value). The table below shows certain income statement data for each of the Company, Vernalis Group and the
combined Group for the eight month transition period ended December 31, 2003. British Biotech plc
    
    
    Vernalis Group plc
    
    
    Vernalis plc
    
    
    Vernalis plcFour months ended
    
    
    Four months ended
    
    
    Four months ended
    
    
    Eight months endedAugust 31, 2003
    
    
    August 31, 2003
    
    
    December 31, 2003
    
    
    December 31, 2003£000
    
    
    £000
    
    
    £000
    
    
    £000Turnover
    
    
    243
    
    
    
    3,444
    
    
    
    4,944
    
    
    
    8,631Operating loss
    
    
    (11,319
    )
    
    
    (4,862
    )
    
    
    (13,207
    )
    
    
    (29,388
    )Loss on disposal of fixed assets
    
    
    (2,538
    )
    
    
    
    
    
    
    (450
    )
    
    
    (2,988
    )Merger transaction expenses
    
    
    (5,396
    )
    
    
    
    
    
    
    
    
    
    
    (5,396
    )Loss on ordinary activities before
interest and taxation
    
    
    (19,253
    )
    
    
    (4,862
    )
    
    
    (13,657
    )
    
    
    (37,772
    )Net interest receivable and similar
income/charges
    
    
    379
    
    
    
    (168
    )
    
    
    697
    
    
    
    908Loss on ordinary activities before taxation
    
    
    (18,874
    )
    
    
    (5,030
    )
    
    
    (12,960
    )
    
    
    (36,864
    )Tax on loss on ordinary activities
    
    
    1,060
    
    
    
    396
    
    
    
    1,189
    
    
    
    2,645Loss on ordinary activities after taxation
    
    
    (17,814
    )
    
    
    (4,634
    )
    
    
    (11,771
    )
    
    
    (34,219
    )
 Merger transaction expenses relate only to the costs of the merger between the Company and
Vernalis Group. The table below shows certain income statement data for each of the Company, Vernalis Group and the
combined Group for the year ended April 30, 2003. British Biotech plc
    
    
    Vernalis Group plc
    
    
    TotalYear ended
    
    
    Year ended
    
    
    Year endedApril 30, 2003
    
    
    April 30, 2003
    
    
    April 30, 2003£000
    
    
    £000
    
    
    £000Turnover
    
    
    1,078
    
    
    
    8,065
    
    
    
    9,143Operating loss
    
    
    (19,862
    )
    
    
    (16,387
    )
    
    
    (36,249
    )Loss on ordinary activities before interest and taxation
    
    
    (19,862
    )
    
    
    (16,387
    )
    
    
    (36,249
    )Net interest receivable and similar income/charges
    
    
    636
    
    
    
    1,368
    
    
    
    2,004Loss on ordinary activities before taxation
    
    
    (19,226
    )
    
    
    (15,019
    )
    
    
    (34,245
    )Tax on loss on ordinary activities
    
    
    1,738
    
    
    
    1,921
    
    
    
    3,659Loss on ordinary activities after taxation
    
    
    (17,488
    )
    
    
    (13,098
    )
    
    
    (30,586
    )
 At the time of the merger, Vernalis Group had cash and cash equivalents of £16 million. In May
2003, Vernalis Group plc had conducted a rights issue raising approximately £14.4 million net of
expenses. Placing and Open Offer On March 21, 2005, shareholders approved the Placing and Open Offer announced on February 24, 2005.
This raised net funds of approximately £27.6 million by way of a Placing and Open Offer of
43,250,107 new ordinary shares representing approximately 27.8 per cent of Vernalis existing
issued ordinary share capital, full details of which were contained in a circular (with notice of
EGM) sent out to shareholders on February 24, 2005. Trading in the new shares commenced on March
22, 2005, bringing the total number of shares in issue to 198,950,492. For details of other major transactions relating to collaboration agreements, see Item 4D. 35




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##### Table of Contents



Vernalis plc Application of Critical Accounting Policies Purchase and pooling of interests Under UK GAAP, the combination of British Biotech plc and Vernalis Group plc was accounted for as a
merger of equals (pooling of interests). Due to the specific conditions of the merger (i.e.
relative size, relative number of directors, etc) the Company was required to treat the transaction
using merger accounting, in compliance with FRS 6 and the Companies Act 1985. Under US GAAP the
transaction was accounted for as the acquisition of Vernalis Group plc by British Biotech plc using
purchase accounting. Under UK merger accounting, the results of the operations are added together as though the
companies have always been in the same group. The result of this was to increase the net loss for
the transition period ended December 31, 2003 by £4.6 million (period prior to the merger), for
fiscal 2003 by £13.1 million and for fiscal 2002 by £9.9 million. In addition, the share capital issued for the merger with Vernalis Group is treated as though they
had always been issued. The net result was to increase the average number of shares in issue for
the purposes of calculating Loss per share, to 71,010,000 for fiscal 2003 and 70,175,000 for fiscal
2002. The Loss per share for the prior periods was restated as 43.1p for fiscal 2003 and 38.6p for
fiscal 2002. Under UK GAAP, the shares issued for the merger with Vernalis Group were issued at par and to
acquire RiboTargets were valued at the market price on the date of acquisition (April 23, 2003)
respectively. Under US GAAP, the shares issued were valued at the average market price for two days
before and after the announcement of the transactions on July 3, 2003 and March 21, 2003,
respectively. The difference between the par value of shares issued by Vernalis plc and the share
capital and share premium of Vernalis Group are taken to a merger reserve. The movement of the
Companys share price between these dates and methods decreased the UK GAAP value of the purchase
price by £42.5 million in respect of Vernalis Group and £4.0 million in respect of RiboTargets. In
accordance with US GAAP (EITF 95-3) an adjustment was made to the opening net assets position to
reflect the redundancy costs arising following a reorganization of the Group after these
transactions. In accordance with UK GAAP, these costs were expensed in the post-acquisition result
in fiscal 2003. Under US GAAP, the purchase price is allocated to all tangible and identifiable intangible assets
based upon estimated fair value at the date of acquisition. For US GAAP purposes, fair values have
been assigned to intangible assets, which included in-process research and development (£4.1
million) and development technology (£56.5 million) in respect of Vernalis Group and which included
in-process research and development (£5.1 million) and technology platform (£2.5 million) in
respect of RiboTargets. Under UK GAAP merger accounting, the assets already included within the
balance sheet relating to intangibles (£17.6 million), remained on the balance sheet. The
specifically identifiable intangible assets have not been recognised under UK GAAP for the
acquisition of RiboTargets, as they do not meet the criteria for recognition required by FRS 10,
Goodwill and intangible assets. Under US GAAP, the amount of purchase consideration allocated to in-process research and
development is immediately written off to the profit and loss account. The portion of the purchase
price allocated to the technology platform under US GAAP is amortised over the estimated useful
economic life. Under UK GAAP these amounts are included in goodwill for an acquisition. A full summary of the accounting differences resulting from the purchase accounting of the Vernalis
Group merger is set out in Part III, Item 18. Under US GAAP, the FAS 141 gives a number of criteria for determining which party is the accounting
acquirer. These criteria include, relative voting rights, composition of senior management, whether
a premium was paid and by whom. Based on the FAS 141 criteria the Company has concluded that
British Biotech plc was the accounting acquirer. Revenue The Group enters into collaborative research agreements whereby other pharmaceutical and
biotechnology companies assist in the research and development of Vernalis intellectual property.
Under these collaborations, the Group receives revenue from the collaborator and participates with
them in the future research and development of the program. The Group receives revenue from these
agreements that are related either to the achievement of specified objectives or to a commitment of
resources by the Group over a period of time. Revenues related to the achievement of specific
objectives are recognised when those objectives have been met. Revenues that are related to the
commitment of resources over a period of time are recognised in proportion to the work completed.
In August 2002, Vernalis entered into a collaborative agreement with GeneSoft Pharmaceuticals Inc.
(now part of the Oscient Pharmaceuticals Corp. group) and received an initial payment of £3.2
million. This has now been fully recognised following the termination of the research agreement in
September 2003. In October 2000, Vernalis entered into a collaborative agreement with Serono S.A.
and received an initial payment of $5 million (£3.3 million). This was recognised as revenue over
the initial two-year period of the research agreement; hence at December 31, 2003 the revenue had
been fully recognised. 36




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##### Table of Contents



Vernalis plc Three milestone payments have been received from Elan. These milestone payments were: £10.3 million
in fiscal 2002 (recognised in full during the year) relating to the FDA approval of frovatriptan in
the United States; £3.7 million in fiscal 2002 following the launch of frovatriptan in the United
States; and the waiver of a loan of £7.5 million in fiscal 2002, which are being recognised as
income in proportion to the resources committed by Vernalis in each period. As a result, income of
£1,872,000 was recognised in the transition period ended December 31, 2003, £6,058,000 was
recognised in fiscal 2003, and £12,059,000 in fiscal 2002. Under US GAAP, the acquisition of
Vernalis Group plc in September 2003 was accounted under purchase accounting, therefore
pre-acquisition revenue was not recognised in the income statement. Since September 2003, an
additional £120,000 of revenue has been recognised under US GAAP in the income statement.
Following the re-acquisition of North American rights to frovatriptan from Elan, the remaining
deferred income was credited against the value of the intangible asset acquired, under both UK and
US GAAP. In June 2004, the Company entered into a research agreement with Biogen Idec, and received an
initial payment of $10 million. This revenue has been deferred and is being recognised over the
expected life of the contract. In August 2004, the Company entered into a collaborative agreement with Endo Pharmaceuticals Inc,
and received $30 million upfront, together with two guaranteed payments of $15 million each,
receivable in August 2005 and August 2006 respectively. These amounts are currently being
recognised on a straight line basis over the patent life of frovatriptan, which currently expires
in 2014. In September 2004, the Company entered into a collaborative agreement with Novartis, and received
an initial payment of $1.5 million, which is currently being recognised over the 3 year research
phase of the programme. Goodwill and Intangible Assets Vernalis has entered into in-licensing arrangements with other pharmaceutical and biotechnology
companies for which payments are made, first, to acquire licenses to develop their intellectual
property and, second, in relation to the achievement of specific research and development
milestones. Under UK GAAP, the Group is required to capitalise these payments as intangible fixed
assets and amortise them over their expected useful life. Following the termination of these
agreements, the intangible assets have been disposed of, and a loss on disposal of £1.8 million has
been recorded in the transition period. In addition, following the merger with Vernalis Group, the
Company has intangible assets relating to the acquisition of Cerebrus and payments made to
GlaxoSmithKline (GSK) in respect of the rights to frovatriptan of £17.6 million, which have been
revalued under US GAAP, at the time of the acquisition. Following the re-acquisition of the North American rights to frovatriptan from Elan, in May 2004,
the Company has capitalised the sum of £21.2 million, which is being amortised on a straight line
basis to the end of the patent life of frovatriptan in 2014, which is considered to be the useful
life of the product. This treatment is identical under UK GAAP and US GAAP. The expected useful life is based upon the shorter of the expected length of the agreement or the
expected patent life, and is subject to an impairment review, which is based on the net present
value of expected returns from the arrangement. Under US GAAP, these payments are subject to an
additional review and may only be recognised as an asset if an alternative primary use exists for
the product or technology. Vernalis believes that such an alternative primary use does not exist
for the acquired products still in development and, under US GAAP, has made an additional charge of
£898,000 for the year ended April 30, 2002 reducing the carrying value of intangible fixed assets.
No further charge was made in fiscal 2003, the transition period, and fiscal 2004 Fixed Asset Investments Vernalis has investments in quoted and unquoted stocks acquired as a result of collaborations with
other companies. Under UK GAAP, these investments are carried at cost less any permanent diminution
in value. During the period, under UK GAAP, provision for the permanent diminution in value of
listed investments was made by reference to the evolution of the market price of the shares and to
reflect the downturn in share values across the biotechnology sector. As at December 31, 2004, the
carrying value of investments in quoted companies was £nil. Under US GAAP, marketable securities are classified as available for sale with changes in value
being taken to other comprehensive income and permanent diminutions taken to the Statement of
Operations. The definition of permanent is more prescriptive under US GAAP. The carrying value of
marketable securities at December 31, 2004 was £15,635,000 (2003: £8,106,000). As at December 31, 2004, the carrying value of unlisted investments was nil under UK and US GAAP. 37




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##### Table of Contents



Vernalis plc Principal Factors Affecting Results of Operations and Financial Condition Revenue The following table shows revenues by activity and by geographic area for the two years ended April
30, 2002, April 30, 2003, the eight months ended December 31, 2003 and the fiscal year ended
December 31, 2004. Eight monthsended
    
    
    Year EndedYears ended April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000(a) Revenues by activityContinuing operationsProduct sales and royalties
    
    
    799
    
    
    
    2,097
    
    
    
    2,592
    
    
    
    10,018Collaborations
    
    
    13,967
    
    
    
    7,046
    
    
    
    6,039
    
    
    
    5,17714,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195(b) Revenues by geographic areaUnited Kingdom
    
    
    602
    
    
    
    90
    
    
    
    49
    
    
    
    161United States
    
    
    
    
    
    
    420
    
    
    
    2,937
    
    
    
    11,207Rest of World
    
    
    14,164
    
    
    
    8,633
    
    
    
    5,645
    
    
    
    3,82714,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195
 Historically, revenue has been derived primarily from product sales and royalties, licensing
and collaborative research and development agreements, including research support fees, milestone
payments and product option and licensing fees. The Group has also received revenue from various government research grants, which is included
within product sales. Research and development expenditure The Groups research and development costs consist primarily of: Internal Costs  

salaries and other related costs of staff who are engaged directly in research and development activities;

the cost of consumables that are used in the Groups research laboratories; and

an appropriate allocation from the Groups general and administrative expenses that are indirectly related to research
and development. External Costs  

the cost of services provided by third-party research and manufacturing organizations that Vernalis employs to conduct
pre-clinical and clinical development work on its behalf;

expenses related to the filing, 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. 38




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##### Table of Contents



Vernalis plc During fiscal 2004, the internal costs were £17.2 million and external costs amounted to £7.2
million. The following is a breakdown of the Groups costs on research and development projects: Eight monthsended
    
    
    Year endedYears ended April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Marimastat
    
    
    1,623
    
    
    
    399
    
    
    
    62
    
    
    
    57BB-10901
    
    
    1,078
    
    
    
    662
    
    
    
    671
    
    
    
    V10153
    
    
    2,742
    
    
    
    1,781
    
    
    
    360
    
    
    
    177V140
    
    
    
    
    
    
    
    
    
    
    650
    
    
    
    1,283Anti Infective program
    
    
    1,218
    
    
    
    2,227
    
    
    
    111
    
    
    
    E21R
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    BB-94 Stent
    
    
    964
    
    
    
    528
    
    
    
    
    
    
    
    MG98
    
    
    
    
    
    
    900
    
    
    
    379
    
    
    
    Frovatriptan
    
    
    4,033
    
    
    
    2,287
    
    
    
    1,238
    
    
    
    3,006VML 670
    
    
    841
    
    
    
    1430
    
    
    
    496
    
    
    
    V2006
    
    
    389
    
    
    
    1147
    
    
    
    756
    
    
    
    Hsp90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    611Other Vernalis Group programs
    
    
    937
    
    
    
    
    
    
    
    
    
    
    
    Other R&D projects and internal costs
    
    
    23,673
    
    
    
    19,151
    
    
    
    22,167
    
    
    
    19,25338,152
    
    
    
    30,512
    
    
    
    26,890
    
    
    
    24,387
 Vernalis is conducting additional clinical studies on frovatriptan exploring its use in the
prevention of MRM. A long term Phase III safety study has completed recruitment and a confirmatory
Phase IIIb efficacy trial is under way. The external costs of these studies in fiscal 2005 are
expected to be around £5.1 million. A Phase I study and a Phase II proof-of-concept study for V10153 have been completed and the next
stage in the development is to conduct a Phase II study in approximately 150 patients with acute
stroke. Vernalis is expecting to begin this shortly, together with an extensive manufacturing
development programme. The combined costs of the clinical and manufacturing programmes are
expected to be approximately £4.5 million in fiscal 2005. The first part of the Phase I clinical program for V2006 is under way and is expected to be
completed shortly. Following the collaboration with Biogen Idec all costs associated with future
studies are incurred by Biogen. V140 is a GABAA antagonist targeted at the treatment of pain in cancer patients. An initial phase 1
clinical programme has been completed and found the compound to be safe and well tolerated. The
Company is currently conducting various preclinical studies, and subject to their satisfactory
completion, will begin a phase II study later in the year. The costs of these studies are expected
to be £1.6 million in fiscal 2005. BB-83698 is a peptide deformylase inhibitor discovered by Vernalis that has shown potency in
pre-clinical studies against a range of gram-positive bacteria. Under the out-licensing agreement
between Vernalis and Oscient, Oscient has assumed responsibility for all further research and
development, with Vernalis receiving milestone and royalty payments. Vernalis has relinquished all rights to VML 670, BB-10901 and MG98 and will not undertake any
further development beyond completion of certain ongoing clinical studies. All other research and
development programs undertaken and reflected in the table above have been discontinued. Expected
costs of approximately £0.5 million have been accrued in the period ended December 31, 2004, in
respect of the closure of these programs. Cost of goods sold The Groups costs of goods sold reflect the cost of manufacturing frovatriptan for sales to the
European market, and for the US market between May 2004 and August 2004, together with the £1.7
million of stocks of frovatriptan that had been purchased from Elan and sold to Endo at nil margin. Selling, general & administration (SG&A) expenses The Group has not historically incurred significant selling expenses. However, following the
reacquisition of frovatriptan and prior to the subsequent licensing in August 2004, Vernalis was
responsible for all selling costs in relation to sales in the US market. Sales and marketing costs
were £1.3 million in fiscal 2004. 39




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##### Table of Contents



Vernalis plc In February 2005, the Company announced that it had exercised its option to establish its own
specialty neurology sales force to co-promote frovatriptan in the US alongside Endo. Under the
terms of this agreement, Endo will provide funding for a Vernalis sales team of up to 25 specialist
neurology sales representatives for up to 5 years beginning January 1, 2006. It is anticipated that
Vernalis will begin to incur costs in relation to building up the new required infrastructure in
the second half of 2005. Administrative expenses consist primarily of the salaries and other related costs of the personnel
employed by the Group in various support functions, including finance, legal, corporate
communications, information technology, human resources, facilities and general management,
together with the costs of facilities, fees for professional advisers, depreciation and
amortisation of goodwill. Foreign currency fluctuations Although the Group maintains its accounting records in pounds sterling, a substantial proportion of
its transactions by value, including receipts and payments, are in other currencies. The Groups
cash and investment balances are predominantly held in pounds sterling at December 31, 2004. The Group received payments under its commercial agreement with Elan in US dollars and will
continue to receive funds in dollars following its collaboration with Endo pharmaceuticals. The
Groups receipts under some of its commercial agreements, including those with GeneSoft (now
Oscient), Serono, Biogen Idec and Novartis, are also denominated in US dollars. The Groups
receipts under the agreement with Menarini are denominated in Euros. The Group has an outstanding balance of $10 million that is owed to GSK and has a long term loan
from Endo repayable in or before August 2009 for $50 million. In addition the Company has a
provision for $6 million in relation to returns and rebates from US sales of frovatriptan. The
Group is also carrying out some of its clinical development programs in the United States, using
US-based contract research organizations and, as a result, its agreements with contract research
organizations are commonly denominated in US dollars. Where a substantial net foreign currency liability exists and is known with certainty, the Group
may hedge against it to 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. To the extent that that the Groups foreign currency assets and liabilities
are not matched, fluctuations in exchange rates between pounds sterling, the US dollar and the euro
may result in an adverse translation effect on the Groups operating profit and net income. In
addition, if the currencies in which the Group earns its revenues and/or holds its cash balances
and other investments weaken against the currencies in which it incurs its expenses, this could
adversely affect the Groups profitability and liquidity. Results of Operations The following table shows certain statement of operations data for the fiscal year 2004, eight
month transition period ended December 31, 2003, and the two-year period ended April 30, 2003. Eight monthsended
    
    
    Year endedYears ended April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Revenue
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195Costs and expensesCost of goods sold
    
    
    
    
    
    
    (418
    )
    
    
    (228
    )
    
    
    (2,909
    )Research and development expenditure
    
    
    (38,152
    )
    
    
    (30,512
    )
    
    
    (26,890
    )
    
    
    (24,387
    )Selling, general & administration expenses
    
    
    (11,732
    )
    
    
    (14,276
    )
    
    
    (10,901
    )
    
    
    (18,642
    )Other operating (expenses)/income
    
    
    164
    
    
    
    (186
    )
    
    
    
    
    
    
    Total operating costs & expenses
    
    
    (49,720
    )
    
    
    (45,392
    )
    
    
    (38,019
    )
    
    
    (45,938
    )Operating loss
    
    
    (34,954
    )
    
    
    (36,249
    )
    
    
    (29,388
    )
    
    
    (30,743
    )Profit/(provisions for loss) on disposal
of fixed assets
    
    
    2,505
    
    
    
    
    
    
    
    (2,988
    )
    
    
    (836
    )Merger transaction expenses
    
    
    
    
    
    
    
    
    
    
    (5,396
    )
    
    
    Amount written off investments
    
    
    (324
    )
    
    
    (799
    )
    
    
    (862
    )
    
    
    (71
    )Net Interest
    
    
    2,783
    
    
    
    2,803
    
    
    
    1,770
    
    
    
    683Loss before provision for income taxes
    
    
    (29,990
    )
    
    
    (34,245
    )
    
    
    (36,864
    )
    
    
    (30,967
    )Provision for income taxes
    
    
    2,899
    
    
    
    3,659
    
    
    
    2,645
    
    
    
    1,758Net loss
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
    
    
    (29,209
    )
 40




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##### Table of Contents



Vernalis plc Comparative Discussion of fiscal year ended December 31, 2004, the Transition Period Ended
December 31, 2003 and Fiscal Years Ended April 30, 2003 and 2002 (UK GAAP) Revenue A table analyzing total revenues is included above in Item 5. Product sales and royalties in
fiscal 2004 were £10,018,000. The significant increase was due to sales of and royalties from
frovatriptan in the year, particularly in the period from May 18 until August 18, when Vernalis
sold the product directly in the US. In total, income from frovatriptan of £10 million comprised
European generated revenues of £2.0 million and North American revenues of £8.0 million. North
American revenues consisted of £0.6 million of royalties, to May 18 and product sales of £7.4
million for the period from May 19 to August 17, 2004. Product sales and royalties in the transition period ended December 31, 2003 of £2,592,000
increased from £2,097,000 in fiscal 2003 primarily due to an increase in the sales of frovatriptan
resulting from an improvement in market share in the United States, as well as the first
full-period contribution of frovatriptan sales in Germany, where frovatriptan was launched in
November 2002. The increase in fiscal 2003 compared to product sales and royalties amounting to
£799,000 in fiscal 2002 was due to the launch of frovatriptan in the United States in June 2002 and
in Germany in November 2002. During the fiscal year ended December 31, 2004, the transitional period and the two years ended
April 30, 2003, the Group earned income under a number of collaborative agreements as set out in
the following table. The amounts received are non-refundable. Eight monthsended
    
    
    Year endedYears ended April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Novartis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,385Biogen Idec Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,110Endo Pharmaceuticals Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327Oscient Corp.
    
    
    
    
    
    
    420
    
    
    
    2,820
    
    
    
    Serono Inc
    
    
    1,378
    
    
    
    568
    
    
    
    
    
    
    
    Roche
    
    
    530
    
    
    
    
    
    
    
    1,230
    
    
    
    487Elan
    
    
    12,059
    
    
    
    6,058
    
    
    
    1,872
    
    
    
    677Astra Zeneca
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    25Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16613,967
    
    
    
    7,046
    
    
    
    6,039
    
    
    
    5,177
 During fiscal 2004, the Company entered into three collaborations with Endo Pharmaceuticals,
Biogen Idec and Novartis, receiving initial payments of $30 million,$10 million and $1.5 million
respectively. In addition, Endo are contracted to make two payments to the Company of $15 million
in each of August 2005 and August 2006. These amounts have been recognised as deferred income and
are being release to revenue over the expected lives of the contracts. During the transition period ended December 31, 2003, Vernalis recognised the remaining £2,820,000
of revenue from Oscient following the termination of the original agreement with GeneSoft in August
2003, as compared to £420,000 in fiscal 2003, which related to the resources committed in that
period. The Group did not earn any revenues from its collaboration with Serono during fiscal 2004 or the
transition period ended December 31, 2003 following the termination of the research agreement in
October 2003. The Group earned £568,000 of revenue from Serono during fiscal 2003 in connection
with the resources committed in that period relating to the research agreement. In fiscal 2002, the
Group earned £1,378,000 due to the resources committed in that period relating to the research
agreement. In fiscal 2004, the Group earned £487,000 of revenue from Roche comprising research funding for its
obesity program. In the transition period ended December 31, 2003, the Group earned £1,230,000 of
revenue from Roche comprising research funding for its obesity program. No revenues were recognised
in fiscal 2003. In fiscal 2002, the Group received £530,000 from Roche relating to its obesity
program and, in particular, a milestone payment on entry into Phase I. Three milestone payments have been received from Elan. These milestone payments were: £10.3 million
in fiscal 2002 (recognised in full during the year) relating to the FDA approval of frovatriptan in
the United States; £3.7 million in fiscal 2002 following the launch of frovatriptan in the United
States; and the waiver of a loan of £7.5 million in fiscal 2002, which are being recognised as
income in proportion to the resources committed by Vernalis in each period. As a result, income of
£1,872,000 was recognised in the transition period ended December 31, 2003, £6,058,000 was
recognised in fiscal 2003, and £12,059,000 in fiscal 2002. 41




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##### Table of Contents



Vernalis plc In fiscal 2004, the Group earned £166,000 of revenue in connection with other collaborations. Cost of goods sold Cost of goods sold in fiscal 2004 reflected costs to manufacture frovatriptan for the European and
US markets, together with £1.7 million of stock that was sold at nil margin to Endo following the
collaboration in August 2004. Research and development expenses Research and development expenditure in fiscal 2004 decreased, as compared to the transition period
ended December 31, 2003, by £2.5 million due to the cost-saving initiative implemented following
the business combinations in 2003. Research and development expenditure in the transition period
ended December 31, 2003 reflected an eight-month period and the inclusion of all three Group
companies before post-integration infrastructure savings. Research and development expenditure in
fiscal 2003 decreased, as compared to fiscal 2002, by £7.7 million due to reduced infrastructure
costs. The reduced infrastructure costs in fiscal 2003 follows the agreement with OSI in August
2001 to transfer certain pre-clinical facilities, together with a general reduction in headcount
across the Group. For a detailed breakdown of external research and development expenses during the transition period
ended December 31, 2003 and the fiscal years 2004, 2003 and 2002, see above under Principal
Factors Affecting Results of Operations and Financial Condition  Research and Development
Expenses. Selling, general & administration (SG&A) expenses SG&A expenses in fiscal 2004 of £18.6 million comprise: £4.4 million of amortisation of goodwill,
restructuring costs of £1.5 million, sales and marketing costs associated with frovatriptan of £1.3
million, professional fees associated with collaborations of £1.1 million, an increase in the
provision for vacant leases of £4.4 million and other costs of £5.9 million. SG&A expenses in the
transition period ended December 31, 2003 of £10.9 million comprise: £2.3 million in respect of
restructuring costs in connection with the integration of Vernalis Group and RiboTargets; £3.0
million of amortisation of goodwill relating to the acquisitions of RiboTargets and Cerebrus (by
Vernalis Group prior to the merger); and other administrative costs of £5.6 million reflecting the
operating costs of the three combined businesses before significant cost cutting. SG&A expenses for fiscal 2003 were lower due to there being no amortisation of goodwill on
RiboTargets and a lower level of restructuring costs of £1.6 million. The results of RiboTargets
are not included in this year. SG&A expenses in fiscal 2002 were lower because of smaller restructuring costs in the period, and
amounted to £11.7 million. Operating loss Operating loss in fiscal 2004 of £30.7 million reflects the factors referred to in the commentary
above. The pro-rata losses are higher in the transition period ended December 31, 2003 due to the
revenues and cost savings noted above. The modest increase in operating loss from £34,954,000 in
fiscal 2002 to £36,249,000 in fiscal 2003 was primary attributable to lower milestone payments
recognised from Elan in 2003 as compared to 2002 and higher SG&A expenses in connection with the
Groups restructuring programs undertaken in 2003, partly offset by lower research and development
expenditure due to reduced infrastructure costs during the same period. Profit/(Loss) on disposal of fixed assets The loss on disposal of fixed assets in fiscal 2004 of £0.8 million related to the Oxford facility
which was sold for £3.3 million, in October 2004. Provision for loss on disposal of fixed assets of
£2,988,000 in the transition period ended December 31, 2003 reflected the Companys intention to
divest its Oxford facility. Profit on disposal of fixed assets of £2,505,000 in fiscal 2002 arose
from the transfer of certain of the Groups pre-clinical facilities and 59 employees to OSI along
with the leases of two properties and certain fixed assets. Merger transaction expenses There are no merger transaction expenses in fiscal 2004. Merger transaction expenses have been
incurred in 2003 in relation to the merger with Vernalis Group. 42




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##### Table of Contents



Vernalis plc Amount written off investments Amounts written off investments were £0.1 million in fiscal 2004, £0.9 million in the transition
period ended December 31, 2003 and £0.8 million in fiscal 2003. In each year, this consisted of an
estimate of the permanent impairment in the value of certain investments by reference to their
market value. Net interest Net interest (interest receivable net of interest expense) was £683,000 in fiscal 2004 and
£1,770,000 in the transition period ended December 31, 2003, as compared to £2,803,000 in fiscal
2003 and £2,783,000 in fiscal 2002. The decrease in net interest in fiscal 2004 is due to the
increased interest expense as discussed below. The decrease in net interest during fiscal 2003 and, fiscal 2002 was due to lower average cash
balances and falling interest rates reducing the Groups interest receivable which amounted to
£1,136,000 in the transition period ended December 31, 2003, £2,129,000 in fiscal 2003 and
£3,651,000 in fiscal 2002. Interest expense amounting to £2.250 million in fiscal 2004 consisted of £0.9 million of loan
interest, finance lease charges of £0.1 million, an exchange loss on the accrued income of $30
million due from Endo of £0.7 million and £0.5 million in respect of the deferred consideration
that was payable to Elan. Interest expense amounting to £544,000 in the transition period ended December 31, 2003, £739,000
in fiscal 2003 and £868,000 in fiscal 2002 primarily consisted of payments on a fixed-rate mortgage
by a fixed charge secured on three of the Groups freehold properties and on various finance
leases. Provision for income taxes No liability for UK corporation tax has arisen in any of the periods to December 31, 2004. The
Group had losses, as computed for taxation purposes, of approximately £415 million at December 31,
2004, (£413 million at December 31, 2003, £412 million at April 30, 2003 and £393 million at April
30, 2002) available to be carried forward to future periods. Tax losses can be carried forward with no expiry date against the profits of the same trade. In the
event that there is a change of ownership of the Group (where one party or a group of connected
parties gain control) then under current UK tax law, if there is also a major change in the nature
or conduct of the trade within a period of three years either side of the change of ownership, any
tax losses at the time of change of ownership may not be available for relief against future
trading profits. In accordance with the provisions of the Finance Act 2000 in respect of research and development
allowances, the Group is entitled to claim tax credits for certain research and development
expenditure. The tax credit receivable by the Group in fiscal 2004 amounted to £1,758,000
(transition period ended December 31, 2003: £2,645,000, 2003: £3,659,000; 2002: £2,899,000). Net loss Net loss in fiscal 2004 of £29.2 million reflects the factors referred to above. The decrease in
net loss from £34.2 million in the transition period is mainly due to the increased revenues and a
reduced cost base, offset by one-off costs associated with collaborations and an increase in long
term provisions in the year. Net loss in the transition period of £34.2 million is higher than in
previous periods, on a pro-rata basis due to the provision for loss on disposal of £3.0 million and
merger transaction expenses of £5.4 million. The increase in net loss from £27,091,000 in fiscal
2002 to £30,586,000 in fiscal 2003 reflected a higher operating loss during the same period and the
profit recognised in 2002 on the sale of certain pre-clinical activities to OSI. Liquidity and Capital Resources Since Vernalis foundation, cash expenditures have exceeded revenues. The Group has financed its
research and development operations primarily by the issuance of equity securities, acquisitions,
revenues from joint development and licensing agreements and interest earned on cash deposits. For
information on the Companys development of share capital, see Item 10B, Additional Information 
Share Capital. Since the US and first European launches of frovatriptan, in June and November 2002 respectively,
Vernalis has received quarterly royalty revenues from its US and European licensees, on sales of
frovatriptan in those markets. Following the re-acquisition of the North American rights to
frovatriptan from Elan on May 18, 2004, Vernalis received direct sales revenue from the sales of
frovatriptan in the United States until August 17, 2004. The Group also receives sales revenues
from Menarini, its European licensee, for supply of finished frovatriptan product for European
markets. The Group plans to generate its commercial returns through sales of frovatriptan and by actively
seeking partners for its 43




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##### Table of Contents



Vernalis plc products in all territories in the world while retaining commercialization rights for certain
products in niche markets. The Groups cash resources will be used to expand and progress the
portfolio of development products and research programs principally focused on oncology and
diseases of the central nervous system. Substantial increases in administrative support costs,
marketing and commercialization expenditure will only be incurred once product approvals are
certain. The Groups operating cash outflows consist principally of:  

payroll and related staff costs;

payments to contract research organizations and consultants working on its development projects;

payments to suppliers of consumables used in its research laboratories;

lease payments, property taxes and other costs relating to its facilities;

payments to professional advisers; and

payments to third parties under the terms of its collaboration agreements. Cash Outflows and Net Funds (UK GAAP) The following table shows certain cash flow data for fiscal 2004, the transition period, fiscal
2003, and fiscal 2002: Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Net cash (outflow)/inflow from operating activities
    
    
    (30,302
    )
    
    
    (36,448
    )
    
    
    (34,089
    )
    
    
    2,090Returns on investments and servicing of finance
    
    
    3,026
    
    
    
    1,952
    
    
    
    659
    
    
    
    (293
    )Taxation
    
    
    1,618
    
    
    
    3,169
    
    
    
    2,783
    
    
    
    1,129Capital expenditure
    
    
    799
    
    
    
    (4,299
    )
    
    
    (16
    )
    
    
    (27,380
    )Cash utilised by operations
    
    
    (24,859
    )
    
    
    (35,626
    )
    
    
    (30,663
    )
    
    
    (24,454
    )Acquisitions  purchase of subsidiary undertakings
    
    
    
    
    
    
    1,967
    
    
    
    Management of liquid resources
    
    
    19,453
    
    
    
    27,443
    
    
    
    25,786
    
    
    
    (9,685
    )Financing
    
    
    4,757
    
    
    
    6,215
    
    
    
    6,478
    
    
    
    33,611(Decrease)/increase in cash in the period
    
    
    (649
    )
    
    
    (1
    )
    
    
    1,601
    
    
    
    (528
    )
 In fiscal 2004, an operating loss of £30.7 million resulted in a cash inflow of £2.1 million.
This was principally due to an increase in debtors of £16.2 million offset by amortisation of £7.1
million, an increase in deferred revenue of £35.3 million and other movements of £6.6 million. In the transition period ended December 31, 2003 an operating loss of £29.4 million resulted in a
cash outflow of £34.1 million. This increase principally related to adverse working capital
movements, in particular a reduction of £4.8 million in deferred income (consistent with the
Groups revenue recognition policies), and £5.4 million of merger expenses paid that were not
included within operating loss, offset by non-cash items including the disposal of intangible fixed
assets of £1.8 million, Amortisation of £4.0 million, and depreciation of £1.6 million. In fiscal 2003, an operating loss of £36.2 million resulted in a cash outflow of £36.4 million.
This was principally due to adverse working capital movements, offset by depreciation and
Amortisation. In fiscal 2002, an operating loss of £35 million resulted in an operating cash outflow of £30.3
million. This reduction was due principally to the receipts from Elan that are being recognised in
the profit and loss account in later periods. In fiscal 2004, capital expenditure was £27.4 million due principally to payments of £5.4 million
to GSK and £25.1 million to re-acquire the North American rights to frovatriptan from Elan and
offset by the sale of the Oxford facility for £3.3 million. During the transition period ended December 31, 2003, capital expenditure was £180,000 on general
equipment, which was primarily offset by proceeds of £162,000 from the sale of the investments held
in CareScience. In fiscal 2003, capital expenditure was £1,310,000 on plant and machinery and the laboratory and
office refurbishment in Oxford, offset by proceeds from the sale of assets of £238,000 following
the transfer of certain employees and equipment to Evotec OAI. In addition, the purchase of
intangible fixed assets amounted to £3,227,000 following a payment to GSK of $5 million. 44




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##### Table of Contents



Vernalis plc In fiscal 2002, capital expenditure was £0.8 million, comprising £2.6 million on the laboratory and
office refurbishment (mainly on the Oxford site), £1.4 million on the purchase of shares in
MethylGene, and included £1.4 million in payments to MethylGene to acquire licenses to develop
their intellectual property and a milestone payment to BresaGen. Capital expenditure in fiscal 2002
was offset by proceeds from the sale of assets of £7.3 million, relating to the sale of certain
pre-clinical facilities to OSI. Cash received from the management of liquid resources reflects movements from time to time in the
composition of cash and liquid investments that are used to finance future capital requirements of
the business. In fiscal 2004, cash received from financing was £33.6 million and in the transition period was
£6.5 million. This principally relates to the receipt of the loan from Endo of £27.5 million and
equity issues of £8.3 million, offset by the repayment of the mortgage on the Oxford property of
£1.5 million. During the transition period, cash received from financing relates principally to
net proceeds of £14.4 million from the fundraising by Vernalis in May 2003, offset by the repayment
of loans to Roche totalling £7 million. Cash received from financing in fiscal 2003 of £6.2
million, consists primarily of the receipt of a loan from Roche of £7 million, offset by capital
payments on the finance leases and mortgage on the Oxford property. Cash received from financing in
fiscal 2002 of £4.8 million relates principally to the receipt of loans from Elan of $10 million. The table below shows the Groups net funds as at December 31, 2004. £000Cash
    
    
    1,309Short-term deposits and investments
    
    
    32,01433,323US Dollar secured loan
    
    
    (26,364
    )Secured loan due after one year
    
    
    Finance leases
    
    
    (18
    )Net funds
    
    
    6,941
 As at April 29, 2005, cash and short-term deposits and investments amounted to £55,052,000. The Groups policy is to place surplus funds on deposit with a range of major international banks
and building societies. Short-term deposits are for fixed terms at fixed rates of interest and the
investment objective is to achieve market returns while protecting the capital value. Short-term
investments are investments in a money market managed fund that is repayable within 48 hours. Cash
equivalents and short-term deposits are predominantly held in UK sterling. The Group does not have
any committed or uncommitted bank facilities. Table of contractual cash obligations The table below shows the contractual obligations and commercial commitments as at December 31,
2004. Payments due (£000)Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    one year
    
    
    2-3 years
    
    
    4-5 years
    
    
    five yearsUS Dollars Secured loan (i)
    
    
    26,711
    
    
    
    
    
    
    
    
    
    
    
    26,711
    
    
    
    Obligations under finance leases
    
    
    18
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    Operating lease commitments (ii)
    
    
    29,827
    
    
    
    2,338
    
    
    
    4,507
    
    
    
    4,602
    
    
    
    18,160Commitments under license agreements (iii)
    
    
    6,100
    
    
    
    500
    
    
    
    1,400
    
    
    
    600
    
    
    
    3,600Capital commitments
    
    
    15
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    62,671
    
    
    
    2,891
    
    
    
    6,107
    
    
    
    31,913
    
    
    
    21,760
 Additionally, the Group is committed to make payments to GSK under the agreement of December
2000 to buy out royalties due to GSK on sales of frovatriptan. The Group is committed to make two
further payments of $5 million: one in September 2002 and a final payment of $5 million is due 90
days after cumulative global sales exceed $300 million.  (i)

The US Dollar secured loan was for a term of five years from August 31, 2004, and was 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. 45




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##### Table of Contents



Vernalis plc  (iii)

Commitments under license agreements are contingent upon successful product development,
registration and approval, primarily relating to license agreement with Monash University and
the Institute of Cancer Research. See also Item 4D Information on the Company  Commercial
Collaborations and Note 18 to the consolidated financial statements. In addition the Company
has commitments relating to ongoing clinical trials of its products under development. There was no expenditure that had been authorised but not contracted for at December 31, 2004. US GAAP Reconciliation The Group prepares its Consolidated Financial Statements in accordance with UK GAAP, which differs
in certain respects from US GAAP. A description of the significant differences and reconciliations
of net income and shareholders equity is in Note 3 of the notes to the Consolidated Financial
Statements. Trend Information The integration of the Company, Vernalis Group and RiboTargets was completed in the first quarter
of 2004 and achieved the anticipated cost savings. Further post-merger restructuring was
implemented in the second quarter of 2004 to reduce headcount to 110. Headcount at December 31,
2004 increased to 131. At December 31, 2004, total cash, short-term deposits and investments were £33.3 million. In
addition, on March 21, 2005, shareholders approved a Placing and Open Offer that raised net funds
of approximately £27.6 million. In total, 43,250,107 new ordinary shares were issued representing
27.8 percent of Vernaliss existing issued ordinary share capital. The Group has also derived revenues from product sales of frovatriptan, primarily in the United
States. Until May 2004, the Group earned revenue with respect to sales of frovatriptan in the
United States in the form of quarterly royalty payments from Elan, frovatriptans original U.S.
licensee. Sales for the year ended December 31, 2003, by Elan were $37.5 million. In the first
quarter of 2004, Elan reported sales of $6.7 million. In May 2004, Vernalis re-acquired from Elan
the North American rights for frovatriptan. Consequently, the Group received direct sales revenue
from the sale of frovatriptan in the United States until August 2004. In August 2004, Vernalis licensed Frovatriptan to Endo Pharmaceuticals. Under the terms of the
license agreement 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 at the
first and second anniversary of closing. Endo will also make a $40 million milestone payment to
Vernalis if MRM approval is achieved as well as various milestone payments to Vernalis 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 make royalty payments to
Vernalis which will be tiered from 20% if FDA approval for MRM is achieved. In H1 2005, the Group expects to initiate a Phase II study with V10153 in stroke patients and to
publish interim analysis of the MRM safety data for frovatriptan. Later in the year, the Groups
further pre-clinical work on V140 will be completed, which, if positive, is expected to result in
the initiation of a Phase II study to investigate the analgesic efficacy and safety in patients
undergoing elective total knee replacement surgery, and it is anticipated that Biogen Idec will
start a phase II study with V2006 in Parkinsons disease. In addition, both the Phase III safety
study and the Phase III efficacy study for frovatriptan as a potential prophylactic treatment for
MRM are expected to complete in H2 2005. If the results of these two trials are positive, the
Group expects to file regulatory submission with the FDA to seek approval for frovatriptan for the
prophylaxis of MRM in H1 2006. For information on Vernalis current research and development
expenses, see above under Principal Factors Affecting Results of Operations and Financial
Condition  Research and Development Expenditure. The Groups believes that based on its expected financial resources and its expected milestone
payments, it has sufficient working capital to meet its current business objectives. The Group
from time to time considers acquisition possibilities, but no agreements, commitments or
understandings with respect to any significant acquisitions currently exist. Consideration for any
such acquisitions would be drawn from the issuance of equity securities and cash reserves in
amounts that cannot now be determined. The Company has no off-balance sheet arrangements in place except as disclosed in the table of
contractual cash obligations above. 46




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##### Table of Contents



Vernalis plc 
 ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES  A

Directors and Senior Management The Memorandum and Articles of Association of the Company provide that there shall be no more than
20 directors and no fewer than two directors serving on the Board of Directors at any time. The Companys Articles of Association provide that at every Annual General Meeting (AGM) of
shareholders of the Company (AGM), one-third, or the closest approximation to one-third, of the
Directors will retire by rotation and be eligible for re-election by the shareholders. The
Directors to retire will be those who have been longest in office or, in the case of those who were
appointed or reappointed on the same day, will be (unless they otherwise agree) determined by lot.
Further, any Director who has been appointed since the date of the last AGM shall retire and be
eligible for re-election by the shareholders. Finally, any Director who is over the age of 70 at
the date of the AGM shall retire and be eligible for re-election by the shareholders. During fiscal 2004, the Companys AGM was held on June 24, 2004 at Ironmongers; Hall, Shaftesbury
Place, Aldersgate, London, EC2Y 8AA. Dr Baxter, who was appointed by the directors since the 2003
annual general meeting, retired in accordance with Article 86 of the Companys Articles of
Association and was reappointed. Mr Merrifield retired by rotation and was re-elected. Mr Kent and
Mr Williams retired by rotation. Re-election At the forthcoming AGM to be held on May 25, 2005 at 11am at Barber-Surgeons Hall,
Monkwell Square, London, EC2Y 5BL, in accordance with the Companys Articles of Association, Ms
Ferguson, Dr Hutchison, Dr Read and Mr Merrifield will retire. Being eligible, and with the Boards
recommendation, they offer themselves for re-election. Mr Slater, who has been appointed to the
Board since the last AGM, will retire. Being eligible, and with the Boards recommendation, he
offers himself for election. With the exception of Dr Hutchison and Mr Slater, none of the
Directors retiring has a service contract with the Company. Certain information concerning the current Directors of the Company is set forth below.
Non-executive Directors are not full-time employees of the Company. Name
    
    
    Age
    
    
    Position/s Held
    
    Period during which Director has served in officePeter Fellner
    
    
    61
    
    
    Executive Chairman
    
    January 2003  date of filingSimon Sturge
    
    
    46
    
    
    Chief Executive Officer
    
    April 2003  date of filingJohn Slater
    
    
    52
    
    
    General Counsel
    
    October 2004  date of filingJohn Hutchison
    
    
    49
    
    
    Development Director
    
    September 2003  date of filingTony Weir
    
    
    44
    
    
    Chief Financial Officer
    
    April 1999  date of filingAllan Baxter
    
    
    55
    
    
    Non-executive Director
    
    May 2004  date of filingCarol Ferguson
    
    
    58
    
    
    Non-executive Director
    
    September 2003  date of filingGeorge Kennedy
    
    
    64
    
    
    Deputy Chairman, Senior Independent Director
    
    September 2003  date of filingKeith Merrifield
    
    
    62
    
    
    Non-executive Director
    
    December 1995  date of filingPeter Read
    
    
    66
    
    
    Non-executive Director
    
    September 2003  date of filing
 No Director is related to any other. Biographical information with respect to the Directors is
as follows: Peter Fellner(61)  Dr Fellner was appointed as Chairman in January 2003, and as Executive Chairman in April 2003. He
was Chairman of Celltech Group plc from 2003 until its acquisition in 2004, having previously been
Chief Executive Officer since 1990. Before joining Celltech he was Chief Executive Officer of Roche
UK from 1986 to 1990. Prior to this he was Director of the Roche UK Research Centre. Dr Fellner is
also Chairman of two private biotechnology companies, Astex Technology Ltd and Ionix
Pharmaceuticals Ltd. In addition he serves as a Director of QinetiQ Group plc and Isis Innovation
Ltd, and is a Director designate of UCB SA. He is a member of the Medical Research Council. Simon Sturge(46)  Mr Sturge was appointed to the Board as Chief Executive Officer in April 2003. He has more than 20
years experience in the pharmaceutical industry. After graduating in biology from Sussex
University in 1980 Mr Sturge became Product Manager of Napp Laboratories, Head of Sales and
Marketing at Portex, and Business Development Manager at Astra Pharmaceuticals. He joined Celltech
in 1988 and was appointed Chief Executive of Celltech Biologics plc (now Lonza Biologics plc) in
1995 before joining RiboTargets Holdings plc as Chief Executive. He founded RiboTargets in July
1997 when it was spun out from the Medical Research Councils Laboratory of Molecular Biology with
a £7 million venture capital investment. 47




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##### Table of Contents



Vernalis plc Tony Weir(44) Mr Weir has a degree in mathematics from Oxford University and is a Fellow of the Institute of
Chartered Accountants. Following qualification he advised a variety of businesses as a financial
consultant, joining British Biotech in 1990 as Chief Accountant and Company Secretary. In April
1999 he was promoted to the Board as Finance Director with responsibility for Finance, Corporate
Communications, Facilities and IT. Following the combinations with RiboTargets and Vernalis Group
plc he continues as Chief Financial Officer. John Hutchison(49) Dr Hutchison was appointed as Development Director on September 1, 2003 following the merger with
Vernalis Group plc. Prior to that he was Senior Vice President Development and Chief Medical
Officer of Vernalis Group plc. In February 2000 he was appointed a Director of Vernalis Group plc,
where he was responsible for drug development, taking potential new therapies from early
pre-clinical testing through to registration and commercialisation. He was previously a main Board
Director of Cerebrus where he was also responsible for drug development since joining the company
in 1997. Dr Hutchison began his industrial career 15 years ago as a clinical pharmacologist with
Fisons, before moving to Experimental Medicine with Astra Pharmaceuticals Ltd. In addition to being
a UK registered physician, Dr Hutchison has a first class Honours degree in human physiology and a
PhD in neuroscience from the University of Liverpool. Dr Hutchison is a Fellow of the Royal College
of Physicians and a Fellow of the Faculty of Pharmaceutical Medicine in London. John Slater(52) Mr Slater was appointed to the Board in November 2004 as General Counsel and Company Secretary and
has responsibility for all legal and business development activities. A solicitor, Mr Slater joined
the Company from Celltech Group plc where he was Director of Legal Services and Company Secretary
for the previous 15 years. Prior to that he held legal and commercial roles in a number of high
technology multinational companies. George Kennedy(64)* Mr Kennedy was appointed as Deputy Chairman and Senior Independent Director on September 1, 2003.
He was Non-Executive Chairman of Vernalis Group plc from May 2000. He was previously with Smiths
Industries PLC from 1973 to 2000, where he was appointed to the Board in 1983, becoming Executive
Director and Chairman of the Medical Division. His other current appointments include
Non-Executive Chairman of Carclo plc and E2V plc; Chairman of the Inprint Group, a privately held
specialist printing company; Chairman of Eschmann Holdings Limited, a manufacturer of medical
equipment; and Non-Executive Director of Isotron plc. From August 2000 to December 2003 he was
Chairman of the Trade Advisory Group for Africa and the Middle East. He was awarded a CBE in 1997
for services to the healthcare industry and exports. Carol Ferguson(58)* Carol Ferguson was appointed as a Non-Executive Director on September 1, 2003. She joined the Board
of Vernalis Group plc as a Non-Executive Director in May 2002. She began her investment career with
Ivory and Sime, an Edinburgh fund management group. Thereafter she moved to Wood Mackenzie, then a
stock broking company, becoming a partner in 1984. Her most recent position was as Finance
Director for Timney Fowler, a textiles company. Her current appointments include the Dental
Practice Board, where she is a Non-Executive Director and chairs the Audit Committee, and the
Chartered Accountants Compensation Scheme where she is a Non-Executive Director. She is also a
Non-Executive Director of Gartmore Smaller Companies Investment Trust plc, Monks Investment Trust
plc, Merrill Lynch Greater Europe Investment Trust plc and the Association of Investment Trusts
Companies. Ms Ferguson has a Masters degree in philosophy and economics from St Andrews University
and was admitted as a member of the Institute of Chartered Accountants of Scotland in 1973. Keith Merrifield(62) Mr Merrifield was appointed to the Board in 1995. He was formerly a main Board Director of Wellcome
plc from 1990 until its acquisition in 1995 by Glaxo Holdings plc, with responsibility for
marketing and international operations. Until May 2003, Mr Merrifield was also a Non-Executive
Director of Coats plc. 48




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##### Table of Contents



Vernalis plc Peter Read(66)* Dr Read was appointed as a Non-Executive Director on September 1, 2003. He joined the Board of
Vernalis Group plc as a Non-Executive Director in March 1998. He is a former Chairman of the
Hoechst Group of Companies in the UK and a past President of the Association of the British
Pharmaceutical Industry. Current appointments include Non-Executive directorships of each of SSL
International plc and Innogenetics Group. He is a Board member of the South East England
Development Agency and is a Fellow of the Royal College of Physicians and of the Faculty of
Pharmaceutical Medicine. In January 2000 he was awarded a CBE for services to the pharmaceutical
industry. Allan Baxter(55)* Dr Baxter was appointed as a Non-Executive Director on May 19, 2004. He is also Senior Vice
President, Drug Discovery at GlaxoSmithKline with responsibility for GlaxoSmithKlines world-wide
drug discovery effort, including the clinical development of new product candidates through to
proof-of-concept studies. Board changes Peter Worrall served as an Executive Director during the fiscal year until he stepped down from the
Board on October 29, 2004. Mr Ian Kent and Mr Eugene Williams served as Non-Executive directors
during the fiscal year until they stepped down from the Board on June 24, 2004. * Audit Committee
 Remuneration Committee
 Nominations and Corporate Governance Committee  B

Compensation The aggregate amount of compensation paid to all Directors by the Company and its subsidiaries for
services in all capacities during fiscal 2004 was £2,186,000. This amount includes directors fees,
salaries and bonus payments, but excludes amounts set aside or accrued to provide pension,
retirement or similar benefits. The aggregate amount set aside or accrued to provide pension,
retirement or similar benefits for Directors of the Company by the Company and its subsidiaries
during the fiscal year was £177,000. The remuneration of each of the Directors who served during the fiscal year is set out below. For
details regarding share options held by directors, see Item 6F. Share Options. Directors remuneration (audited) Performance
    
    
    Compensation
    
    
    December
    
    
    December
    
    
    December
    
    
    Decemberrelated
    
    
    for loss
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Salary/fees
    
    
    Benefits
    
    
    bonus
    
    
    of office
    
    
    Total
    
    
    Total
    
    
    Pension
    
    
    Pension£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000ExecutiveDr P J Fellner
Chairman)
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    136
    
    
    
    
    
    
    
    S J Sturge (CEO) (i)
    
    325
    (vii)
    
    
    1
    
    
    
    165
    
    
    
    
    
    
    
    491
    
    
    
    209
    
    
    58
    (ix)
    
    
    38Dr J B Hutchison (iv)
    
    196
    (vii)
    
    
    1
    
    
    
    57
    
    
    
    
    
    
    
    254
    
    
    63
    (iii)
    
    
    35
    
    
    
    11A J Weir
    
    195
    (vii)
    
    
    1
    
    
    
    90
    
    
    
    
    
    
    
    286
    
    
    
    129
    
    
    
    35
    
    
    
    23P B Worrall (ii), (iv)
    
    203
    (vii)
    
    
    1
    
    
    
    54
    
    
    
    452
    
    
    
    710
    
    
    79
    (iii)
    
    
    42
    
    
    
    14J A D Slater (vi)
    
    40
    (vii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    7
    
    
    
    1,159
    
    
    
    4
    
    
    
    366
    
    
    
    452
    
    
    
    1,981
    
    
    
    616
    
    
    
    177
    
    
    
    86Non-ExecutiveG M Kennedy (iv)
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60
    
    
    20
    (iii)
    
    
    
    
    
    
    Dr P R Read (iv)
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    11
    (iii)
    
    
    
    
    
    
    C C Ferguson (iv)
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    11
    (iii)
    
    
    
    
    
    
    I F Kent
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    27
    
    
    
    
    
    
    
    Dr A Baxter (x)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    K J Merrifield
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    23
    
    
    
    
    
    
    
    E W Williams
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    23
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    115
    
    
    
    
    
    
    
    Total
    
    
    1,364
    
    
    
    4
    
    
    
    366
    
    
    
    452
    
    
    
    2,186
    
    
    
    731
    
    
    
    177
    
    
    
    86
 Retirement benefits are accruing to five (2003: four) Directors under a money purchase scheme.  (i)

Benefits for Simon Sturge include a relocation allowance of £24,000 payable over 12 months
from October 2004. 49




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##### Table of Contents



Vernalis plc  (ii)

Compensation for loss of office includes a payment of £331,000 in respect of his notice
period, accrued holiday pay and £121,000 compensation for loss of office.(iii)

Remuneration from date of appointment, September 1, 2003 until December 31, 2003.(iv)

During the eight-month period ended December 31, 2003, the remuneration paid by Vernalis
Group plc to the Directors of Vernalis plc is set out below. Performance
    
    
    Compensation
    
    
    December
    
    
    December
    
    
    December
    
    
    Decemberrelated
    
    
    for loss
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Salary/fees
    
    
    Benefits
    
    
    bonus
    
    
    of office
    
    
    Total
    
    
    Total
    
    
    Pension
    
    
    Pension£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000P B Worrall (v)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    Dr J B Hutchison
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    8G M Kennedy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    Dr P R Read
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    C C Ferguson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    8
  (v)

On September 1, 2003, 16,137 ordinary shares of 10 pence each in Vernalis Group plc
awarded to Mr Worrall under that companys Restricted Share Scheme vested and were transferred
to him.(vi)

Remuneration from date of employment, October 29, 2004, until December 31, 2004.(vii)

Includes benefits received through payroll.(ix)

Includes £27,000 received through payroll.(x)

Dr A Baxter has waived his rights to receive remuneration from the Group. Total emoluments of the highest-paid Director, excluding pension contributions, amounted to
£710,000 (eight month period ended December 31, 2003: £406,000). Pension contributions made during
the period for the highest-paid Director were £42,000 (eight month period ended December 31, 2003:
£18,000). Total amounts set aside or accrued during fiscal 2004 to provide pension contributions to directors
amounted to £104,000.  C

Service Contracts Appointment of Directors and service contracts The Companys policy in entering into service contracts with Executive Directors, including the
Chairman, is to enable the recruitment of high-quality Executives and to obtain protection from
their sudden departure to competitor companies. In addition, service contracts are an important
element in maintaining maximum protection for the Groups intellectual property rights and other
commercially sensitive information. All service contracts are approved by the Remuneration
Committee and are one-year rolling contracts. Each service contract may be terminated by mutual
agreement or by either party giving 12 months notice to the other. If an Executive Director is
guilty of serious misconduct, serious breach (after due warning) or persistent breach of failure to
carry out his duties then the Company is entitled summarily to terminate his service contract
without notice and without paying compensation in respect of that termination. Should an Executive
Director be dismissed he would receive a sum equal to 12 months pay and benefits (unless for gross
misconduct, or a similar event, where no payments would be made). The service agreements of Dr Fellner and Mr Sturge were made on March 21, 2003 and came into effect
on April 23, 2003. The service agreement of Mr Weir was made on June 24, 1999 and came into effect
on that date. The service agreement of Dr Hutchison was made on July 2, 2003 and came into effect
on September 1, 2003. The service agreement of Mr Slater was made on October 29, 2004. Mr Worralls service agreement was made on July 2, 2003. Mr Worrall resigned from the Board on
October 29, 2004 and ceased employment on October 31, 2004. Mr Worrall received a compensation
payment for loss of office. Full details of his compensation for loss of office are given in
B-Compensation above. 50




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##### Table of Contents



Vernalis plc Non-Executive Directors appointments and remuneration Non-Executive Directors are appointed by letter of engagement for periods not exceeding three
years. They receive fees for services as members of the Board and its committees and the Chair of
each Board committee is paid an additional fee for performing that role. Mr Kennedy is also paid
additional remuneration to reflect his additional responsibilities as Deputy Chairman. The level of
fees is determined by the Chairman after taking into account appropriate advice. Mr Merrifield signed a new appointment letter dated March 21, 2003, which became effective on April
23, 2003. Mr Merrifield, who was appointed in December 1995, also has a current fixed term to April
22, 2006. Ms Ferguson, Mr Kennedy and Dr Read signed new appointment letters dated July 17, 2003,
each of which became effective on September 1, 2003. Each of Ms Ferguson, Mr Kennedy and Dr Read
has an appointment for a fixed term of three years to August 30, 2006. Dr Baxter signed a new
appointment letter effective May 19, 2004 for a fixed term of three years to May 18, 2007. Mr Kent
and Mr Williams resigned on June 24, 2004 following the successful merger of Vernalis and British
Biotech. All of these appointments are subject to the Directors being re-elected under the rotation
provisions in the Companys Articles of Association, and subject to Companies Act provisions. Each
Non-Executive Director still serving at the end of his/her term will have his/her appointment
reviewed by the Board and a further term of office may be agreed. Where a Non-Executive Director
does not serve until the end of his/her term, the policy is to pay the fees due pro rata to the
date of cessation. Chairmans remuneration The remuneration of the Companys Chairman is determined by the Committee, led by the Deputy
Chairman and Senior Non-Executive Director, in the absence of the Chairman, after taking into
account appropriate professional advice. The Chairman receives an annual salary, but does not
participate in the performance-related bonus scheme or pension scheme, nor does he receive any
other benefits. In addition to his salary, under the terms of his contract he is entitled to
receive certain fixed bonus payments once the Companys share price has reached pre-determined
levels, payment being conditional on exercise of a corresponding part of the options granted to him
on April 25, 2003 and such payment being equal to approximately half of the option price payable by
Dr Fellner in respect of such options. Accordingly, Dr Fellner is entitled to receive, in each case
after the deduction of income tax and employees National Insurance contributions (for which reason
the figures given are approximate), £350,000 once the Vernalis share price has reached £1.00,
£100,000 when the Vernalis share price has reached each of £1.20, £1.40 and £1.60, £350,000 when
the Vernalis share price has reached £2.00 and a final £350,000 when the Vernalis share price has
reached £3.00. In each case, the share price will only have reached the requisite value if the
market value of an Ordinary Share has been at or above the required value over 30 consecutive
dealing days.  D

Board Practices The Combined Code The Company is committed to practising good corporate governance of its affairs as part of its
management of relationships with its shareholders and other stakeholders. The Company seeks to
uphold and to report on compliance with best practice in corporate governance. Compliance statement The Directors are satisfied that, other than as disclosed within this report, the Company has
complied with the provisions set out in Section 1 of the Combined Code on Corporate Governance
published in July 2003. During the current financial year, the Board will continue to assess its
practices to ensure compliance with the Combined Code on an ongoing basis and will continue to
monitor any changes required to be made to further develop and enhance its governance policies. The principles set out in the Combined Code cover four areas: the Board, Directors remuneration,
accountability and audit and relations with shareholders. With the exception of Directors
remuneration which is dealt with separately within this report, the following section sets out how
the Board has applied such principles. The Board The Board of the Company is responsible for the Groups system of corporate governance. As at
December 31, 2004, the Board comprised ten Directors: an Executive Chairman, Dr P J Fellner; a
Chief Executive Officer, Mr S J Sturge; three other Executive Directors and five Non-Executive
Directors. The role of Non-Executive Directors is to ensure that independent judgement is brought
to Board deliberations and decisions. The Non-Executive Directors possess a wide range of skills
and experience, relevant to the development of the Company, which complement those of the Executive
Directors. 51




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##### Table of Contents



Vernalis plc The Chairman operates in an executive capacity and is not therefore considered to be independent.
All Non-Executive Directors are considered by the Board to be independent. Mr G M Kennedy, the
Deputy Chairman, is currently the Companys Senior Independent Director. In recommending Mr
Merrifield for a further one-year term as a Director, the Board considers that he will provide
valuable continuity for the Board during this period of development and change for the Company and
that he will continue to be independent. He meets all the criteria for independence specified by
the Combined Code other than he has now completed nine years service as a Non-Executive Director. All Directors are required to retire and submit themselves for re-election at the first Annual
General Meeting after appointment and, thereafter, at least every three years. Subject to their
re-election and Companies Act provisions, the Non-Executive Directors are appointed for specified
terms. The Board has agreed procedures for Directors to follow if they believe they require independent
professional advice in the furtherance of their duties and these procedures allow the Directors to
take such advice at the Companys expense. In addition, all the Directors have direct access to the
advice and services of the Company Secretary. The Company Secretary, who is also one of the
Executive Directors, is accountable to the Board through the Chairman on governance matters. It is
the responsibility of the Company Secretary to ensure that Board procedures are followed and all
rules and regulations are complied with. Under the direction of the Chairman, the Company
Secretarys responsibilities include facilitating induction and professional development and
ensuring the smooth flow of information within the Board and its committees, and between
Non-Executive Directors and senior management. Any new Director receives a comprehensive, formal
and tailored induction into the Companys operations. Appropriate training is provided to new
Directors and is also available to other Directors as required. The Company has arranged Directors
and Officers insurance on behalf of all the Directors. The terms of reference of the Chairman and Chief Executive Officer have been agreed with the Board
and, in accordance with best practice, their roles remain separate. These terms of reference were
reviewed in light of the Chairman assuming executive responsibilities on April 23, 2003, and were
revised further in January 2004. As part of its leadership and control of the Company, the Board has agreed a list of items that are
specifically reserved for its consideration. This list was revised in January 2004. These include
business strategy, financing arrangements, material acquisitions and divestments, approval of the
annual budget, major capital expenditure projects, risk management, treasury policies and
establishing and monitoring internal controls. At each meeting, the Board reviews strategy and
progress of the Group towards its objectives, particularly in respect of research and development
projects, and monitors financial progress against budget. The Board meets on a regular basis approximately every two months, with additional meetings when
circumstances and urgent business dictate. In the financial period under review, nine meetings of
the full Board were held. Of these, apologies were received from: Mr Williams for March 15 meeting;
Messrs Williams, Worrall and Dr Baxter for June 24 meeting; Dr Hutchison for July 12 meeting; and
Ms Ferguson for August 3 meeting. Otherwise, meetings were attended by all members. All Directors
receive an agenda and Board papers in advance of meetings to help them make an effective
contribution at the meetings. In addition, the Executive Directors ensure regular informal contact is maintained with
Non-Executive Directors. The Board makes full use of appropriate technology as a means of updating
and informing all its members. While the Board retains overall responsibility for, and control of, the Company, day-to-day
management of the business is conducted by the Executive Directors. Review of the Groups principal
business activities is the responsibility of the Senior Executives (comprising the Executive
Directors, the Director of Human Resources and the Research Director) who meet weekly. The Board has agreed a process of establishing a formal and rigorous process for the annual
evaluation of its own performance and that of its committees and individual Directors including the
Chairman. The first such evaluation will be completed in 2005. The Chairman holds meetings with Non-Executive Directors without the presence of Executive
Directors as appropriate. Board committees In accordance with best practice, the Company has established Audit, Nominations and Corporate
Governance, and Remuneration Committees with written terms of reference for each that deal with
their authorities and duties. The full terms of reference of all the Committees have been published
on the Companys website. 52




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##### Table of Contents



Vernalis plc Audit Committee The Audit Committee is comprised entirely of independent Non-Executive Directors. During the
financial period it was chaired by Mr Kent (until January 21, 2004) and thereafter by Ms Ferguson,
who the Board considers has recent and relevant financial experience. The other current members are
Mr Kennedy, Dr Read and Dr Baxter (appointed from September 13, 2004). Mr Williams and Mr Kent
resigned on June 24, 2004. The Audit Committee is responsible for reviewing the Groups annual
accounts and interim reports prior to their submission for approval to the full Board. This
Committee also monitors the Groups accounting policies, internal financial control systems and
financial reporting procedures. The Audit Committee provides a forum through which the Groups
external auditor reports to the Board. The auditor attends its meetings and has the opportunity to
meet privately with Committee members in the absence of executive management. In addition, the
Audit Committee monitors the scope and results of the audit, the independence and objectivity of
the auditor and its performance, confirms its re-appointment and agrees the level of audit fees. In
order to safeguard auditor objectivity and independence, the Audit Committee pre-approves any
non-audit services to be performed by the auditor. The Audit Committee held eight meetings during
the period under review. Apologies were received from: Messrs Kent and Williams for March 15
meeting; Messrs Kennedy, Williams and Dr Read for March 26 meeting; Dr Read for May 4 meeting; Mr
Williams for May 19 meeting and Dr Baxter for November 18 meeting. Otherwise, meetings were
attended by all members. The Audit Committees terms of reference have recently been amended to provide a process for
employees of the Company
to raise in confidence concerns about possible impropriety in matters of financial reporting or
other matters. The terms of reference of the Audit Committee include the following responsibilities:  

To review the effectiveness of the Companys financial reporting and internal control
policies and 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 The Nominations and Corporate Governance Committee is chaired by Mr Kennedy. The other current
members are Dr Fellner, Mr Sturge, Mr Merrifield and Dr Read. The Committee is responsible to the
full Board for determining the qualities and experience required of the Companys Executive and
Non-Executive Directors and for identifying suitable candidates. Both Dr Baxter and Mr Slater, who
were appointed to the Board during the year, were identified and interviewed by Committee members
prior to their appointment. In appropriate cases, recruitment consultants assist in the process.
The Committee is also responsible for succession planning and for reviewing, and making
recommendations in relation to, the Companys corporate governance procedures. The Nominations and
Corporate Governance Committee met four times during the period under review. Apologies were
received from Mr Merrifield and Dr Read for 9 and 13 September meetings. Otherwise, meetings were
attended by all members. The terms of reference of the Nominations and Corporate Governance Committee include the following
responsibilities:  

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. Remuneration Committee The Remuneration Committee is made up entirely of independent Non-Executive Directors and is
chaired by Mr Merrifield. The other current members are Mr Kennedy and Dr Read, both of whom
replaced Mr Williams and Mr Kent who resigned on June 24, 2004. The Remuneration Committee
determines the terms of service and remuneration of the Executive Directors and senior employees.
It also determines overall remuneration policy for all other employees and targets for
performance-related pay schemes operated by the Company. The Remuneration Committee held five
meetings during the period under review. Apologies were received from: Messrs Williams and Kent for
March 15 meeting; and Dr Read for September 9, meeting. Otherwise, meetings were attended by all
members. 53




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Vernalis plc The terms of reference of the Remuneration Committee include the following responsibilities:  

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 The Companys policy on the remuneration of employees, including Executive Directors, is
established by the Committee and approved by the Board. The overall budget for remuneration of
employees and the individual remuneration packages of each Executive Director and senior employee
is determined by the Committee. No Executive Director or employee participates in discussions
relating to the setting of their own remuneration. The objective of the Companys remuneration policies is that all employees, including Executive
Directors, should receive appropriate remuneration given their performance, scale of
responsibility, skills and experience. Remuneration packages enable the Company to attract and
retain key employees by ensuring they are remunerated appropriately and competitively and that they
are motivated to achieve the highest level of Company performance in line with the best interests
of shareholders. A proportion of remuneration is performance-related. Performance conditions for
performance-related bonuses and long-term incentives are designed with a view to alignment of
executive and shareholder interests. The Committee believes that the performance conditions are
demanding and appropriate, in that they measure value for shareholders when compared with
comparable companies. Share options under the current Share Option Plan will only become
exercisable in full if the Companys share price growth equals or exceeds that of the upper
quartile company in the FTSE Small Cap Index and no option will be exercisable if share price
growth is below that of the median company. Options currently held by Executive Directors are
subject to various performance conditions which are set out separately within this report. Policies on remuneration take account of the pay structure and employment conditions within the
Group and also the industry sector. To determine the elements and level of remuneration appropriate
to each employee and Executive Director, the Committee considers remuneration levels in comparable
biotechnology and pharmaceuticals companies, reviews pay and benefits surveys relating to industry
sector or professional specialism and considers individual skills, experience and performance. Components of remuneration Employees remuneration currently comprises annual salary, a performance-related bonus, a long-term
incentive in the form of share options, pension contributions and other benefits. Annual salary The Committee approves the overall budget for employee salary increases and specific increases for
Executive Directors and other members of the Management Team. In determining appropriate salary
levels for each Executive Director and senior employee, the Committee considers both the nature and
the status of the Companys operations and the responsibilities, skills, experience and performance
of each Executive Director and other members of the Management Team. The Committee compares the
Companys remuneration packages for its employees with those for employees of similar seniority in
companies whose activities are comparable with the Group and with which it competes for staff. Performance-related bonus All employees participate in a performance-related bonus scheme. The level of bonus, if any, is
based on overall Group performance and, in the case of Executive Directors and senior employees, is
additionally linked to individual performance measures against criteria established at the
beginning of the financial year. In 2004 the Remuneration Committee placed a greater proportion of
executive pay at risk, so that it is closely linked to the interests of shareholders. Senior
directors received pay rises equivalent to retail price index inflation and increases to the
potential bonus level that they could achieve. The Committee has ensured that challenging and
clearly assessable objectives are set for the Chief Executive Officer linked to a 100% bonus
maximum (as a percentage of salary), with similarly demanding objectives for the other Executive
Directors, linked to a 60% maximum bonus. The objectives are directly linked to shareholder value,
the growth of the portfolio and operational effectiveness as follows: 54




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Vernalis plc  

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 M&A.

Operational effectiveness: related to the performance
of the business, ensuring appropriate financial
controls, managing staffing levels, whilst ensuring
good corporate governance. As a further direct link between Executive remuneration and the interests of shareholders, the
Committee has asked that a proportion of any future bonus paid be used to purchase shares in the
Company, with the aim of building and maintaining an eventual personal shareholding of at least one
times annual salary. Details of bonuses paid to Executives in 2004 are detailed in the remuneration
tables as set out previously. Maximum bonus levels range between 10 and 40 per cent for all other employees based on their role
and market need. Bonuses are awarded wholly in cash. Long-term incentives The Board believes that long-term incentive schemes are important in retaining and recruiting
high-calibre individuals and ensuring that the performance of Executives is focused on creating
long-term shareholder value whilst allowing the Companys cash reserves to be conserved. Details of
the Share Option Plan are given later within this report. One set of option awards in the Company,
equivalent to twice base salary, have been made to members of the executive team. For all other
employees the level is role related and below one times base salary. Further awards of options will
be considered by the Remuneration Committee periodically. Pensions benefits All employees are invited to participate in either a Group Personal Pension Plan or an Occupational
Pension Scheme. The only pensionable element of remuneration is annual salary. All schemes are
money purchase in nature and have no defined benefits. During the period, the Group contributed a
maximum of 10 per cent of base salary in relation to employees, a maximum of 15 per cent in
relation to senior employees and 19 per cent in relation to Executive Directors to the schemes. The
Group has no obligation to the pension scheme beyond the payment of contributions. Other benefits All employees are entitled to private health insurance, the cover being extended to spouse and
family for Executive Directors and some senior employees. Terms and conditions of service for
employees from the merged Group companies were harmonised in 2004. Exemptions from Corporate Governance Listing Requirements Under the NASDAQ Marketplace Rules In connection with the listing of the Companys ordinary shares in the United States in July 1992,
the Company received an exemption with respect to the quorum requirement under Rule 4350(f), which
requires each issuer to provide for a quorum as specified in its by-laws for any meeting of the
holders of common stock, which shall in no case be less than 33 1/3 per cent of the outstanding
shares of a companys common voting stock. The Companys articles of association provide that a
quorum for a general meeting of the Company is constituted by two or more shareholders present in
person and entitled to vote, except in the case of adjourned meetings where the quorum is one
member present in person or by proxy. This quorum requirement is in accordance with U.K. law and
generally accepted business practices in the United Kingdom. The Company also obtained an exemption
from Rule 4350(g), which requires the solicitation of proxies for all meetings of shareholders. The
Company complies with the requirements of UK law and the Listing Rules (Listing Rules) of the UK
Listing Authority (UKLA), which require the issue to all registered members of the Company of proxy
forms in respect of all resolutions to be proposed at a general meeting of the Company. The proxy
forms must be issued with notice of the meeting and must be returned by the shareholder to be
received at least 48 hours before the relevant meeting or 24 hours before a poll is taken, if the
poll is not taken on the same day as the meeting or adjourned meeting. With respect to independence of Directors, under UK law and practice, Mr Kennedy, one of the
Companys directors and a member of the Audit, Remuneration and Nominations and Corporate
Governance Committees, is regarded by the Board as an independent director despite the payment of
£50,000 made to him in connection with the merger between the Company and Vernalis Group that
renders him non-independent under Rules 4350(c) and 4350(d) in conjunction with Rule 4200(15).
Consequently, under the Combined Code, both the Companys Remuneration and Audit Committees are
comprised entirely of independent Non-Executive Directors, however, under NASDAQ requirements and
Rules 4350(c) and 4200(15) that would not be the case because of Mr Kennedys membership of both
committees. In addition, the membership in the Nominations and Corporate Governance Committee of Mr
Kennedy, as well as Dr Fellner and Mr Sturge, two Executive Directors, is in accordance with the
Combined Code requiring a majority of non-executive directors. 55




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Vernalis plc The Company believes that the current representation of Directors in the Nominations and Corporate
Governance Committee, the Audit Committee and the Remuneration Committee permits the Board to have
a thorough understanding of executive matters while at the same time benefiting from the
contribution of independent insights into the Groups business and corporate governance. In
addition, the Board has agreed procedures for Directors to follow if they believe they require
independent professional advice in the furtherance of their duties and these procedures allow
directors to take such advice at the Companys expense. Non-Executive Directors also maintain
regular informal contact (UK law does not currently require separate meetings of non-executive
directors). Under the Companys Articles of Association, a Director is not permitted (subject to certain
exceptions) to vote as a Director on any contract, transaction, arrangement or other kind of
proposal in which he has an interest and which he knows is material. Under UK legislation, a
director who is in any way, whether directly or indirectly, interested in a contract or proposed
contract with the Company must declare the nature of his interest at a meeting of the directors.
Under the U.K. Listing Authority Listing Rules, where a transaction is proposed between a listed
company or any of its subsidiary undertakings and a related party, prior shareholder approval is
generally required, subject to certain exceptions. The related party is not permitted to vote at
the meeting. Under UK company law, certain substantial property transactions (involving non-cash
assets) between the Company and a director or a person connected with him will, if of the requisite
value, need prior shareholder approval. Under the Listing Rules, equity compensation plans which involve or may involve the issue of new
shares or the transfer of treasury shares and certain material amendments thereto must receive
prior shareholder approval. Under UK law and practice there are several circumstances where
shareholder approval is required before a listed company can issue new shares. Under the UK
Takeover Code, which regulates the takeover of companies listed on the London Stock Exchange, if a
person or persons acting in concert acquire shares in a listed company which carry 30 per cent or
more of the voting rights, that person is required to make a takeover offer for all the shares of
the listed company. However, where the listed company issues new shares in itself as consideration
for an acquisition such that a person or persons acting in concert hold more that 30 per cent of
the voting rights, the UK Takeover Panel will normally waive the obligation which would otherwise
arise for such person to make a takeover offer if the independent shareholders of the Company
approve the share issue. The Listing Rules require the prior approval of shareholders for a
reverse takeover (which includes an acquisition by a listed company of a business, unlisted
company or assets which would result in a change in voting control of the listed company). Under UK
law, if a company needs to create additional authorised share capital for a proposed new issue then
the prior approval of shareholders is required. Under UK law, any allotment of relevant securities
requires authority to be given to the Companys directors either by the Companys articles of
association or by the shareholders. For listed companies, guidelines which are customarily and
generally followed state that the amount of share capital which can be allotted by the directors
without going back for a fresh shareholder approval is restricted to the lesser of one third of the
issued ordinary share capital and the unissued but authorised share capital. In addition, under UK
law, any issue of equity securities wholly for cash must be made on a pre-emptive basis unless
shareholders approve the disapplication of the relevant provisions of UK company legislation. For
listed companies, guidelines which are customarily and generally followed state that a any
disapplication, without going back to shareholders for a specific authority, be limited to five per
cent of the equity share capital in issue at the date of the last audited accounts and impose a
cumulative limit, again without going back to shareholders, of 7.5 per cent in any three year
rolling period. Furthermore, there are Listing Rules and institutional guidelines relating to the
price of a new issue, in certain circumstances. These are prohibitions and guidelines, rather than
a requirement for shareholder approval: (i) the Listing Rules provide that the offer price on a
vendor placing (a placing of new listed equity shares of an existing class, issued as consideration
for the sale to the Company of assets or stock by a vendor) should not be at a discount of more
than 10 per cent to the middle market price unless the UKLA permits otherwise; (ii) there are
institutional guidelines, customarily and generally followed, that on a vendor placing, where more
than 10 per cent of the issued equity share capital is being placed or the shares are being placed
at a discount of more than five per cent to the market price, existing shareholders should have a
100 per cent clawback arrangement (i.e. shares are placed, but subject to clawback for existing
shareholders on a pre-emptive basis); (iii) the Listing Rules provide that on an open offer (an
offer on a pre-emptive basis to existing shareholders for cash, but with no nil paid trading) the
offer price should not be at a discount of more than 10 per cent to the middle market price, unless
the UKLA is satisfied that the issuer is in severe financial difficulties or there are other
exceptional circumstances; and (iv) the Listing Rules provide that the placing price on a placing
of listed equity securities of an existing class may not be at a discount of more than 10 per cent
to the middle market price, unless the UKLA is satisfied that the issuer is in severe financial
difficulties or there are other exceptional circumstances. Corporate social responsibility The Board is committed to running the Company in accordance with best practice in corporate
governance. This commitment includes recognition by the Company of the importance of taking into
account its corporate social responsibilities (CSR) in operating the business. In this context,
Vernalis seeks to integrate CSR considerations relating particularly to social, ethical and health,
safety and environment (HS&E) issues in its day to day operations. The Board acknowledges its duty
to ensure the Group conducts its activities responsibly and with proper regard for all its
stakeholders including employees, shareholders, business partners, suppliers and the local and
scientific communities. 56




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Vernalis plc In exercising its corporate social responsibility, Vernalis seeks to ensure that:  

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 concern for the business. Vernalis addresses CSR issues in three key areas that have potential for significant effect on the
Companys short- and long-term value. These areas are as follows: Social
    
    
Recognising the importance of the
Companys employees and of managing
external relations ethicallyEthical
    
    
    Investing in pharmaceutical
research and development with the
aim of establishing and sustaining a
business model designed to secure a
fair return for shareholdersHealth, 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
 Social The health, welfare and development of the Companys employees remain a priority. With the intent
of attracting, recruiting, developing and retaining key employees, Vernalis maintains a number of
policies and procedures for the benefit of its employees. These include a code of business conduct
and ethics; a whistle-blowing policy and procedure; an equal opportunities policy; a dignity at
work policy and a stress policy. An employee handbook including these policies is made available to
all employees on the Companys intranet. Employee development is encouraged through appropriate
training. Scientists are encouraged to attend external conferences relevant to their disciplines.
Regular and open communication between management and employees is viewed as essential for
motivating a highly educated workforce. Briefings at the two Company sites at Winnersh and
Cambridge are held regularly to provide updates on Company business and to provide opportunity for
questions and feedback. Review meetings are also held regularly within each department and amongst
those involved on each of the Companys R&D programmes. A staff consultancy group comprising
employee representations from across the Company meets at least quarterly to discuss and review
issues and concerns raised by employees. The Company maintains both an internet website which is
freely accessible and an intranet site accessible to all executives and staff. Ethical In conducting its business, Vernalis has an extensive range of established procedures that enable
it formally to manage the risks associated with the discovery and development of drugs for the
therapeutic treatment of serious diseases. The Company operates within a strict regulatory
environment in the pharmaceutical industry and conducts its laboratory research and clinical
development activities in accordance with internationally recognised regulatory standards. The
Company manages its resources prudently to ensure appropriate investment is made in its R&D
programmes and its commercialisation activities. Up-to-date security systems are utilised to
protect the Companys IT systems. The Companys intellectual property is protected through a robust
patenting programme. Close attention is paid to maintaining relationships with key stakeholders
including business collaborators, suppliers and shareholders. A Code of Business Conduct and Ethics
has been developed to promote fair, honest and ethical conduct by all employees in their
relationships with other Company stakeholders. Health safety and environment The Company has well-developed health and safety policies and procedures, safeguarding staff,
contractors and visitors, and it complies with current legislation and best practice. Mr Weir is
the Executive Director responsible for HS&E. Health and safety is managed on each site through
committees with competent persons representing all disciplines and with external expert support.
The Companys health and safety policies and procedures are published on the Companys intranet and are readily available in hard copy; they form a key component in the staff induction programme.
Appropriate health and safety training is provided (for example manual handling, fire safety,
cylinder gas safety) with quarterly internal safety audits, and annual audits by specialists and
governmental agencies (for example the Environment Agency). No significant issues have been
identified by these audits. Risk and COSHH assessments are regularly reviewed and updated as
necessary. 57




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Vernalis plc During the year the Company has employed a consultant to advise on how best the Company can manage
its activities so as to minimise their environmental impact. As a result, the Company has
introduced a number of new practices particularly relating to waste management and utility
consumption. The Companys environmental policy will be included on the internet as part of the
redesign of the Companys website which is currently in progress. Waste is minimised with packaging
and containers returned to suppliers where possible. Paper waste is recycled and confidential paper
waste is shredded and recycled. The Company does not knowingly discharge toxic materials into the
environment other than very small amounts via fume cupboard extraction systems, arising from
small-scale synthetic chemistry, and low-level radioactive waste which is discharged into public
drainage, as permitted under our Certificate of Authorisation from the Environment Agency. E     Employees At December 31, 2004, Vernalis employed 124 full-time employees. Of these, 49 were PhDs or held
other post-graduate qualifications. The Company employs a number of temporary staff who, by their very nature, work for short periods
of time in all divisions. The average number of temporary staff was ten. The following table summarises the number of full-time employees, including Executive Directors,
employed by the Group, at the end of each fiscal year for the past three years: Eight month period
    
    
    Twelve-month periodYears ended April 30
    
    
    ended December 31
    
    
    ended December 31Division
    
    2001
    
    
    2002
    
    
    2003
    
    
    2003
    
    
    2004Research and Preclinical
    
    
    164
    
    
    
    126
    
    
    
    148
    
    
    
    102
    
    
    
    77Regulatory Affairs,
Quality and Clinical
Research
    
    
    25
    
    
    
    15
    
    
    
    15
    
    
    
    7
    
    
    
    9Project Management
    
    
    14
    
    
    
    16
    
    
    
    14
    
    
    
    8
    
    
    
    6Biometrics and IT
    
    
    23
    
    
    
    19
    
    
    
    22
    
    
    
    8
    
    
    
    7Business Development
    
    
    7
    
    
    
    5
    
    
    
    5
    
    
    
    3
    
    
    
    3Corporate Services
    
    
    27
    
    
    
    27
    
    
    
    38
    
    
    
    15
    
    
    
    15Facilities Engineering
    
    
    15
    
    
    
    11
    
    
    
    11
    
    
    
    4
    
    
    
    3Directorate
    
    
    12
    
    
    
    10
    
    
    
    9
    
    
    
    4
    
    
    
    4Total
    
    
    285
    
    
    
    229
    
    
    
    262
    
    
    
    151
    
    
    
    124
 In the fiscal reporting year employees worked at the groups headquarters in Winnersh, Reading
and in the research laboratories at Cambridge. Although numbers have steadily fallen since the merger and restructuring, they will increase by the
end of 2005 as the Company begins to expand, especially in developing a sales and marketing group
in the United States of America following the recent decision to co-promote frovatriptan with our
partners, Endo Pharmaceuticals. Current estimate for the number of full-time employees at the end
of 2005 is 130 in the UK and approximately 5 in the USA. A significant number of the Groups management and professional employees have had prior experience
with pharmaceutical, biotechnology or medical product companies. Vernalis believes that it has been
successful in attracting skilled and experienced scientific personnel. However, competition for
such personnel is intense. None of the Groups employees is covered by collective bargaining
agreements and no employee is represented by a trade union. The Companys philosophy is to encourage open discussion of progress and to communicate its
corporate aims effectively. Employees are encouraged to identify closely with the Company through
participation in share option schemes, regular departmental meetings and informal meetings with
management and formal employee representation forums. As a result, management considers relations
with its employees to be good. F     Share Options The Company currently operates two share option schemes, the Share Option Plan and New SAYE Plan,
under which grants of options may be made. Option incentive arrangements under the British Biotech
Group 1992 share Option Scheme (the 1992 Scheme), the Discretionary Executive Share Option Scheme
(the Executive Scheme) and the British Biotech Deferred Share Bonus Scheme (the Bonus Scheme)
remain in place but will not be operated again. The total number of shares that have been, or may
be issued in pursuance of rights granted after September 18, 1996, under the Share Option Plan,
SAYE Plan, Executive Scheme, the SAYE Scheme and the Bonus Scheme may not exceed 10 per cent of the
issued share capital of the Company at any time. 58




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Vernalis plc In addition, the Company has entered into an option deed in favour of the Chairman (see section
below). The 1992 Scheme As of December 31, 2004, options over a total of 152 Ordinary Shares were outstanding under the
Original Schemes. Such options have an exercise price of £16.39 and exercise periods expiring by
October 2005. Executive Scheme As of December 31, 2004, options over a total of 72,687 Ordinary Shares were outstanding under the
Executive Scheme. Such options have exercise prices between £4.40 and £42 and exercise periods
expiring between December 2006 and January 2010. Bonus Scheme Grants of options under the Bonus Scheme in fiscal 2003 and fiscal 2002 were made conditional upon
the meeting of certain performance criteria, with the performance criteria being more demanding
with increased seniority. Such conditions and performance criteria for fiscal 2003 and fiscal 2002
were agreed by the Committee and relate to the market value of an Ordinary Share reaching specified
levels in order that certain tranches of options become exercisable. As of December 31, 2004, awards over a total of 44,364 Ordinary Shares were outstanding under the
Bonus Scheme. All awards have an exercise price of £1 and have exercise periods expiring between
July 2005 and January 2010. Discretionary Share Option Plan The Option Plan is administered by the Remuneration Committee. There are two parts to the Option
Plan. There is an approved part for which the Inland Revenue approval is being sought. There is
also a part that is not designed for Inland Revenue approval; this part is used primarily where the
Company wishes to grant to participants options over more than £30,000 worth of Shares. Except to
the extent required to comply with the legislation, the approved and the unapproved parts of the
Option Plan are essentially the same. Eligibility Selected employees and directors of Vernalis plc (or any participating subsidiary of the Company)
who are required to devote substantially the whole of their working time to the business of the
Merged Group (or any subsidiary of the Company) other than those within two years of their normal
retirement date can participate in the Option Plan at the discretion of the Remuneration Committee. Grant of Options Options may be granted within the period of 42 days following the announcement of the Companys
results for any period, the day after any general meeting of the Company, or at such other
exceptional times as determined by the Remuneration Committee. In the case of options under the
part of the Option Plan approved by the Inland Revenue, it may also grant within the period of 42
days following the day on which it is approved by the Inland Revenue. Options may be granted over both newly issued Shares and over Shares purchased in the market.
However, it is anticipated that only new issue Shares will be used. No payment will be required for the grant of an option. Options are not pensionable benefits, are
not transferable and may only be exercised by a person to whom they were granted or their personal
representatives. No options may be granted more than 10 years after the adoption of the Option Plan. Option Exercise Price The price per New Ordinary share payable upon the exercise of an option will not be less than the
higher of:  

the middle market quotation for a New Ordinary share as derived
from the Daily Official List for the dealing day immediately
preceding the date the option is to be granted or, if so
determined by the Remuneration Committee, the average of such
quotations for the three or five dealing days immediately
preceding the day the option is to be granted or at such other
times as agreed with the Inland Revenue; and

where shares are to be subscribed, their nominal value. 59




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Vernalis plc   Limits on the Issue of Shares The Option Plan is subject to the following overall limit on the number of shares which may be
acquired by subscription: that in any 10 year period not more than 10 per cent of the issued
ordinary share capital of the Company may in aggregate be issued or issuable pursuant to rights
acquired under the Option Plan, the Executive Share Option Scheme, the Bonus Scheme (excluding
qualifying awards), the SAYE Scheme (excluding rights acquired before September 18, 1996) or any
other employees share scheme adopted by the Company since 1996. For the purposes of this limit, options granted to Peter Fellner on April 25, 2003 will not be
included and options and rights acquired which lapse or have been released will cease to count. Individual limit It is intended that the aggregate maximum value of approved and unapproved options which may be
granted each year will after the first year not normally exceed one times an employees earnings
(subject, in the case of approved options, to the statutory limit of £30,000) other than in
exceptional circumstances at the discretion of the Remuneration Committee. For these purposes, an
employees earnings will be his salary current at the date of grant together with any bonus(es)
paid in the previous year. In the first year of operation of the Option Plan, the aggregate maximum
value of options that may be granted may be up to 2.75 times an employees base salary. Exercise of options Options will normally be exercisable between three and 10 years following grant provided that any
performance target set by the Committee has been satisfied. Following shareholder consultation the
performance conditions for options granted on April 23, 2003 were harmonised with options granted
during the transition period ended December 31, 2003 and going forward. The performance condition
is share price growth against the FTSE Small Cap Index. No options will vest if performance is
below median; 50 per cent of the shares under options will vest at median and there will only be
full vesting if the Companys share price performance is in the upper quartile (with options
vesting pro rata between median and upper quartile). These conditions are considered appropriate in
that the focus on delivering shareholder value is retained whilst being simple to measure and
communicate. Rights attaching to Shares Shares allotted or transferred under the Option Plan will rank equally with all other Shares of the
Company for the time being in issue. The Company will apply for any new Shares allotted under the
Option Plan to be admitted to the Official List and to trading on the London Stock Exchanges
market for listed securities. Variation of Capital In the event of any rights or Capitalisation issue, subdivision, consolidation, reduction or other
variation of share capital, the Remuneration Committee may make (in respect of the approved part
subject to receiving prior approval of the Inland Revenue) adjustments it considers appropriate to
the number of Shares subject to option and the price payable on the exercise of options. Alterations to the Option Plan The Option Plan may at any time be amended by the Company in any respect, provided that the prior
approval of the Company in a general meeting is obtained for alterations and additions to the
advantage of participants to the rules governing eligibility, limits on participation, terms of
exercise and adjustment of options. The requirement to obtain the prior approval of shareholders does not, however, apply in relation
to any alteration or addition which is minor in nature and made to benefit the administration of
the Option Plan to comply with the provisions of any existing or proposed legislation or to obtain
or maintain favourable tax, exchange control or regulatory treatment for participants or Merged
Group companies. Any amendments or additions to the Option Plan which affects the terms on which
approved options may be granted or exercised requires the prior approval of the Inland Revenue.
Following the merger with Vernalis Group plc all share options in Vernalis Group plc have lapsed. At December 31, 2004, options over a total of 5,779,310 Ordinary Shares were outstanding. Such
options have exercise prices ranging from £0.585p to £0.88p and exercise periods expiring between
April 2013 and October 2014. On April 13, 2005, options were granted over a further 3,990,395
Ordinary Shares at £0.6925. 60




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Vernalis plc SAYE Plan All UK resident employees (including full-time Directors) working 16 hours or more per week or any
subsidiary nominated to join in the SAYE Plan, are eligible to apply for options to acquire
Ordinary Shares under the SAYE Plan. Other employees may be invited to participate at the
Directors discretion. Options are not transferable. The first invitation to apply for options was issued following
approval of the SAYE Plan by the UK Inland Revenue. Subsequent invitations to apply for options may
normally only be issued in the period beginning three weeks before, and ending six weeks after, the
announcement of the interim or final results of the Group. No payment will be required for the
grant of an option. No options may be granted more than 10 years after the first grant of options
under the SAYE Plan. The exercise price may not be less than an amount equal to 80 per cent of the
market value (determined in accordance with the UK Taxation of Chargeable Gains Act 1992) of an
Ordinary Share; The aggregate maximum monthly contribution payable by an employee under all SAYE contracts linked
to the SAYE Plan may not exceed such sum as may from time to time be permitted by the UK Income and
Corporation Taxes Act 1988 and approved by the Directors. The first invitation to apply for options
was made in October 2004 and was taken up in respect of 482,543 Ordinary Shares. In normal circumstances, an option may be exercised only during the period of six months commencing
on the date that the bonus under the related SAYE contract is payable, that is, the third, the
fifth or the seventh anniversary of the commencement of the SAYE contract. Earlier exercise will be
permitted  (i)

if the option-holders employment is terminated due to death, injury, disability, redundancy
or retirement at normal retirement age;(ii)

if the option-holders employment terminates by reason of early or late retirement and the
option has been held for at least three years; or,(iii)

if the Company by which the option-holder is employed leaves the Group or if the business in
which he works is sold outside the Group. If an employee ceases to be employed for any other
reason, his option will normally lapse. The exercise of options will also be permitted in the event of a change in control, a
reorganisation, an amalgamation or a voluntary winding-up of the Company. In the event of a change
in control of the Company, option-holders may surrender their options in consideration for the
grant of substitute options over shares in the acquiring company. In all cases, an option may be
exercised only to the extent of the amount then paid under the related SAYE contract and any
interest or bonus payable thereon. As of December 31, 2004, options over a total of 482,543 Ordinary Shares were outstanding under the
SAYE Plan at an exercise price of £0.71p per Ordinary Share and with an exercise period that
expires in June 2008. Option Deed in respect of the Chairman A share option over 2,670,071 shares, representing four per cent of the then issued ordinary share
capital of Vernalis was granted on April 23, 2003 by the Company to the Chairman. The grant was
made under an option deed made by Vernalis in favour of the chairman. The exercise price is 100
pence per share. The option will vest and become exercisable as follows: Per cent of share subject to the option vesting
    
    Vernalis share price equal to or greater than50
    
    100 pence25
    
    200 pence25
    
    300 pence
 For the option to vest in respect of any of the percentages of shares, the Vernalis target
share price must be met (using the mid-market closing price as quoted in the daily official list of
the London Stock Exchange) over 30 consecutive trading days. The option will vest on a change of
control of Vernalis to the extent that the Vernalis share price has reached the target set out
above. As at April 29, 2005, no share options have vested. As of December 31, 2003, awards over a total of 2,670,071 Ordinary Shares were outstanding under
the Option Deed. All awards have an exercise price of 100p and exercise periods expiring between
April 2003 and April 2013. 61




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##### Table of Contents



Vernalis plc Directors options Share options held by Executive Directors are set forth in the following table as at December 31,
2004. AtAt
    
    
    Granted in
    
    
    Lapsed in
    
    
    December 31,
    
    
    Exercise
    
    
    Date fromJanuary 1,
    
    
    the year
    
    
    the year
    
    
    2004
    
    
    price
    
    
    which
    
    
    Expiry
    
    
    Performance2004 Number
    
    
    Number
    
    
    Number
    
    
    Number
    
    
    £
    
    
    exercisable
    
    
    date
    
    
    conditionsDr P J FellnerOption Deed
    
    
    2,670,071
    
    
    
    
    
    
    
    
    
    
    
    2,670,071
    
    
    
    1.00
    
    
    Apr 2003
    
    Apr 2013
    
    (viii)2,670,071
    
    
    
    
    
    
    
    
    
    
    
    2,670,071Dr J B HutchisonShare Option Plan
    
    
    431,138
    
    
    
    
    
    
    
    
    
    
    
    431,138
    
    
    
    0.835
    
    
    Oct 2006
    
    Oct 2013SAYE Plan
    
    
    
    
    
    
    13,345
    
    
    
    
    
    
    
    13,345
    
    
    
    0.71
    
    
    Dec 2007
    
    June 2008
    
    (vii)431,138
    
    
    
    13,345
    
    
    
    
    
    
    
    444,483J A D SlaterShare Option Plan
    
    
    
    
    
    
    538,922
    
    
    
    
    
    
    
    538,922
    
    
    
    0.835
    
    
    Oct 2007
    
    Oct 2014
    
    (vii)
    
    
    
    538,922
    
    
    
    
    
    
    
    538,922S J SturgeShare Option Plan
    
    
    1,367,520
    
    
    
    
    
    
    
    
    
    
    
    1,367,520
    
    
    
    0.59
    
    
    Apr 2006
    
    Apr 2013
    
    (vii)1,367,520
    
    
    
    
    
    
    
    
    
    
    
    1,367,520A J Weir1992 Scheme
    
    
    5,077
    
    
    
    
    
    
    
    (5.077
    )
    
    
    
    
    
    
    7.19
    
    
    Jul 1997
    
    Jul 2004
    
    (i)7,615
    
    
    
    
    
    
    
    (7,615
    )
    
    
    
    
    
    
    7.19
    
    
    Jul 1999
    
    Jul 2004
    
    (ii)Executive Scheme
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    42.00
    
    
    Dec 2000
    
    Dec 2006
    
    (iii)1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    42.00
    
    
    Dec 2001
    
    Dec 2006
    
    (iv)3,078
    
    
    
    
    
    
    
    
    
    
    
    3,078
    
    
    
    20.30
    
    
    Dec 2000
    
    Dec 2007
    
    (iii)3,078
    
    
    
    
    
    
    
    
    
    
    
    3,078
    
    
    
    20.30
    
    
    Dec 2002
    
    Dec 2007
    
    (iv)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2001
    
    Sep 2008
    
    (iii)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2003
    
    Sep 2008
    
    (iv)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2002
    
    Jul 2009
    
    (iii)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2004
    
    Jul 2009
    
    (iv)Share Option Plan
    
    
    615,380
    
    
    
    
    
    
    
    
    
    
    
    615,380
    
    
    
    0.59
    
    
    Apr 2006
    
    Apr 2013
    
    (vii)SAYE Plan
    
    
    370
    
    
    
    
    
    
    
    (370
    )
    
    
    
    
    
    
    5.60
    
    
    Oct 2003
    
    Mar 2004
    
    (v)Bonus Scheme
    
    
    98
    
    
    
    
    
    
    
    (98
    )
    
    
    
    
    
    
    1.00
    
    
    Jul 1997
    
    Jul 2004
    
    (v)196
    
    
    
    
    
    
    
    (196
    )
    
    
    
    
    
    
    1.00
    
    
    Jul 1999
    
    Jul 2004
    
    (v)1,608
    
    
    
    
    
    
    
    
    
    
    
    1,608
    
    
    
    1.00
    
    
    Jul 1998
    
    Jul 2005
    
    (v)3,217
    
    
    
    
    
    
    
    
    
    
    
    3,217
    
    
    
    1.00
    
    
    Jul 2000
    
    Jul 2005
    

    (v)62,500
    
    
    
    
    
    
    
    (62,500
    )
    
    
    
    
    
    
    1.00
    
    
    Aug 2003
    
    Aug 2008
    
    (vi)742,121
    
    
    
    
    
    
    
    (75,856
    )
    
    
    666,265P B WorrallShare Option Plan
    
    
    550,898
    
    
    
    
    
    
    
    (117,548
    )
    
    
    433,350
    
    
    
    0.835
    
    
    Oct 2004
    
    Oct 2005
    
    (vii)550,998
    
    
    
    
    
    
    
    (117,548
    )
    
    
    433,350Total
    
    
    5,761,748
    
    
    
    552,267
    
    
    
    (193,404
    )
    
    
    6,120,611
 None of the Non-Executive Directors who served during the financial period (Ms Ferguson, Mr
Kent, Mr Kennedy, Mr Merrifield, Dr Read, Mr Williams or Dr Baxter) held share options at any time
during the period. On April 13, 2005 the Company announced that, as part of a Company-wide grant of share options, the
following options over new ordinary shares of 5p each in the Company were granted to Directors. 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
 The options are exercisable between three and ten years following grant provided the performance
target, which measures share price growth against the FTSE Small Cap Index, has been satisfied. 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). 62




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##### Table of Contents



Vernalis plc Performance conditions Option awards are subject to share price growth performance as compared with the following various
comparators:  (i)

RPI.(ii)

Pharmaceuticals Index.(iii)

Median FTSE 100.(iv)

Upper-quartile FTSE 100.(v)

No performance conditions.(vi)

Progressively as share price increases from £5.00 to £8.00 by July 2004.(vii)

See Share Option Plan description below.(viii)

See Option Deed in respect of the Chairman below. No price was paid for the grant of options, nor were any options exercised by Directors during the
year. The market price of the Companys shares at December 31, 2004, the last working day of the
financial year, was 87.46 pence. During fiscal 2004, the market price of the Companys shares
ranged from 47.5 pence to 97 pence (transition period ended December 31, 2003: 57 pence to 84
pence). 
 ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A     Major Shareholders As at April 6, 2005 the Company was aware of the following substantial interests in its ordinary
shares, held directly: As at April 6, 2005
    
    
    As at April 30, 2004
    
    
    As at October 15, 2003
    
    
    As at October 29, 2002% 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)
    
    
    27.98
    
    
    
    55,663,903
    
    
    
    29.49
    
    
    
    41,909,773
    
    
    
    28.06
    
    
    
    38,097,713
    
    
    
    20.59
    
    
    
    137,468,526Apax Partners & Co Ltd
    
    
    6.10
    
    
    
    12,143,679
    
    
    
    8.54
    
    
    
    12,143,679
    
    
    
    8.54
    
    
    
    12,143,679Jupiter Asset Management Ltd
    
    
    5.79
    
    
    
    11,523,912
    
    
    
    6.00
    
    
    
    8,529,960
    
    
    
    6.28
    
    
    
    8,531,682Biogen Idec Inc
    
    
    3.81
    
    
    
    7,581,673Legal & General Investment Management Limited
    
    
    3.68
    
    
    
    7,313,720
    
    
    
    3.05
    
    
    
    4,335,781
    
    
    
    
    
    
    
    
    
    
    
    4.02
    
    
    
    26,836,870Fidelity Investment Services Ltd
    
    
    3.65
    
    
    
    7,257,496
    
    
    
    3.70
    
    
    
    5,257,295
    
    
    
    5.42
    
    
    
    7,365,230Novartis Pharma AG
    
    
    3.57
    
    
    
    7,106,344Morley Fund Management Limited
    
    
    3.25
    
    
    
    6,470,854HBOS 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
    
    
    
    5,256,442BVF Partners LP and BVF Inv
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.41
    
    
    
    49,467,536UBS Asset Management (Phillips
& Drew Holding Limited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.85
    
    
    
    25,703,347M&G Prudential plc
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.38
    
    
    
    22,608,885
 At such date of calculation of major shareholders, the issued share capital of the Company was
198,950,492 Ordinary shares. The major shareholders do not have different voting rights. At such date, the Directors
of the Company owned 333,708 Ordinary Shares representing approximately
0.17 percent (i) of the Companys outstanding share capital, as follows: Directors interests in shares The table below sets out the interests of the Directors in the Companys shares. With the exception
of shares issued to Directors following the Placing and Open Offer announced in February 2005 and
the share options issued on April 13, 2005, there have been no changes in Directors interests in
shares since December 31, 2004. 63




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##### Table of Contents



Vernalis plc Ordinary shares held atOrdinary shares held
    
    
    Ordinary shares held
    
    
    December 31, 2003following Placing and Open
    
    
    at December 31, 2004
    
    
    Or at date of appointmentOffer Number
    
    
    Number
    
    
    NumberDr A Baxter
    
    
    1,828
    
    
    
    
    
    
    
    Dr P J Fellner
    
    
    63,888
    
    
    
    50,000
    
    
    
    50,000Ms C C Ferguson
    
    
    35,535
    
    
    
    27,810
    
    
    
    27,810Dr J B Hutchison
    
    
    45,757
    
    
    
    35,811
    
    
    
    35,811Mr G M Kennedy
    
    
    37,405
    
    
    
    29,274
    
    
    
    29,274Mr K J Merrifield
    
    
    1,500
    
    
    
    1,500
    
    
    
    1,500Dr P R Read
    
    
    3,300
    
    
    
    2,583
    
    
    
    2,583Mr J A D Slater
    
    
    21,965
    
    
    
    17,191
    
    
    
    17,191Mr S J Sturge
    
    
    56,435
    
    
    
    56,435
    
    
    
    56,435Mr A J Weir*
    
    
    66,095
    
    
    
    51,728
    
    
    
    51,728
   (i)

Dr P J Fellner holds share options over 2,670,071 shares, which together with his holding
of 63,888 shares, represents 1.37 per cent of the issued share capital.(ii)

Dr J B Hutchison holds share options over 831,947 shares, which together with his holding of
45,757 shares, represents 0.44 per cent of the issued share capital.(iii)

S J Sturge holds share options over 2,036,534 shares, which together with his holding of
56,435 shares, represents 1.05 per cent of the issued share capital.(iv)

A J Weir holds share options over 1,142,930 shares, which together with his holding of 66,095
shares, represents 0.61 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.(v)

J A D Slater holds share options over 713,353 shares, which together with his holding of
21,965 shares, represents 0.37 per cent of the issued share capital. As far as is known to the Company and subject to the disclosure provided under Item 8D. Financial
information Significant Changes, it is not directly or indirectly owned or controlled by another
corporation or by any government, and there are no arrangements the operation of which may result
in a change of its control. B     Related Party Transactions There have been no material transactions during the last three years to which any Director or
officer, any relative or spouse thereof or any five per cent shareholder, was a party, or had a
direct or indirect interest, and no such transactions are presently proposed. No Director or
officer of the Company, or any associate thereof, was indebted to the Company or any of its
subsidiaries at any time during the last three years. Each of Dr P J Fellner, Mr S J Sturge, Mr A J
Weir, Mr J A D Slater and Dr J B Hutchison has a service agreement with Vernalis plc, as did Mr T
Edwards and Mr P B Worrall during his term of office. Following Mr T Edwards resignation from the
Board on September 10, 2003, he was paid £150,000 in respect of consultancy provided to the
Company. See also item 6F Directors, Senior Management and Employees  Share Options  Option Deed
in respect of the Chairman. C     Interests of Experts and Counsel Not applicable. 
 ITEM 8.     FINANCIAL INFORMATION The information provided under Item 8A relates to Vernalis plc and its subsidiaries for the
transition period (ended December 31, 2003) and the three fiscal years ended April 30, 2002, April
30, 2003, and December 31, 2004 respectively. Under UK GAAP, the merger of British Biotech plc and
Vernalis Group plc has been accounted for as a merger of equals (pooling of interests). In
accordance with this treatment the prior year comparatives have been restated to include the
results and balances of Vernalis Group plc. Under US GAAP, the transaction has been accounted as
an acquisition of Vernalis Group plc by the Company under purchase accounting. 64




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##### Table of Contents



Vernalis plc A     Consolidated Statements and Other Financial Information Reference is made to Item 18 Financial Statements for a list of all financial statements,
including the notes thereto, and exhibits. B     Dividends The Company does not currently pay dividends. At present, it is intended that no dividends will be
paid by the Company. Even if future operations lead to significant levels of distributable profits,
of which there can be no assurance, any earnings will be reinvested in the Groups business and no
dividends are expected to be paid in the foreseeable future. C     Legal matters There are no legal or arbitration proceedings (including any such proceedings which are pending or
threatened of which Vernalis is aware) which may have or have had during the 12 months preceding
the date of filing, a significant effect on the financial position of Vernalis and the Group as a
whole. D     Significant Changes See item 4A, Information on the Company  History and Development of the Company  Important Events
Since April 30, 2004. 
 ITEM 9.     THE OFFER AND LISTING The market data presented under this Item relate in part to the Company prior to the acquisition of
Vernalis Group. Certain data is provided as of the date of the filing to reflect recent market data
and ordinary share and ADR record ownership after the merger with Vernalis Group (under UK merger
accounting) and change of name to Vernalis plc. A     Offer and Listing Details Trading Market for Ordinary Shares and ADSs The principal trading market for the Shares is the London Stock Exchange (the Exchange), on which
the Ordinary Shares have been listed since July 1992 (now under symbol VER). With effect from
October 20, 1997, the Exchange introduced a new trading system based on an electronic order book,
known as the Stock Exchange Electronic Trading Service (SETS). This replaced the Stock Exchange
Automated Quotation system (SEAQ), the old quote-driven system of share trading under which market
makers were required to quote two-way prices in the Ordinary Shares and buying and selling was
conducted largely by telephone. SETS is based on the automated matching of orders placed
electronically by prospective buyers and sellers. All trades resulting from orders executed on the order book generate automatic trade reports and,
regardless of size, information is published immediately and buy and sell orders are matched in
SETS. Trading may still take place outside the order book and there are certain circumstances in
which the reporting of large trades (deemed to be at least eight times the normal market size
(NMS)) may be delayed until the earlier of the risk being unwound or the market close. The Company also has a sponsored ADR facility with The Bank of New York as Depositary. The
Companys ADSs, each representing two Ordinary shares (prior to April 23, 2003, each ADS
represented 40 Ordinary shares; prior to December 16, 2002, each ADS represented 10 Ordinary
shares, and prior to August 5, 1996 each ADS represented two Ordinary shares) have been quoted on
the NASDAQ National Market System since July 1992 (now under symbol VNLS). At April 29, 2005, there were a total of 22,441 record holders of the Companys Ordinary Shares,
including those represented by ADRs, of which 20 had registered addresses in the US and held a
total of 5,634,374 Ordinary Shares (2.83 per cent of the total outstanding shares of the Company).
At April 29, 2005 there were 1,451,311 ADRs equivalent to 2,902,622 Ordinary Shares held of record
by 22 ADR holders. Since certain of the Companys Ordinary Shares and ADRs are held by nominees,
the number of holders of record may not be representative of the number of beneficial owners. The following table shows, for the years and months indicated, the reported high and low sales
prices (in pence) for the Ordinary Shares on the Exchange, based on its Daily Official List, and
the highest and lowest sales prices (in dollars) for ADSs as reported by NASDAQ. On April 29, 2005, the last sales price on the London Stock Exchange was 66p per Ordinary Share and
$2.42 per ADR on NASDAQ. 65




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##### Table of Contents



Vernalis plc Pence per Ordinary Share
    
    
    US$ per ADSFinancial year end
    
    High
    
    
    Low
    
    
    High
    
    
    LowApril 30, 2000
    
    
    945
    
    
    
    300
    
    
    
    8.31
    
    
    
    2.38April 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
    
    
    95.86
    
    
    
    46.94
    
    
    
    4.14
    
    
    
    1.64Financial year ended April 30, 2002First quarter
    
    
    460
    
    
    
    360
    
    
    
    3.60
    
    
    
    2.50Second quarter
    
    
    425
    
    
    
    270
    
    
    
    3.00
    
    
    
    1.85Third quarter
    
    
    375
    
    
    
    315
    
    
    
    2.76
    
    
    
    2.25Fourth quarter
    
    
    605
    
    
    
    210
    
    
    
    4.31
    
    
    
    1.48Financial year ended April 30, 2003First quarter
    
    
    250
    
    
    
    210
    
    
    
    7.16
    
    
    
    3.00Second quarter
    
    
    138
    
    
    
    44
    
    
    
    4.15
    
    
    
    1.60Third quarter
    
    
    105
    
    
    
    50
    
    
    
    3.32
    
    
    
    1.50Fourth quarter
    
    
    87.5
    
    
    
    59
    
    
    
    2.79
    
    
    
    1.67Eight months ended December 31, 2003First half (to August 31, 2003)
    
    
    80.5
    
    
    
    57
    
    
    
    2.58
    
    
    
    1.86Second half (to December 31, 2003)
    
    
    84
    
    
    
    70
    
    
    
    3.00
    
    
    
    2.05Financial year ending December 31, 2004First quarter
    
    
    69.67
    
    
    
    54.85
    
    
    
    2.90
    
    
    
    2.10Second quarter
    
    
    75.6
    
    
    
    47.44
    
    
    
    3.049
    
    
    
    1.78Third quarter
    
    
    95.86
    
    
    
    46.94
    
    
    
    4.14
    
    
    
    1.64Fourth quarter
    
    
    88.45
    
    
    
    80.54
    
    
    
    3.629
    
    
    
    2.80Financial year ending December 31, 2005First quarter
    
    
    87.46
    
    
    
    69.5
    
    
    
    4.14
    
    
    
    1.64Last six monthsNovember 2004
    
    
    85.98
    
    
    
    80.54
    
    
    
    3.10
    
    
    
    2.84December 2004
    
    
    88.45
    
    
    
    84.5
    
    
    
    3.629
    
    
    
    2.904January 2005
    
    
    87.46
    
    
    
    83.51
    
    
    
    3.26
    
    
    
    2.82February 2005
    
    
    84
    
    
    
    73.13
    
    
    
    3.25
    
    
    
    2.80March 2005
    
    
    77
    
    
    
    69.5
    
    
    
    3.09
    
    
    
    2.39April 2005
    
    
    71.5
    
    
    
    66
    
    
    
    2.60
    
    
    
    2.34
 
 ITEM 10.     ADDITIONAL INFORMATION Information provided under this Item reflects the Group as of the date of the filing, other than
information under Item B describing the development of share capital of British Biotech plc prior
to the merger with Vernalis Group (under UK merger accounting) and certain historical tax analysis
also relating to British Biotech plc. 66




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Vernalis plc A     Share Capital The Company raised funds through venture capital in 1986 and 1988, two private placements of its
equity securities, an initial public offering in July 1992, a rights issue in May 1994 (the 1994
Rights Issue), the conversion of warrants between December 1995 and January 1996 and a rights issue
in July 1996 (the 1996 Rights Issue). Between December 11, 1995 and January 31, 1996, all 9,052,770
issued warrants were converted into Ordinary Shares on a one-for-one basis for a total
consideration of £47,527,000 before expenses. In July 1996, 7,246,524 Ordinary Shares were issued
by way of rights to shareholders on a one-for- eight basis for a total consideration before
expenses of £148,554,000. In August 1996, 587,036,718 Ordinary Shares were issued by way of the
nine-for-one Capitalisation issue, which had the effect of reducing the Companys Ordinary Share
price to approximately one tenth of its previous level. In April 2003 the Company undertook a
capital reorganisation. 20 Old Ordinary shares of 5 pence were consolidated into one Intermediate
Ordinary share of £1. The consolidation of Old ordinary Shares into intermediate Ordinary shares
was immediately followed by a share capital subdivision as follows. Each Intermediate Ordinary
share was subdivided into one New Ordinary share of 5 pence and one Deferred share of 95 pence. On April 23, 2003 the Company issued 33,375,889 New Ordinary shares of 5p each in respect of the
acquisition of RiboTargets. Between September 1 and November 4, 2003 the Company issued 75,375,103
new Ordinary 5p shares with a nominal value of £3,768,755 to Vernalis Group plc shareholders in
consideration for their shares in Vernalis Group plc under the terms of the merger, which was
approved by shareholders on September 1, 2003. B     Memorandum and Articles of Association Memorandum of Association and Articles of Association The following is a summary of the rights under the Companys Memorandum of Association and Articles
of Association relating to voting, dividends, transfers and rights upon a liquidation, which attach
to the Vernalis shares. Memorandum The Memorandum of Association of the Company provides that the Companys principal objects are,
inter alia, to act as or carry on the business of a holding company and to carry on activities
ancillary thereto. The objects of the Company are set out in full in clause 4 of its Memorandum of
Association which is attached as an exhibit. Articles of Association The Articles of Association contain, inter alia, provisions to the following effect.  (a)

Transfer The issued and unissued ordinary shares of 5 pence each in the capital of the Company were made
eligible for settlement in CREST by means of a resolution of the board dated 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. 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. 67




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Vernalis plc   The board may also refuse to register a transfer of uncertificated shares in accordance with the
CREST Regulations. If the directors decide not to register a share transfer, they must no later than two months after
the transfer or the relevant operator-instruction was received, in each case by Vernalis, send
notice of the refusal to the transferee.  (b)

Voting rights Subject to any special rights or restrictions as to voting which are given to any shares (as to
which there are none at present), on a show of hands every shareholder who is present in person has
one vote, and on a poll every shareholder present in person or by proxy has one vote for every five
pence in nominal value of the shares he holds. In the case of joint holders, the vote of the person
whose name stands first in the register of members is accepted to the exclusion of any vote
tendered by any other joint holder. Unless the directors decide otherwise, a shareholder may not
vote at any general or class meeting or exercise any other right in relation to meetings while any
amount of money relating to his shares remains outstanding.  (c)

Dividends Subject to the Companies Act, the Company may, by ordinary resolution, declare dividends in
accordance with the respective rights of the shareholders, but no dividend shall exceed the amount
recommended by the board. Subject to the Companies Act, the directors may pay such interim
dividends as appear to them to be justified by the financial position of the Company on shares of
any class, of any amount, on any date and for any period. The directors may also pay fixed
dividends on any class of share carrying a fixed dividend on the dates prescribed for the payment
of such dividends. Except as otherwise provided by the rights attached to the shares, all dividends
shall be divided and paid proportionately to the amounts paid up on the shares on which the
dividend is paid during any period in respect of which the dividend is paid. Except as otherwise provided by the Articles of Association or the rights attached to any shares, a
dividend or any other money payable in respect of a share can be paid in whatever currency the
directors decide. Directors may deduct any amount relating to shares which remains outstanding from any dividend or
other money payable to the shareholder on or in respect of any share held by him. The Company may stop sending dividend payments through the post, or cease using any other method of
payment (including payment through CREST) if, for two consecutive dividends, the dividend payments
have been returned undelivered or remain uncashed during the period for which they are valid or the
payments by any other method have failed and, in the case of any one dividend, reasonable enquiries
have failed to establish any new address or account of the registered shareholder. Any dividend which remains unclaimed for 12 years from the date when it was declared or became due
for payment, shall be forfeited and 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 up If the Company is wound up the liquidator may, with the sanction of a resolution divide among the
shareholders (the division among shareholders to be decided upon by the liquidator) in kind the
whole or any part of the assets of 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. 68




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Vernalis plc  (e)

Alteration of share capital The Company may, by ordinary resolution, increase its capital, consolidate (or consolidate and then
divide) all or any of its share capital into shares of a larger nominal amount than its existing
shares and cancel any shares which, at the date of the passing of the ordinary resolution have not
been taken, or agreed to be taken and reduce the amount of the Companys share capital by the
amount of the cancelled shares. Subject to the Companies Act, the Company may also divide some or
all of its existing shares into shares of a smaller nominal value by ordinary resolution and
provide that as between the holders of the divided shares different rights and restrictions apply. The directors have the power to deal with any fractions of shares resulting from a consolidation,
including selling any shares representing fractions for the best price reasonably obtainable and
distributing the net proceeds of sale among shareholders in proportion to their fractional
entitlements. The Company may by 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.  (f)

Restrictions on shareholders If any shareholder or any other person who the Company has reasonable cause to believe has an
interest in the Companys shares has been duly served with a statutory notice and has not, within
14 days, provided details of those who have an interest and the extent of their interest in that
particular shareholding, the Company may send out a further notice to the shareholder (a
restriction notice) to direct that in respect of the shares in relation to which the default
occurred (the identified shares) (which expression shall include any further shares which are
issued in respect of such shares) the shareholder shall not be entitled to attend or vote either
personally or by proxy at a general meeting of the Company or a meeting of the holders of any class
of shares or to exercise any other right in relation to general meetings of 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 rights Subject 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; 69




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Vernalis plc  (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)

Directors Number
Subject to the passing of an ordinary resolution changing the provisions in the Articles of
Association, there must be at least two directors and not more than 20 (disregarding alternative
directors). Age
No person will be appointed a director or be required to stop being a director because he has
reached a particular age. However, any person who is age 70 or over must retire in accordance with
the Articles of Association. Notice of a meeting at which a resolution will be proposed to
re-appoint or appoint a director who is age 70 or more must state the fact that the relevant
director is aged 70 or more. Appointment
Directors may be appointed by ordinary resolution or by the board of Vernalis and a director need
not be a Shareholder. A director appointed by the board of Vernalis holds office only until the
next following annual general meeting and is not taken into account in determining the directors
who are to retire by rotation at that meeting. Removal
In addition to any power to remove directors under the Companies Act, the Company may pass a
Resolution to remove a director from office even though his time in office has not ended and may
(subject to the Articles of Association) elect a person to replace a director who has been removed
in this way by passing an ordinary resolution. Retirement by rotation
At every annual general meeting, one third of the directors will retire by rotation and be eligible
for re-election. If one-third is not a whole number, the number of directors to retire is the
number nearest to and less than one third. If there are less than three directors, they will all
retire. The directors to retire will be those who have been directors longest since they were last
elected. If there are directors who were last elected on the same date, and they cannot agree who
is to retire, they must draw lots to decide. In addition, any director who would not otherwise be
required to retire by rotation must retire by rotation at the third annual general meeting since
his last appointment or re-appointment. Any director age 70 or more must retire by rotation. Eligibility
Only the following may be elected as directors at a general meeting:  (i)

directors retiring at that meeting;(ii)

anyone recommenced 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 7 and 42 days before the
meeting a letter stating that he intends to nominate another person for election as director
and written confirmation from the nominee that he is willing to be elected. Remuneration
The total fees paid to all of the directors must not exceed £400,000 per annum or such other higher
amount as may from time to time be decided by ordinary resolution. Any director who performs any
special or extra services for Vernalis is entitled to receive special pay (whether by way of
salary, lump sum or a combination or in any other way, paid as well as or
instead of his ordinary pay as a director) as the board of Vernalis or a committee thereof may
decide. Each director may be paid reasonable expenses incurred in attending and returning from
board meetings, committee meetings, general meetings or otherwise properly and reasonably incurred
in connection with Vernalis business or in the performance of his duties as a director. Pensions and gratuities for directors
The board of Vernalis or any committee thereof may provide pensions or other benefits to any
director or former director of the Company, or any relation or dependent of such person. However,
if the directors want to provide a benefit to a director or former director who has not held an
executive post or place of profit in the Company or in a subsidiary undertaking of the Company or
in any former owner of the business of the Company or any subsidiary undertaking of the Company,
the Company must also pass an ordinary resolution to approve such payment. Permitted interestsSubject to the provisions of the Companies Act and provided that a director
discloses the nature and extent of his interest to the board, a director can do any one or more of
the following: 70




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Vernalis plc  (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 Any director who is so interested does not have to account to the Company for any benefit he
receives as a result of any of the above. Subject to the Articles of Association, a director cannot vote, and be counted in a quorum, on any
resolution relating to any contract, transaction, arrangement or other proposal in which he (or a
person connected with him) knowingly has a material interest unless the only material interest
falls within one of the following:  (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(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 employees
The directors may exercise powers to make provision for the benefit of employees or former
employees of the Company or any of its subsidiaries in connection with the cessation or transfer of
the whole or part of the business of the Company or that subsidiary.  (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. 71




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Vernalis plc  (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 Meetings Subject 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 shareholders The Company may sell any certificated shares by instructing a member of the London Stock Exchange
to sell them at the best price reasonably obtainable at the time of sale, if:  (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. To sell any shares in this way, the directors may appoint anyone to transfer the shares. This
transfer will be just as effective as if it had been signed by the holder, or by a person who is
entitled to the shares by law. The person to whom the shares are transferred will not be bound to
concern himself as to what is done with the purchase moneys nor will his ownership be affected even
if the sale is irregular or invalid in any way. The proceeds of sale will belong to the Company, but it must pay an amount equal to the sale
proceeds less the costs of the sale to the shareholder who could not be traced, or to the person
who is entitled to his shares by law, if that shareholder, or person, asks for it. After the sale, the Company must record the name of the shareholder, of (if known) the person who
would have been entitled to the shares by law, as a creditor for the money in its accounts. The
Company will not be a trustee of the money and will not be liable to pay interest on it. The
Company can use the money, and any money earned by using the money, for its business or in any
other way that the directors decide, but the money cannot be invested in the Companys shares or
in the shares of any holding company of the Company. Rights attaching to the Deferred Shares The following is a summary of the rights which attach to the Deferred Shares: (a) Income The Deferred Shares carry no rights to participate in the profits of the Company. (b) Capital On a return of capital in a winding up or dissolution (but not otherwise) the holders of the
Deferred Shares shall be entitled to participate in the distribution of the assets of the Company
pari passu with the holders of the Ordinary Shares but only in respect of any excess of those
assets above £1,000,000,000,000. The holders of the Deferred Shares shall not be entitled to any
further right of participation in the assets of the Company. 72




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Vernalis plc (c) Attendance and voting at general meetings The holders of the Deferred Shares shall not be entitled, in their capacity as holders of such
shares, to receive notice of any general meeting of the Company or to attend, speak or vote at any
such meeting. (d) Form The Deferred Shares shall not be listed on any stock exchange nor shall any share certificates be
issued in respect of such shares. The Deferred Shares shall not be transferable, save as referred
to below or with the written consent of the directors. (e) Class rights The Company may from time to time create, allot and issue further shares, whether ranking pari
passu with or in priority to the Deferred Shares, and on such creation, allotment or issue any such
further shares (whether or not ranking in any respect in priority to the Deferred Shares) shall be
treated as being in accordance with the rights attaching to the Deferred Shares and shall not
involve a variation of such rights for any purpose. A reduction by the Company of the capital paid up on the Deferred Shares shall be in accordance
with the rights attaching to the Deferred Shares and shall 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. (f) Companys rights The Company has the irrevocable authority at any time to do all or any of the following without
obtaining the sanction of the holder or holders of the Deferred Shares:  (i)

to appoint any person to execute on behalf of any holder of Deferred Shares a transfer of all
or any part thereof and/or an agreement to transfer the same (without making any payment
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 The following contracts are the only contracts not entered into in the ordinary course of business
which have been entered into by the Group within two years immediately preceding the date of this
document and are or may be material to the Group;  (a)

Sale proposal relating to the acquisition by the Company of RiboTargets Holdings plc On March 21, 2003, the Company made an offer (the RiboTargets Offer) to RiboTargets shareholders to
acquire the entire issued share capital of RiboTargets. The RiboTargets Offer comprised the
following:  

for every RiboTargets B ordinary share approximately 2.79 of the Companys shares;

for every RiboTargets A ordinary share approximately 0.85 of the Companys shares; and

396,198 of the Companys shares allocated amongst RiboTargets shareholders pro rata to
their holdings of RiboTargets ordinary shares immediately prior to April 23, 2003. 73




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Vernalis plc   The Companys acquisition of RiboTargets was completed on April 23, 2003. Based on the Companys
share price of 3.875 pence on March 19, 2003, the last practicable business day prior to
announcement of the RiboTargets Offer, the aggregate value of the RiboTargets Offer amounted to
approximately £26 million.  (b)

Deed of covenant In connection with the RiboTargets Offer, the Company entered into a deed of covenant dated March
17, 2003 in favour of RiboTargets whereby the Company agreed to carry on the business of the Group
(then the British Biotech Group) in the ordinary course pending completion of its acquisition of
RiboTargets.  (c)

Undertaking(i)

On March 21, 2003, in consideration for the Company agreeing to make the RiboTargets Offer,
certain RiboTargets shareholders holding in aggregate 100 per cent of the issued RiboTargets B
ordinary shares, 99.9 per cent of the issued RiboTargets A ordinary shares, and 100 per cent
of the issued RiboTargets ordinary shares, entered into an undertaking (the Undertaking) to
accept the RiboTargets Offer and granted warranties in favour of the Company in respect of
their ownership of the RiboTargets shares. The Undertaking imposes restrictions on the ability
of the (now, former) RiboTargets shareholders who are party to it to sell the shares in the
Company which they received in connection with the RiboTargets Offer (Lock-up Shares) without
the Companys prior approval. Each (now, former) RiboTargets shareholder that entered into the
Undertaking:  (a)

may not dispose of any its Lock-up Shares at any time during the period of six
calendar months following April 23, 2003 (the Initial Lock-up Period);(b)

subject as described in (ii) below, during the period of eight calendar months after
the Initial Lock-up Period has expired (the Interim Lock-up Period) must:  (x)

notify the Company or its nominated broker (currently Cazenove) in writing
prior to the disposal of any Lock-up Shares; and(y)

must not dispose of any Lock-up Shares other than through the Companys
nominated broker. However, if a (now former) RiboTargets shareholder who has entered into the Undertaking receives an
unsolicited offer to acquire Lock-up Shares then sub-paragraph (y) above will not apply and such
RiboTargets shareholder shall only be obliged to notify the Companys nominated broker in writing
prior to such disposal.  (ii)

During the Interim Lock-up Period the Qualifying Shareholders (as defined below) are together
entitled to dispose of Lock-up Shares up to a maximum aggregate of Lock-up Shares equal to
three per cent of the issued ordinary share capital of the Company immediately following April
23, 2003 without using the Companys nominated broker to effect such disposal. Qualifying
Shareholder means a RiboTargets shareholder who has entered into the Undertaking whose
beneficial holding of Lock-up Shares immediately following April 23, 2003 amounted to less
than one per cent of the aggregate issued ordinary share capital of the Company immediately
following April 23, 2003.(iii)

A (now, former) RiboTargets shareholder wishing to dispose of any Lock-up Shares in the six
months after the Interim Lock-up Period has expired must consult with the Companys nominated
broker about such disposal for a reasonable period of time prior to the proposed disposal,
including, without limitation, with respect to the method and timing of the disposal.(iv)

In addition, each (now, former) RiboTargets shareholder who has entered into the Undertaking
agreed, prior to the end of the Initial Lock-up Period, not to acquire or offer to acquire,
directly or indirectly, any of the Companys shares if the effect would be to oblige any
person to make a mandatory offer for the Company under Rule 9 of the Code.(v)

The Undertaking contains exemptions which allow the (now, former) RiboTargets shareholders
that entered into the undertaking to dispose of Lock-up Shares, regardless of the restrictions
listed above, in the following situations:  (a)

a disposal pursuant to a court order;(b)

a renunciation of a right to subscribe for shares where such right is derived from
the Lock-up Shares or a failure to take up any such right;(c)

if the Company makes an offer to its shareholders to purchase its own shares or
proposes a scheme of arrangement, a disposal or agreement to dispose of any Lock-up Shares
to the Company pursuant to that offer or scheme; or 74




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Vernalis plc  (d)

by acceptance of a general offer made for all the issued share capital of the
Company, provided such offer is recommended by the board of directors of the Company.  (d)

Placing and Open Offer Agreement A Placing and Open Offer Agreement dated May 1, 2003 was signed between Cazenove & Co. Ltd and the
Company under which Cazenove agreed to act as agent for the Company to procure Placees, or failing
that, to subscribe themselves for the New Ordinary Shares at the Offer Price and to make an Open
Offer of the New Company Shares to Qualifying Shareholders. The Placing and Open Offer was
approved at the Extraordinary General Meeting on May 28, 2003 and raised £16 million (before
expenses) by way of a fully underwritten Placing and Open Offer of 44,444,445 new ordinary shares.  (e)

Roche Convertible Loan On May 13, 2002 Vernalis Group plc entered into a convertible loan agreement with Roche Finance
Limited pursuant to which Roche Finance Limited made a loan to Vernalis Group plc of £7 million,
convertible at any time by Roche into ordinary shares in Vernalis Group plc at a conversion price
of 329 pence per share. Vernalis Group plc also had rights to convert the Roche Convertible Loan in
specified circumstances. If not converted the Roche Convertible Loan was repayable after five
years. Interest was payable semi-annually in arrears on May 13 and November 13 in each year. The
terms of the Roche Convertible Loan included an anti-dilution provision that was triggered by the
issue of new ordinary shares in the Placing and Open Offer, the effect of which was to reduce the
conversion price. This would result in Roche Finance Limited receiving an additional 1,576,044 new
ordinary shares in Vernalis Group plc on conversion of the full amount of the Roche Convertible
Loan. In accordance with the terms of the Roche Convertible Loan, the Company notified Roche Finance
Limited on Vernalis becoming aware that the right to cast more than 50 per cent of the votes at a
general meeting of Vernalis Group plc had become unconditionally vested in the Company. The Roche
Convertible Loan was repaid in full by the Company in November 2003.  (f)

Summary of offer document On July 25, 2003 J.P. Morgan plc made an offer (the Offer) on behalf of Vernalis plc (then British
Biotech plc) for all the issued and to be issued ordinary shares of 10 pence each in Vernalis Group
plc, now Vernalis Group Limited (the Vernalis Group Shares). The terms of the Offer were 0.861 shares in the Company for each Vernalis Group share. The Offer became wholly unconditional on September 1, 2003 and closed on September 23, 2003.
Vernalis Group Limited is now a subsidiary of the Company. The procedure for the compulsory
acquisition of the final outstanding minority interests in Vernalis Group plc has been completed
and Vernalis Group Limited is now a wholly owned subsidiary of the Company. Based upon the
Companys mid-market closing price of 64.5 pence on July 24, 2003 (the last business day prior to
the Offer being posted), the total value of the Offer was approximately £48.6 million.  (g)

Lease between Allied Dunbar Assurance plc (successor to Marion Merrel Limited) and Vernalis
Research Limited (successor to Cerebrus Limited), dated May 13, 1997 The property is approximately 44,000 sq. ft. in size and Vernalis has a 20 year leasehold interest
in the property, which commenced on May 9, 1997 and expires in 2017. Vernalis may terminate the
Lease in 2012 if it wishes. Current annual rent is £730,000. The rent is reviewed every 5 years,
next due in 2007.  (h)

Sub-License Agreement between Menarini International Operations Luxembourg SA and Vernalis
Development Limited (formerly known as Vanguard Medica Limited), dated as of September 10,
1999; and Supply Agreement between Vernalis Development Limited (formerly known as Vanguard
Medica Limited) and Menarini International Operations Luxembourg SA, dated as of September 10,
1999 Vernalis have also signed a license agreement with Menarini granting Menarini exclusive marketing
rights for frovatriptan in the European Union, Eastern Europe and specified countries in Central
America. Under this agreement Vernalis will supply Menarini with the finished packed product ready
for sale. Vernalis receives revenue on supply of product and also from royalties. For additional
information, see above Item 4D Information on the CompanyCommercial Collaborations under
Menarini (Frovatriptan). 75




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Vernalis plc  (i)

Second Amending Agreement dated November 27, 2000, and Third Amending Agreement dated March
1, 2004, both amending the Frovatriptan Development and Sublicense Agreement with SmithKline
Beecham In December 2000, SmithKline Beecham waived all of its rights to royalties on sales of frovatriptan
in return for a series of five $5 million cash payments by Vernalis. For additional information,
see above Item 4D Information on the CompanyCommercial Collaborations under SmithKline Beecham
(Frovatriptan). By an amendment of March 1, 2004, the agreement was varied in respect of the
payment of the second $5 million milestone payment originally payable in September 2003. This
amount was deferred, with $2.5 million paid in March 2004 and $2.5 million paid in September 2004.  (j)

Second Amended and Restated License Agreement between Elan Pharma International Limited and
Vernalis Limited, dated March 15, 2002, amending and restating the Amended and Restated
Sub-License Agreement between the parties, dated as of December 12, 2000. Vernalis signed a license agreement with Elan in 1998 granting Elan exclusive marketing rights for
frovatriptan in the United States, Canada and Mexico. On signing, Elan paid Vernalis a fee of $7.5
million and made a $10 million investment in Vernalis Group ordinary shares at a negotiated price
of £6.25 per share. Elan subsequently paid Vernalis a further $7.5 million in 1999 when the FDA
formally accepted Vernalis New Drug Application (NDA) for frovatriptan for review, and a further
$15 million in the fourth quarter of 2001 following FDA marketing approval. Under the terms of the
1998 license agreement, Vernalis could have potentially received three additional milestone
payments exceeding $30 million in total on achievement by Elan of agreed sales targets for
frovatriptan. In addition, Elan would pay Vernalis a royalty based on its net sales of
frovatriptan. In December 2000, Vernalis entered into a new financing agreement with Elan under
which Elan made a $10 million loan to Vernalis and a further equity investment of £4.96 million.
Following that investment, Elan held 2,943,396 Ordinary Shares, representing approximately 6.7 per
cent of Vernalis Groups issued share capital, which was subsequently sold in July 2002. Elan no
longer holds shares in Vernalis Group (or Vernalis). For additional information, see above Item 4D
Information on the Company  Commercial Collaborations under Elan (frovatriptan). In the first quarter of 2002 Elan appointed UCB as its co-promotion partner for frovatriptan in the
US market. The co-promotion agreement was between Elan and UCB and Vernalis had no contractual
relationship directly with UCB. In conjunction with the appointment of UCB, Vernalis agreed to
revised commercial arrangements with Elan. Under the new terms, Elan forgave the full amount of its
loan to Vernalis, including accrued interest, and accelerated a $5.4 million sales milestone
payment due under the restated 1998 license agreement to 30 days following the US launch. In
return, Vernalis would have received royalties at a reduced rate on US sales up to a pre-determined
level during the launch phase and early years of marketing of frovatriptan. At the end of an
initial three-year period following the US launch of frovatriptan, Elan would have had an option to
extend the reduced royalty period by up to four years by making an additional lump sum payment to
Vernalis. This payment replaced the second sales milestone payment due under the 1998 license
agreement.  (k)

Agreement for the Sale and Purchase of Elans rights to frovatriptan in North America by
Vernalis, dated March 30, 2004 Purchase of Frovatriptan Rights and termination of License Agreement/Development Agreement
Under the Agreement, Vernalis Development Limited agreed to buy from the Elan group companies
(Sellers) all of the Sellers rights and assets relating to frovatriptan in North America. Also,
under the terms of the Agreement, the License Agreement and Development Agreement between the
parties was terminated. Consideration
The 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 frovatriptan
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. However, the remainder of the consideration which was renegotiated in respect of early settlement
to $39 million, plus the inventory cost of $4.5 million, was paid to Elan on August 24, 2004. Warranties and indemnities
The Sellers made certain warranties about the assets and contracts acquired by Vernalis as part of
the transaction. The Sellers liability under the warranties is limited to $25 million and no
liability arises until total claims exceed $500,000. The Sellers liability under the warranties
expires on December 31, 2005. 76




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Vernalis plc Vernalis has the benefit of an indemnity from the Sellers for certain legal costs of Vernalis
arising from a claim arising from termination of the agreement between UCB (Elans co-promotion
partner for frovatriptan in the US) and Elan. Vernalis also has the benefit of an indemnity from the Sellers for any claim arising in connection
with the Sellers development, testing, manufacture, use or sale of frovatriptan. In return
Vernalis, which is responsible for all liabilities incurred in connection with the sale, marketing,
distribution or supply of the frovatriptan after May 18, 2004, has given an indemnity to the
Sellers in relation to claims arising in relation to frovatriptan other than arising from the
Sellers development, testing, manufacture, use or sale of frovatriptan. Guarantee and security
Vernalis guaranteed Vernalis Development Limiteds obligations to the Sellers under the Agreement
(the principal of which was the obligation to pay the consideration) and guarantees Vernalis
Development Limiteds obligations under the Transitional Services Agreement. Transfer of Product Registrations
The current FDA approval for frovatriptan was transferred to Vernalis Development Limited by the
Sellers. The Sellers also transferred the Investigational New Drug Application encompassing,
amongst other things, the identification of the intention to study the use of frovatriptan for the
proposed MRM indication, and the application for approval of frovatriptan in Canada. Governing law and jurisdiction
The Agreement is subject to the laws of England and Wales and the jurisdiction of the courts of
England.  (l)

Transitional Services Agreement between Elan Corporation PLC, Elan Pharmaceuticals Inc, Elan
Pharma Limited and Vernalis Development Limited, dated May 18, 2004 Elan continues to provide certain transitional services in relation to frovatriptan that it is
obliged to provide for up to 12 months following completion of the Transitional Services Agreement,
that is until May 18, 2005. The obligation to provide certain other services for up to six months
expired on November 18, 2004. The services that were or continue to be provided for the 12 month
period include: adverse drug experience data management; medical enquiries; medical monitoring;
returns, rebates and chargebacks; and financial accounting. The services that were provided for six
months included: quality assurance; product quality complaints; supply chain management; assistance
with the FDA and Health Canada interactions; and management of contracts with managed care
organisations. No fee was payable by Vernalis Development Limited for any service that was provided by Elan during
the first six months following May 18, 2004. Vernalis Development Limited reimburses Elan for the
costs of providing the services for the second six month period up to May 18, 2005 in respect of
rebates, returns and chargebacks. This sum is based on the number of staff providing the service
on typical pharmaceutical industry rates for providing such services.  (m)

Floating Charge between Vernalis Development Limited and Elan Pharma International Limited,
dated May 18, 2004 Charge
In respect of Vernalis Development Limiteds payment obligations under the Agreement (the Secured
Obligations) Vernalis Development Limited had granted Elan a first floating charge over monetary
claims relating to frovatriptan from or in relation to North America (the Charged Property). Crystallisation
The floating charge was automatically convertible into a fixed charge over the Charged Property on
a default by Vernalis Development Limited of the Secured Obligations or on the insolvency of
Vernalis. Termination/Discharge
The floating charge was discharged on early settlement of sums due under the Agreement.  (n)

Licence Agreement between Vernalis Development Limited and Endo Pharmaceuticals Inc. dated
July 14, 2004. On July 14, 2004, Vernalis Development Limited (Vernalis) entered into an agreement granting an
exclusive licence of its rights and assets relating to frovatriptan in North America (re-acquired
from Elan) to Endo Pharmaceuticals Inc (Endo). The conditions precedent to the Licence Agreement
were fulfilled and closing achieved on August 17, 2004. 77




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Vernalis plc In consideration of the licence, Endo paid an upfront licence fee of $30 million and a further
amount of $3 million for frovatriptan inventory acquired by Vernalis from Elan. Endo will also
make to Vernalis two unconditional payments of $15 million on the first and second anniversary of
closing of the Licence Agreement and will also make a payment of $40 million on FDA approval of the
use of frovatriptan as a prophylactic treatment for (MRM), currently in Phase III clinical
development, 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 frovatriptan from 20% if FDA
approval of the MRM indication is obtained. Under the terms of the Licence Agreement: -  

Product registrations for frovatriptan and the Investigational New Drug Application in respect of the MRM study are
transferred to Endo.

Endo is committed to specified minimum levels of commitment in respect of marketing frovatriptan, both during the
initial years of the agreement and following MRM approval.

Vernalis will continue to conduct and control the MRM clinical development program as sponsor.

Vernalis has secured the option to co-promote frovatriptan in the United States with effect from January 1, 2006. If
the option is exercised, a portion of the cost of a specified number of details over a five-year period will be funded
by Endo. 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 central nervous system
products alongside frovatriptan. The obligations of Vernalis under the License Agreement are guaranteed by Vernalis plc  (o)

Loan Agreement between Vernalis plc, Vernalis Development Limited and Endo Pharmaceuticals
Inc., dated July 14, 2004 On 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 . 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. 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 MRM 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.  (p)

Deed of Release between Vernalis Development Limited and Elan Pharma International Ltd.,
dated August 24, 2004 On August 24, 2004, Elan executed a Deed of Release in respect of the Floating Charge dated May 18,
2004 as a consequence of payment by Vernalis of the sum of $39 million, the sum renegotiated by
Vernalis Development Limited in respect of early settlement by Vernalis of its obligations under
the Sale and Purchase Agreement and payment of $4.5 million for inventory stock.  (q)

Placing and Open Offer Agreement A Placing and Open Offer Agreement dated February 24, 2005 was signed between Nomura International
plc, Cazenove & Co. Ltd, J.P. Morgan plc and the Company under which Nomura and Cazenove agreed to
act as agents for the Company to procure Placees, or failing that, to subscribe themselves for the
New Ordinary Shares at the Offer Price and to make an Open Offer of the New Company Shares to
Qualifying Shareholders. The Placing and Open Offer was approved at the Extraordinary General
Meeting on March 21, 2005 and raised £30.3 million (before expenses) by way of a fully underwritten
Placing and Open Offer of 43,250,107 new ordinary shares. 78




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Vernalis plc D     Exchange Controls and other Limitations Affecting Security Holders There are currently no UK foreign exchange control restrictions. There are no restrictions under the Companys Memorandum and Articles of Association or under
English law that limit the right of non-resident or foreign owners to hold or vote on the Groups
Ordinary Shares. E     Taxation This section discusses certain material US Federal income tax and UK tax consequences generally
applicable to ownership of ADSs or Ordinary Shares not in ADS form by a US holder (as defined
below) that is not resident in the UK, for the purposes of the Old Treaty and the New Treaty (as
defined below). It applies only to US holders that hold the ADSs or Ordinary Shares as capital
assets for US tax purposes. This section does not apply to a US holder that is a member of a
special class of holders subject to special rules, including a dealer in securities, a trader in
securities that elects to use a mark-to-market method of accounting for his securities holdings, a
tax-exempt organization, a life insurance company, a person liable for alternative minimum tax, a
person that actually or constructively owns 10 per cent or more of the stock of the Company, a
person that holds ADSs or Ordinary Shares as part of a straddle or a hedging or conversion
transaction, a person whose functional currency is not the US dollar and holders who acquired the
Ordinary Shares or ADSs as compensation. This summary is based on the US Internal Revenue Code of 1986, as amended (the Code), its
legislative history, existing and proposed regulations, published rulings and court decisions, and
on the UK tax law and UK Inland Revenue practice all as currently in effect as of the date of this
document, as well as on the Convention Between the Government of the United States of America and
the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital
Gains as entered into force in 1980 (the Old Treaty), the Convention Between the Government of
the United States of America and the Government of the United Kingdom of Great Britain and Northern
Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income and on Capital Gains entered in force March 31, 2003 (the New Treaty), and the
Estate and Gift Tax Treaty Between the United Kingdom and the United States (the Estate and Gift
Tax Treaty). These laws are subject to change, possibly on a retroactive basis. The New Treaty generally is effective in respect of taxes withheld at source for amounts paid or
credited on or after May 1, 2003. Other provisions of the New Treaty, however, took effect on
January 1, 2004. The rules of the Old Treaty remain applicable until these effective dates. A US
holder, however, that is eligible for the benefits of the Old Treaty and the New Treaty may elect
to have the Old Treaty apply in its entirety for a period of 12 months after the applicable
effective dates of the New Treaty. This summary is also based in part on representations of the US Depositary and assumes that each
obligation provided for in, or otherwise contemplated by, the Deposit Agreement between Vernalis,
the Bank of New York as Depositary and all owners from time to time of ADRs issued thereunder dated
July 7, 1992, amended and restated as of August 5, 1996 and amended and restated as of December 13,
2002 and any related agreement, will be performed in accordance with its terms. A US holder is a beneficial owner of ADSs or Ordinary Shares that is for US Federal income tax purposes:  

a citizen or resident of the United 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 Old
Treaty and the New Treaty. In general and taking into account earlier assumptions, for US Federal income tax and United
Kingdom tax purposes, if a US holder holds ADRs evidencing ADSs, the holder will be treated as the
owner of the Ordinary Shares represented by those ADRs. Accordingly, except as noted below, the tax
consequences discussed below apply equally to US holders of ADRs and to US holders of Ordinary
Shares not in ADR form, and exchanges of Ordinary Shares for ADRs and ADRs for Ordinary Shares
generally will not be subject to US Federal income tax or to UK tax. 79




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Vernalis plc United Kingdom Taxation Taxation of Dividends For the purposes of this summary, the term Eligible US holder means a beneficial owner of an ADS
or Ordinary Share that derives and beneficially owns the cash dividend paid thereon and that is a
resident of the United States for the purposes of the Convention relating to income and capital
gains taxes (the Income Tax Convention). An Eligible US holder will generally be entitled under the current Income Tax Convention to
receive, in addition to any dividend paid by the Company, an amount equal to the tax credit
available to UK resident shareholders in respect of such dividend, currently equal to one-ninth of
the dividend paid, but subject to a notional withholding tax equal to 15 per cent of the sum of the
dividend paid and the tax credit. The withholding tax will exceed the tax credit and therefore no
additional payment will result. The amount of withholding tax is restricted to the amount of the tax credit and no additional
withholding tax is due in situations where the withholding tax is more than the credit. For example, a dividend of £80.00 to an individual Eligible US holder would generally entitle the
individual Eligible US holder to receive a tax credit of approximately £8.89 (i.e. one-ninth of 80)
and the amount of withholding tax will be limited to £8.89 (even though 15 per cent of the gross
dividend would be £13.33). The result is the refund to which the individual Eligible US holder
would otherwise be entitled is eliminated and no withholding tax is due. Such an Eligible US holder
would, therefore, only receive the net amount of the dividend, i.e. £80.00. It is anticipated that almost all ADS holders will be subject to the above arrangements. US shareholders who own less than 10 per cent of the voting stock as portfolio investors, and who
are entitled to a tax credit under the Income Tax Convention may elect to be treated as receiving
an amount equal to the credit without affirmatively making a claim to the United Kingdom or
obtaining a receipt therefrom. This election is made on Line 5 of Form 8833, which is to be filed
with the portfolio investors income tax return. Such an investor making this election will be
treated as having received an additional dividend equal to the gross tax credit payment and as
having paid the UK withholding tax on such tax credit payment. Taxation of Capital Gains A US holder who is not resident or ordinarily resident in the UK for UK tax purposes will not
normally be liable for UK tax on capital gains realised or accrued on the sale or other disposal of
Ordinary Shares or ADSs unless such Ordinary Shares or ADSs are held in connection with a trade,
profession or vocation carried on by such US holder in the UK through a branch or agency and the
Ordinary Shares or the ADSs are, or have been used, held or acquired for the purposes of such
trade, profession or vocation or such branch or agency. Inheritance Tax An ADS or Ordinary Share owned by an individual US holder who, for the purposes of the convention
relating to estate and gift taxes between the US and the UK (the Estate and Gift Tax Convention),
is domiciled in the US and is not a national of the UK is not generally subject to UK inheritance
tax in respect of the ADSs or Ordinary Shares on the individuals death or on a gift made by the
individual during his lifetime except where the ADS or Ordinary Share is part of the business
property of a UK permanent establishment or pertains to a UK fixed base used for the
performance of independent personal services. The Estate and Gift Tax Convention generally provides
for inheritance tax paid in the UK to be credited against US Federal gift or estate tax payable in
the US and for US Federal gift or estate tax paid in the US to be credited against any inheritance
tax payable in the UK, based on priority rules set forth in that Convention, in a case where an ADS
or Ordinary Share is subject both to UK inheritance tax and to US Federal gift or estate tax. There
are special rules applying to ADSs or Ordinary Shares held in trust. Stamp Duty and Stamp Duty Reserve Tax (SDRT) Stamp duty or SDRT at 1.5 per cent arises upon the deposit with the Depositary of the Ordinary
Shares. The rate is applied to the amount or value of the consideration for the sale, or, if the
transaction is not a transfer on sale, the value of the Ordinary Shares at the date on which the
instrument of transfer transferring the Ordinary Shares is executed. The duty is then rounded up to
the nearest 1p in the case of SDRT or £5 in the case of stamp duty. On the transfer of Ordinary
Shares to the Depositary, stamp duty or SDRT will be payable by the Depositary. Under the Deposit
Agreement, holders of ADRs must pay an amount in respect of such duty or tax to the Depositary. Provided that any agreement to transfer or instrument of transfer is not executed in the UK and
remains at all subsequent times outside the UK, no UK stamp duty will be payable on the acquisition
or transfer of ADSs evidenced by ADRs. An agreement to transfer ADSs evidenced by ADRs should not
give rise to a liability to SDRT. 80




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Vernalis plc A transfer of Ordinary Shares by the Depositary or its nominee to the relative ADR holder when the
ADR holder is not transferring beneficial ownership should not give rise to any SDRT and should
only give rise to UK stamp duty at the rate of £5 per transfer. Purchases of Ordinary Shares, as opposed to ADSs, will normally give rise to a charge to UK stamp
duty or SDRT at the rate of 0.5 per cent (rounded up to the nearest 1p in the case of SDRT or £5 in
the case of stamp duty) of the price payable for the Ordinary Shares at the time of the transfer.
SDRT is the liability of the purchaser and stamp duty is also usually paid by the purchaser. Where
such Ordinary Shares are later transferred to the Depositarys nominee, further stamp duty or SDRT
at the 1.5 per cent rate will normally be payable. Where Ordinary Shares being acquired are transferred directly to the Depositarys nominee, the
charge will generally be the higher charge of 1.5 per cent of the price payable for the Ordinary
Shares so acquired. United States Federal Income Taxation Taxation of Dividends Subject to the passive foreign investment company (PFIC) rules discussed below, a US holder is
subject to US Federal income taxation on the gross amount of any dividend paid by the Company out
of its current or accumulated earnings and profits, as determined for US Federal income tax
purposes (although, to the extent that the PFIC rules apply, they materially alter this treatment).
A US holder that is eligible for the benefits of the Old Treaty may include in the gross amount of
any dividend payment the UK tax withheld from the dividend payment pursuant to the Old Treaty, as
described above in United Kingdom Taxation. Subject to certain limitations, the UK tax withheld
in accordance with the Old Treaty and effectively paid over to the UK Inland Revenue will be
creditable against the US holders US Federal income tax liability, if the US holder is eligible
for the benefits of the Old Treaty and has appropriately filed Internal Revenue Form 8833. Under
the New Treaty, a US holder will not be entitled to a UK tax refund, but also will not be subject
to UK withholding tax. In that case, the US holder will include in income for US Federal income tax
purposes only the amount of the dividend actually received from the Company, and the receipt of a
dividend will not entitle the US holder to a foreign tax credit. The dividend is taxable to a US
holder when he receives the dividend, actually or constructively. Dividends will be income from sources outside the United States, but dividends paid in taxable
years beginning before January 1, 2007 generally will be passive or financial services income,
and dividends paid in taxable years beginning after December 31, 2006 will, depending on the US
holders circumstances, be passive or general income, which, in either case, is treated
separately from other types of income for purposes of computing the foreign tax credit allowable. Dividends paid to a non-corporate US holder in taxable years beginning before January 1, 2009 that
constitute qualified dividend income will be taxable to the holder at a maximum rate of 15 per cent
if certain holding period requirements are met. It is not certain, however, that dividends paid by
the Company would be qualified dividend income. See the discussion below under Passive Foreign
Investment Company Considerations. Special rules apply in determining the foreign tax credit
limitation with respect to dividends that are subject to the maximum 15% tax rate. The amount of the dividend distribution that the US holder must include in his income is the US
dollar value of the pound payment made, determined at the spot pound/US dollar rate on the date the
dividend distribution is includible in the US holders income, regardless of whether the payment is
in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the US holder includes the dividend payment in income
to the date the US holder converts the payment into US dollars will be treated as ordinary income
or loss and will not be eligible for the special tax rate applicable to qualified dividend income.
The gain or loss generally will be income or loss from sources within the United States for foreign
tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for US
Federal income tax purposes, will be treated as a non-taxable return of capital to the extent of
the US holders basis in the Ordinary Shares or ADSs, and thereafter as capital gain. No dividends
received deduction will be allowed to US corporations with respect to dividends paid by the
Company. Special rules described below apply with respect to dividends distributed to a US holder during
periods in which Ordinary Shares or ADSs are treated as stock of a PFIC. 81




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Vernalis plc Taxation of Capital Gains Subject to the PFIC rules discussed below, a US holder who sells or otherwise disposes of his
Ordinary Shares or ADSs will recognise capital gain or loss for US Federal income tax purposes
equal to the difference between the US dollar value of the amount that the US holder realises and
his tax basis, determined in US dollars, in his Ordinary Shares or ADSs (although, to the extent
that the PFIC rules apply, they materially alter this treatment). Capital gain of a non-corporate
US holder that is recognised before January 1, 2009 is generally taxed at a maximum rate of 15 per
cent where the holder has a holding period greater than one year. The gain or loss will generally
be income or loss from sources within the United States for foreign tax credit limitation purposes. Passive Foreign Investment Company Considerations The Company believes that, for the taxable year ending December 31, 2004, Ordinary Shares and ADSs
should not be treated as stock of a PFIC for US Federal income tax purposes; however, the Company
believes that Ordinary Shares and ADSs will be treated as stock of a PFIC for previous taxable
periods, including for the taxable period ending December 31, 2003, and the Company believes that
Ordinary Shares and ADSs may be treated as stock of a PFIC for the current or future taxable years.
The conclusion that the Company is properly classified as a PFIC is a factual determination made
annually and thus is subject to change. The Company will monitor its status and will, promptly
following the end of each taxable year, notify shareholders if it believes that it is properly
classified as a PFIC for that taxable year. A US holders Ordinary Shares or ADSs will be treated
as stock in a PFIC if the Company was a PFIC which was not a qualified electing fund with respect
to the US holder at any time during the US holders holding period in his Ordinary Shares or ADSs,
even if the Company is not currently a PFIC, unless the US holder makes a deemed sale election, as
described below. For purposes of this rule, if a US holder makes a mark-to-market election, as
described below, with respect to his Ordinary Shares or ADSs, the US holder will be treated as
having a new holding period in his Ordinary Shares or ADSs beginning on the first day of the first
taxable year beginning after the last taxable year for which the mark-to-market election applied. The following is a general discussion of the PFIC rules applicable to US holders who hold Ordinary
Shares or ADSs during any taxable year of the Company in which the Company is treated as a PFIC. Under the PFIC rules, a US holder that does not make a QEF election or mark-to-market election,
each as described below, is subject to special rules with respect to (a) any gain realised on the
sale or other disposition of Ordinary Shares or ADSs and (b) any excess distribution by the
Company to the US holder (generally, any distributions to the US holder in respect of the Ordinary
Shares or ADSs during a single taxable year that are greater than 125 per cent of the average
annual distributions received by the US holder in respect of the Ordinary Shares or ADSs during the
three preceding taxable years or, if shorter, the US holders holding period for the Ordinary
Shares or ADSs). Under these rules: (i) the gain or excess distribution would be allocated rateably
over the US holders holding period for the Ordinary Shares or ADSs, (ii) the amount allocated to
the taxable year in which the gain or excess distribution was realised would be taxable as ordinary
income, (iii) the amount allocated to each prior year for which the Company is treated as a PFIC,
with certain exceptions, would be subject to tax at the highest tax rate in effect for that year,
and (iv) the interest charge generally applicable to underpayments of tax would be imposed in
respect of tax attributable to each such year. The special PFIC tax rules described above will not apply to a US holder who makes an election to
have the Company treated as a qualified electing fund (a QEF election) for the first taxable
year in which the US holder owns Ordinary Shares or ADSs and for which the Company is treated as a
PFIC, if the Company provides certain required information to holders. The election generally must
be made with the US holders US Federal income tax return for the taxable year of the US holder
that includes the last day of the first taxable year of the Company for which the Company is
treated as a PFIC. Once a US holder makes a QEF election, the election will apply to all subsequent taxable years of
the US holder with respect to the Company, unless the US holder revokes the election with the
consent of the Internal Revenue Service. The Company intends to provide registered shareholders, on
request, with such information as may be required to make a QEF election effective. A US holder that makes a QEF election will be currently taxable on his pro rata share of the
Companys ordinary earnings and net capital gain (at ordinary income and capital gain rates,
respectively) for each taxable year of the Company, regardless of whether or not distributions were
received. These amounts of ordinary income will not be eligible for the favourable tax rates
applicable to qualified dividend income, as described above. The US holders basis in the Ordinary
Shares or ADSs will be increased to reflect taxed but undistributed income. Distributions of income
that had previously been taxed will result in a corresponding reduction of basis in the Ordinary
Shares or ADSs and will not be taxed again as a distribution to the US holder. If the Company
ceases to be a PFIC, a US holder that has made a valid QEF election will no longer be currently
taxable on his pro rata share of the Companys ordinary earnings and net capital gain. 82




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Vernalis plc In general, the special PFIC tax rules described above will also not apply to a US holder of
marketable stock who makes an appropriate election to mark-to-market such stock (a
mark-to-market election). The ADSs will be considered marketable stock for these purposes as long
as the ADSs are traded on the NASDAQ, other than in de minimis quantities, on at least 15 days
during each calendar quarter. However, there is no certainty that the Ordinary Shares will be
considered marketable stock for these purposes unless and until the Internal Revenue Service
designates the London Stock Exchange as having rules adequate to carry out the purposes of the PFIC
rules. There can be no assurance that the Internal Revenue Service will make such a designation. A US holder that makes a mark-to-market election must include in each year for which the election
applies, as ordinary income, an amount equal to the excess of the fair market value of the Ordinary
Shares or ADSs at the close of the taxable year over the US holders adjusted basis in the Ordinary
Shares or ADSs, and is allowed a deduction for any excess of the adjusted basis over the fair
market value of the Ordinary Shares or ADSs, but only to the extent of previously included
mark-to-market inclusions. These amounts of ordinary income will not be eligible for the favourable
tax rates applicable to qualified dividend income or long-term capital gains, as described above. A
US holders adjusted basis in the Ordinary Shares or ADSs will be adjusted to reflect the amounts
included or deducted with respect to the mark-to-market election, and any gain or loss on the
disposition of Ordinary Shares or ADSs, while treated as stock of a PFIC, would generally be
ordinary income or, to the extent of previously included mark-to-market inclusions, ordinary loss.
An election to mark-to-market will apply to the taxable year for which made and for all subsequent
taxable years unless the Ordinary Shares or ADSs cease to be marketable stock or the Secretary of
the Treasury consents to the revocation of such election. A US holder will not include
mark-to-market gain or loss with respect to Ordinary Shares or ADSs for any taxable year that the
Ordinary Shares or ADSs are not treated as stock of a PFIC to the US holder. A US holder that has not made a QEF or a mark-to-market election with respect to the Company will
continue to be subject to the PFIC rules, even after the Company ceases to qualify as a PFIC,
unless the US holder makes a deemed sale election under Section 1298(b)(1) of the Code. A US
holder that makes a deemed sale election will be treated as if he had sold his Ordinary Shares or
ADSs on the last day of the last taxable year of the Company in which the Company was a PFIC and
will be required to recognise for Federal income tax purposes any gain (but not loss) realised on
the deemed sale. A US holder that makes a deemed sale election will no longer be subject to the
PFIC rules, unless the Company again becomes a PFIC. US holders that have not already made a QEF
election with respect to the Company are advised to consult with their tax adviser as to the
desirability of making a deemed sale election. A deemed sale election may be made by filing an amended tax return for the taxable year that
includes the last day of the last taxable year of the Company in which the Company was a PFIC,
together with Form 8621 or a statement, prepared in accordance with Temporary US Treasury
Regulation Section 1.1297-3T, reporting any gain or loss on the deemed sale. Gain recognised on the
deemed sale will be allocated pro rata to each day in the US holders holding period for his
Ordinary Shares or ADSs as of the last day of the last taxable year of the Company in which the
Company was a PFIC, and will be taxed as ordinary income. Any gain allocated to a prior taxable
year will be taxed at the highest marginal rate in effect for such year. In addition, the US holder
will be required to pay interest on the tax due, based on the rates applicable to underpayments of
tax in effect for the relevant taxable years. Loss on the deemed sale must be reported on Form 8621
but will not be recognised for Federal income tax purposes. A US holder that recognises gain
pursuant to a deemed sale election will increase his basis in his Ordinary Shares or ADSs by the
amount of the gain recognised. A deemed sale election must be made within 3 years of the due date,
including extensions, of the US holders tax return for the taxable year that included the last day
of the last taxable year of the Company in which the Company was a PFIC. Special rules apply with respect to the calculation of the amount of the foreign tax credit with
respect to excess distributions by a PFIC or, in certain cases, QEF inclusions. In general, these
rules allocate creditable foreign taxes over the US holders holding period for the Ordinary Shares
or ADSs and otherwise coordinate the foreign tax credit limitation rules with the PFIC rules. In addition, notwithstanding any election a US holder makes with regard to the Ordinary Shares or
ADSs, dividends received from the Company by the US holder will not constitute qualified dividend
income to the holder if the Company is a PFIC either in the taxable year of the distribution or the
preceding taxable year. Dividends received by the US holder that do not constitute qualified
dividend income are not eligible for the 15 per cent maximum rate applicable to qualified dividend
income, as described above. Instead, the US holder must include the gross amount of any such
dividend paid by the Company out of its accumulated earnings and profits (as determined for US
Federal income tax purposes) in his gross income, and it will be subject to tax at rates applicable
to ordinary income. A US holder that owns Ordinary Shares or ADSs during any year that the Company is a PFIC with
respect to him must file Internal Revenue Service Form 8621. 83




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Vernalis plc F     Documents on Display This Form 20-F and any related documents may be inspected by investors at the Companys registered
office at Oakdene Court, 613 Reading Road, Winnersh, Berkshire, RG41 5UA or at the public reference
room of the SEC located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington DC 20549,
at prescribed rates. More information concerning the public reference room of the SEC can be
obtained by calling the SEC at 1-800-SEC-0330. The SEC filings of the Company are also available to
the public from commercial document retrieval services and, for filings made on or after November
4, 2002, at the website maintained by the SEC at www.sec.gov. 
 ITEM 11.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information presented under this Item relates to Vernalis plc and its consolidated subsidiaries for
the fiscal period reported. Details of Vernaliss exposure to market risk and its management of risk are provided in Item 3.
Risk Factors and Note 25 of the Consolidated Financial Statements which are incorporated herein by
reference. 
 ITEM 12.     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 84




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Vernalis plc 
 PART II 
 ITEM 13.     DEFAULTS, DIVIDEND ARREARS AND DELINQUENCIES None. 
 ITEM 14.     MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS None. 
 ITEM 15.     CONTROLS AND PROCEDURES The management of Vernalis, including its Chief Executive Officer and Chief Financial Officer has
evaluated, the effectiveness of the design and operation of the Companys disclosure controls and
procedures (as defined under Securities and Exchange Commission rules) as at December 31, 2004.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the design and operation of these disclosure controls and procedures were effective as of December
31, 2004. During the period covered by this Annual Report there were no changes in connection with
the Companys internal controls over financial reporting, nor were any changes identified that had,
or may reasonably have been expected to have, a material effect on internal controls over financial
reporting. 
 ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT The Board has determined that Ms C C Ferguson, who the Board considers to be independent, qualifies
as an audit committee financial expert, as such term is defined for purposes of this Item 16A. In
order to further supplement her skills specific advisers and experts will continue to be engaged to
provide independent advice to her as well as to the management and other members of the committee. 
 ITEM 16B.     CODE OF ETHICS The Company has a code of business conduct and ethics which it is implementing across the
Group. 
 ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES The Companys principal independent auditor is PricewaterhouseCoopers LLP, London, UK. In
accordance with the Sarbanes-Oxley Act of 2002, the auditors will not be engaged on any non-audit
work which may compromise their independence. Fees billed to the Company for professional services by PricewaterhouseCoopers LLP in fiscal 2002,
in fiscal 2003, the eight month transitional period to December 31, 2003 and fiscal 2004, were as
follows: Eight months ended
    
    
    Year EndedYear ended April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Audit fees
    
    
    65
    
    
    
    110
    
    
    
    96
    
    
    
    122Audit-related fees
    
    
    133
    
    
    
    148
    
    
    
    170
    
    
    
    55Taxation
    
    
    84
    
    
    
    134
    
    
    
    76
    
    
    
    58All other fees
    
    
    162
    
    
    
    513
    
    
    
    390
    
    
    
    160444
    
    
    
    905
    
    
    
    732
    
    
    
    395
 Audit-related fees relates principally to SEC and UK Listing Authority compliance work in
relation to the Company and to Vernalis Group plc. 85




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Vernalis plc Tax fees relates to tax compliance work, together with advice on the tax treatment of completed
and proposed collaborations. All other fees in fiscal 2004 of £160,000 related to costs incurred in relation to the
re-acquisition of frovatriptan rights from Elan, and a proposed fundraising in the year, for the
eight month transitional period ended December 31, 2003 of £390,000 relates to reporting accounting
work in respect of the Placing and Open Offer by Vernalis Group in May 2003 and the merger between
British Biotech and Vernalis Group. All other fees for fiscal 2003 of £513,000 relates to the
acquisition of RiboTargets and the proposed merger with MorphoSys. All other fees for fiscal 2002
of £162,000 relates to the proposed fundraising by Vernalis Group in that year. In fiscal 2004, the Audit Committee pre-approved all audit fees, audit related fees, taxation fees.
Other fees were pre-approved by the Audit Committee or their Chairman as described below. See also Note 4d to the Consolidated Financial Statements. Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors The Audit Committee is responsible for the oversight of the independent auditors work. The Audit
Committees policy is to pre-approve, at the time such services are provided, all audit and
non-audit services provided by PricewaterhouseCoopers LLP. In such an event, the Audit Committee
sets forth its pre-approval in detail, listing the particular services or categories of services
which are pre-approved, and setting forth a specific budget for such services. In urgent
circumstances, the Audit Committees Chair, Ms C C Ferguson, may issue such a pre-approval.
Additional services may be pre-approved on an individual basis. PricewaterhouseCoopers LLP and
Vernalis management then report to the Audit Committee not less than twice yearly regarding the
extent of services actually provided in accordance with the applicable pre-approval and the fees
for the services performed. 
 ITEM 16D.     EXEMPTIONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES Not applicable until the Companys annual report for the fiscal year ending December 31, 2005 
 ITEM 16E.     PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable. 86




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Vernalis plc PART III 
 ITEM 17.     FINANCIAL STATEMENTS Not applicable. 
 ITEM 18.     FINANCIAL STATEMENTS The financial statements presented under this Item are the financial statements of Vernalis
plc and its consolidated subsidiaries for the reported periods other than post balance sheet events
described in Note 25 to the Notes to the Consolidated Financial Statements. The following Consolidated Financial Statements and related Notes thereto, together with the report
of PricewaterhouseCoopers LLP thereon, are filed as part of this Annual Report on Form 20-F. PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Statements of Operations
    
    
    F-2Statements of Total Recognised Gains and Losses
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Cash Flow Statements
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6 to F-36
 Financial statements schedules have been omitted because the required information is shown in the
Consolidated Financial Statements or the related Notes thereto. 
 ITEM 19.     EXHIBITS The following documents are filed as exhibits to this Annual Report on Form 20-F:  1.

Memorandum and Articles of Association of the Company (2)4.

Material Contracts:4.1

Service Contracts of Directors(a)

Service Agreement, dated March 21, 2003 between the Company and Peter Fellner (2)(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. (2)(c)

Service Agreement, dated June 24, 1999, between the Company and Tony Weir (3)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. (2)(d)

Service Agreement, dated July 2, 2003, between the Company and Peter Worrall (2) (4)(e)

Service Agreement dated July 2, 2003, between the Company and John Hutchison (2)(f)

Engagement Letter between the Company and Peter Read, dated July 18, 2003 (2)(g)

Engagement Letter between the Company and George Kennedy, dated July 17, 2003 (2)(h)

Engagement Letter between the Company and Carol Ferguson, dated July 17, 2003 (2)(i)

Engagement Letter between the Company and Keith Merrifield, dated December 1, 1999
(3), 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. (2) 87




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Vernalis plc  (j)

Engagement Letter between the Company and Ian Kent, dated March 21, 2003 including Letter of
Amendment between the Company and Ian Kent, dated July 17, 2003. (2) (4)(k)

Engagement Letter between the Company and Eugene Williams, dated December 12, 2000.
(3) Engagement letter between the Company and Eugene Williams, dated March 21, 2003
including Letter of Amendment between the Company and Eugene Williams dated July 17, 2003.
(2) (4)(l)

Engagement Letter between the Company and Timothy Edwards, dated June 24, 1999 (3)
(4)(m)

Engagement Letter between the Company and Elliot Goldstein, dated October 6, 1998 (3)
(4)(n)

Engagement Letter between the Company and Alan Baxter, dated May 19, 2004 (1)(o)

Engagement Letter between the Company and John Slater, dated October 29, 20044.2

Acquisition of Ribo Targets(a)

Offer for the acquisition by the Company of RiboTargets dated March 21, 2003 (2)(b)

Deed of covenant dated March 17, 2003 entered into by the Company in favour of RiboTargets (2)(c)

Undertaking dated March 21, 2003 entered into by certain (now former) RiboTargets
shareholders (2)4.3

Merger with Vernalis Group plc(a)

Offer for the acquisition by the Company of Vernalis Group plc dated July 25, 2003 (2)4.4

Agreements originally entered into by Vernalis Group plc(a)

Lease between Allied Dunbar Assurance plc (successor to Marion Merrel Limited) and Vernalis
Research Limited (successor to Cerebrus Limited) dated May 13, 1997 (2)(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 (2)(d)

Second Amending Agreement dated November 27, 2000 (2), and Third Amending Agreement
dated March 1, 2004, both amending the Frovatriptan Development and Sublicense Agreement
between SmithKline Beecham plc and Vernalis Development Limited (formerly known as Vanguard
Medica Limited). (1)(e)

Second Amended and Restated License Agreement between Elan Pharma International Limited and
Vernalis Limited, dated March 15, 2002, amending and restating the Amended and Restated
Sub-License Agreement between the parties, dated as of December 12, 2000. (5)(f)

£7,000,000 Convertible Loan Agreement between Vernalis Group plc and Roche Finance Ltd, dated
May 13, 2002 (5)(g)

Placing and Open Offer Agreement, dated May 1, 2003, between Vernalis Group plc and Cazenove (2)4.5

Reacquisition of North American Rights to Frovatriptan(a)

Agreement for the Sale and Purchase of the North American frovatriptan Assets of Elan, among
Elan Pharma International Limited, Elan Pharmaceuticals, Inc., Elan Pharma Limited and
Vernalis plc, dated March 29, 2003. (1)(b)

Transitional Services Agreement between Elan Corporation plc, Elan Pharmaceuticals Inc, Elan
Pharma Ltd and Vernalis Development Ltd dated May 18, 2004. (1)(c)

Floating Charge between Vernalis Development Ltd and Elan Pharma International Ltd dated May
18, 2004. (1)(d)

Licence Agreement between Vernalis Development Ltd and Endo Pharmaceuticals Inc dated July
14, 2004. (8) 88




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Vernalis plc  (e)

Loan Agreement between the Company, Vernalis Development Ltd and Endo Pharmaceuticals Inc
dated July 14, 2004.4.6

Other contracts(a)

The Company Discretionary Share Option Plan (2)(b)

Deed of Grant of Option, dated April 23, 2003, between the Company and Peter Fellner (2)4.7

Placing and Open Offer Agreement dated February 24, 2005, between Nomura International plc,
Cazenove & Co Ltd, JP Morgan plc and the Company8.

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)  (1)

Incorporated by reference to the Annual Report of Vernalis plc on Form 20-F for the year ended December 31, 2003.(2)

Incorporated by reference to the Annual Report of Vernalis plc on Form 20-F for the year ended April 30, 2003.(3)

Incorporated by reference to the Annual Report of British Biotech plc on Form 20-F for the year ended April 30, 2001.(4)

Timothy Edwards, Elliot Goldstein and Peter Worrall have stepped down from the Board of the Company.(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 Group plc (File No: 0-31200) in connection with its registration
statement on Form 20-F filed with the SEC on September 17, 2001 and the Annual Report on Form
20-F filed with the SEC July 1, 2002.(6)

Incorporated by reference to Item 4L 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. 89




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Vernalis plc 
 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorised the undersigned to sign this Annual Report on its
behalf. Vernalis plc
(Registrant)By:
    /s/ A J WeirName:
    Anthony J WeirDate: May 13, 2005
    Title:
    Chief Financial Officer 90




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Vernalis plc Vernalis plc
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Vernalis plc In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, of cash flows and of changes in shareholders equity present fairly, in
all material respects, the financial position of Vernalis plc and its subsidiaries at December 31,
2004 and 2003 and April 30, 2003 and the results of their operations and their cash flows for each
of the two years in the period ended April 30, 2003, the eight months ended December 31, 2003 and
the year ended December 31, 2004, in conformity with accounting principles generally accepted in
the United Kingdom. These financial statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). These standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. Accounting principles generally accepted in the United Kingdom vary in certain significant respects
from accounting principles generally accepted in the United States of America. Information relating
to the nature and effect of such differences is presented in Note 3 to the consolidated financial
statements. PricewaterhouseCoopers LLP
London, UK
April 12, 2005
(except for Note 3, as to which the date is May 13, 2005) F-1




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Vernalis plc CONSOLIDATED STATEMENTS OF OPERATIONS Eight monthsended
    
    
    Year endedYears ended April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Revenue (Note 4a)
    
    
    14,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195Costs and expensesCost of goods sold
    
    
    
    
    
    
    (418
    )
    
    
    (228
    )
    
    
    (2,909
    )Research and development expenditure
    
    
    (38,152
    )
    
    
    (30,512
    )
    
    
    (26,890
    )
    
    
    (24,387
    )Selling, general & administration expenses
    
    
    (11,732
    )
    
    
    (14,276
    )
    
    
    (10,901
    )
    
    
    (18,642
    )Other operating (expenses)/income
    
    
    164
    
    
    
    (186
    )
    
    
    
    
    
    
    Total operating costs & expenses (Note 4d)
    
    
    (49,720
    )
    
    
    (45,392
    )
    
    
    (38,019
    )
    
    
    (45,938
    )Operating loss (Note 4)
    
    
    (34,954
    )
    
    
    (36,249
    )
    
    
    (29,388
    )
    
    
    (30,743
    )Profit/(provision for loss) on disposal of fixed assets
    
    
    2,505
    
    
    
    
    
    
    
    (2,988
    )
    
    
    (836
    )Merger transaction expenses
    
    
    
    
    
    
    
    
    
    
    (5,396
    )
    
    
    Amount written off investments
    
    
    (324
    )
    
    
    (799
    )
    
    
    (862
    )
    
    
    (71
    )Net interest (Note 5)
    
    
    2,783
    
    
    
    2,803
    
    
    
    1,770
    
    
    
    683Loss before provision for income taxes
    
    
    (29,990
    )
    
    
    (34,245
    )
    
    
    (36,864
    )
    
    
    (30,967
    )Provision for income taxes (Note 6)
    
    
    2,899
    
    
    
    3,659
    
    
    
    2,645
    
    
    
    1,758Net loss
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
    
    
    (29,209
    )Net loss per share (basic and diluted)
    
    
    (38.6)p
    
    
    
    (43.1)p
    
    
    
    (24.9)p
    
    
    
    (19.8p
    )Ordinary
Shares used in computingNet loss per share (000s)
    
    
    70,175
    
    
    
    71,010
    
    
    
    137,219
    
    
    
    147,388
 All potential ordinary shares, including options and deferred shares, are anti-dilutive. STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES Eight months
    
    
    Yearended
    
    
    endedYears ended April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Net loss for the financial year/period
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
    
    
    (29,209
    )Total losses recognised during the year/period
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
    
    
    (29,209
    )
 The notes on pages F-6 to F-36 are an integral part of these Consolidated Financial
Statements. F-2




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##### Table of Contents



Vernalis plc CONSOLIDATED BALANCE SHEETS April 30,
    
    
    December 31,
    
    
    December 31,2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000Fixed assetsIntangible assets (Note 8)
    
    
    28,687
    
    
    
    22,925
    
    
    
    36,999Tangible assets (Note 9)
    
    
    11,564
    
    
    
    7,508
    
    
    
    1,596Investments (Note 10)
    
    
    1,107
    
    
    
    83
    
    
    
    41,358
    
    
    
    30,516
    
    
    
    38,595Current assetsStock
    
    
    57
    
    
    
    49
    
    
    
    49Debtors (Note 11) (includes £7.4 million due in more
than one year as at December 31, 2004. 2003: Nil)
    
    
    11,984
    
    
    
    10,991
    
    
    
    27,773Other investments
    
    
    48,115
    
    
    
    22,329
    
    
    
    32,014Cash
    
    
    339
    
    
    
    1,885
    
    
    
    1,30960,495
    
    
    
    35,254
    
    
    
    61,145Current liabilitiesCreditors: amounts falling due within one year (Note 12)
    
    
    (20,987
    )
    
    
    (19,773
    )
    
    
    (16,050
    )Net current assets
    
    
    39,508
    
    
    
    15,481
    
    
    
    45,095Total assets less current liabilities
    
    
    80,866
    
    
    
    45,997
    
    
    
    83,690Creditors: amounts falling due after more than one year
(Note 13)
    
    
    (24,773
    )
    
    
    (8,119
    )
    
    
    (60,285
    )Provisions for liabilities and charges (Note 14)
    
    
    (2,517
    )
    
    
    (4,089
    )
    
    
    (10,530
    )Net assets
    
    
    53,576
    
    
    
    33,789
    
    
    
    12,875Capital and reservesShare capital (note 15)
    
    
    36,895
    
    
    
    38,813
    
    
    
    39,492Share premium account
    
    
    298,252
    
    
    
    298,226
    
    
    
    305,842Merger reserve
    
    
    89,445
    
    
    
    101,985
    
    
    
    101,985Other reserve
    
    
    50,776
    
    
    
    50,776
    
    
    
    50,776Profit and loss account
    
    
    (421,792
    )
    
    
    (456,011
    )
    
    
    (485,220
    )Total shareholders funds
    
    
    53,576
    
    
    
    33,789
    
    
    
    12,875ANALYSIS OF SHAREHOLDERS FUNDSEquity
    
    
    21,869
    
    
    
    2,082
    
    
    
    (18,832
    )Non-Equity
    
    
    31,707
    
    
    
    31,707
    
    
    
    31,70753,576
    
    
    
    33,789
    
    
    
    12,875
 The notes on pages F-6 to F-36 are an integral part of these Consolidated Financial
Statements. F-3




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##### Table of Contents



Vernalis plc CONSOLIDATED CASH FLOW STATEMENTS Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Net cash (outflow)/inflow from operating activities (Note 19)
    
    
    (30,302
    )
    
    
    (36,448
    )
    
    
    (34,089
    )
    
    
    2,090Returns on investments and servicing of finance (Note 20)
    
    
    3,026
    
    
    
    1,952
    
    
    
    659
    
    
    
    (293
    )Taxation
    
    
    1,618
    
    
    
    3,169
    
    
    
    2,783
    
    
    
    1,129Capital expenditure (Note 21)
    
    
    799
    
    
    
    (4,299
    )
    
    
    (16
    )
    
    
    (27,380
    )Cash utilised by operations
    
    
    (24,859
    )
    
    
    (35,626
    )
    
    
    (30,663
    )
    
    
    (24,454
    )Acquisitions  purchase of subsidiary undertakings
    
    
    
    
    
    
    1,967
    
    
    
    Management of liquid resources
    
    
    19,453
    
    
    
    27,443
    
    
    
    25,786
    
    
    
    (9,685
    )Financing (Note 22)
    
    
    4,757
    
    
    
    6,215
    
    
    
    6,478
    
    
    
    33,611(Decrease)/increase in cash in the period
    
    
    (649
    )
    
    
    (1
    )
    
    
    1,601
    
    
    
    (528
    )
 Reconciliation of net cash flow to movement in net funds Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Decrease/(increase) in cash in the period
    
    
    (649
    )
    
    
    (1
    )
    
    
    1,601
    
    
    
    (528
    )Cash outflow from decrease/(inflow from increase) in
debt and lease financing
    
    
    4,300
    
    
    
    (6,291
    )
    
    
    7,955
    
    
    
    (24,944
    )Cash (inflow)/outflow from movement in liquid resources
    
    
    (19,453
    )
    
    
    (27,443
    )
    
    
    (25,786
    )
    
    
    9,685Other non-cash movements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (463
    )Exchange adjustment
    
    
    62
    
    
    
    29
    
    
    
    (55
    )
    
    
    1,218Finance leases acquired with subsidiary
    
    
    
    
    
    
    (1,269
    )
    
    
    
    
    
    
    Liquid resources acquired with subsidiary
    
    
    
    
    
    
    12,903
    
    
    
    
    
    
    
    Movement in net funds in the period
    
    
    (15,740
    )
    
    
    (22,072
    )
    
    
    (16,285
    )
    
    
    (15,032
    )Net funds at May 1/January 1
    
    
    76,070
    
    
    
    60,330
    
    
    
    38,258
    
    
    
    21,973Net funds at April 30/December 31 (Note 23)
    
    
    60,330
    
    
    
    38,258
    
    
    
    21,973
    
    
    
    6,941
 The notes on page F-6 to F-36 are an integral part of these Consolidated Financial Statements. F-4




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##### Table of Contents



Vernalis plc CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the period from April 30, 2002 to December 31, 2004 Share
    
    
    
    
    
    
    
    
    
    
    Profit
    
    
    TotalShare
    
    
    premium
    
    
    Other
    
    
    Merger
    
    
    and loss
    
    
    shareholderscapital
    
    
    account
    
    
    reserve
    
    
    reserve
    
    
    account
    
    
    equity£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000April 30, 2002
    
    
    35,221
    
    
    
    298,615
    
    
    
    30,733
    
    
    
    89,328
    
    
    
    (390,595
    )
    
    
    63,302Loss for year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,586
    )
    
    
    (30,586
    )Allotment of shares
    
    
    1,674
    
    
    
    
    
    
    
    20,043
    
    
    
    117
    
    
    
    
    
    
    
    21,834Credit for bonus share award
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (611
    )
    
    
    (611
    )Expense on issue of shares
    
    
    
    
    
    
    (363
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (363
    )April 30, 2003
    
    
    36,895
    
    
    
    298,252
    
    
    
    50,776
    
    
    
    89,445
    
    
    
    (421,792
    )
    
    
    53,576Loss for period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,219
    )
    
    
    (34,219
    )Allotment of shares
    
    
    1,918
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,918Expense on issue of shares
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )Adjustment to merger reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,540
    
    
    
    
    
    
    
    12,540December 31, 2003
    
    
    38,813
    
    
    
    298,226
    
    
    
    50,776
    
    
    
    101,985
    
    
    
    (456,011
    )
    
    
    33,789Loss for year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,209
    )
    
    
    (29,209
    )Allotment of shares
    
    
    679
    
    
    
    7,616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,295December 31, 2004
    
    
    39,492
    
    
    
    305,842
    
    
    
    50,776
    
    
    
    101,985
    
    
    
    (485,220
    )
    
    
    12,875
 The notes on pages F-6 to F-36 are an integral part of these Consolidated Financial
Statements. F-5




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##### Table of Contents



Vernalis plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. History and operations The Group (as defined below) was founded in 1986 and, since foundation, its principal business has
been pharmaceutical research and development with the objective of developing a portfolio of
patented pharmaceuticals. This research has been conducted both on its own behalf and in connection
with a number of collaborative research agreements with other companies. 2. Summary of significant accounting policies The consolidated financial statements have been prepared in accordance with applicable Accounting
Standards in the United Kingdom. The significant accounting policies adopted in arriving at the
consolidated financial statements are as follows: (a) Accounting convention The financial statements have been prepared under the historical cost convention, and in accordance
with applicable Accounting Standards in the United Kingdom. A summary of the principal Group
accounting policies, which have been applied consistently, is set out below. Vernalis is a research and development based pharmaceutical business which expects to incur further
losses until revenues from royalty income and milestone receipts exceed expenditure on the product
portfolio. The directors believe that the Group has sufficient funds available to continue for the
foreseeable future, therefore the financial statements have been prepared on the going concern
basis. (b) Basis of preparation The consolidated financial statements of the Group include the accounts of Vernalis plc (the
Company) and all its subsidiary undertakings (together, the Group), made up to December 31
2004. Intercompany transactions are eliminated on consolidation. The identifiable assets and liabilities of subsidiary undertakings accounted for under acquisition
accounting principles are included in the consolidated balance sheet at their fair values at the
date of acquisition. The results and cash flows of such subsidiaries are brought into the Group
accounts only from the date of acquisition. The merger basis of accounting, as set out in FRS 6 (Acquisitions and Mergers), has been adopted by
the Group in respect of the merger of Vernalis Group plc and the Company. Under merger accounting
principles, the results, assets and liabilities and cashflows of Vernalis Group plc and the Company
have been combined from the beginning of the period in which the merger took place. (c) Accounting estimates The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates. (d) Accounting policies Turnover
Turnover, which excludes value added tax, represents the value of goods and services supplied.
Product sales are recognised on dispatch to the customer, net of a provision for expected sales
returns and rebates to be paid in future years. Non-refundable access fees, options fees and
milestone payments receivable for participation by a third party in commercialization of a compound
are recognised when they become contractually binding provided there are no related commitments of
the Group. Where these receipts are inducements to enter into contracts, they are recognised over
the expected life of the contract. Where there are related commitments, revenue is recognised on a
percentage of completion basis in line with the actual levels of expenditure incurred in fulfilling
these commitments. All other license income and contract research fees are recognised over the
accounting period to which the relevant services relate. Revenues derived from grants received are
recognised in line with the related expenditure. Royalty income is recognised in relation to sales
to which the royalty relates. F-6




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##### Table of Contents



Vernalis plc Research and development
Research and development expenditure is written off as incurred, except where assets are acquired
or constructed in order to provide facilities for research and development over a number of years.
These assets are capitalised and depreciated over their useful lives. Expenditure relating to
clinical trials is accrued on a percentage of completion basis with reference to fee estimates with
third parties. Joint arrangements
The Group has certain contractual research agreements with other participants. These joint
activities do not create an entity carrying on a trade or business of its own and, as such, each is
accounted for as a joint arrangement that is not an entity. That is, the Group accounts for its own
assets, liabilities and cash flows measured in accordance with the terms of the agreement governing
the arrangement. Goodwill
Goodwill arising from the purchase of subsidiary undertakings represents the excess of the value of the purchase consideration over the fair value of the underlying net assets acquired. The goodwill arising is capitalised and amortised in equal instalments over its estimated useful economic life. Provision is made for any impairment in value if events or changes in circumstances indicate that the carrying value may not be recovered in full. Goodwill in respect of the acquisition of RiboTargets Holdings plc in 2003 and Cerebrus
Pharmaceuticals Limited in 1999 is being amortised over three years and five years respectively. Goodwill previously written off to reserves has not been reinstated on the balance sheet as
permitted by FRS10. Other intangible assets
Other intangible assets, which principally comprise payments made to third parties to acquire
royalty streams and product rights, are amortised on a straight line basis over their estimated
useful economic life. Provision is made for any impairment in value if events or changes in
circumstances indicate that the carrying value may not be recoverable in full. Tangible fixed assets
Tangible fixed assets are stated at historic cost less depreciation, with the exception of freehold
land and assets in the course of construction that are not depreciated. Historic cost comprises the
purchase price together with any incidental costs of acquisition. Depreciation is calculated to
write off the cost, less residual value, of tangible fixed assets in equal annual instalments over
their estimated useful lives as follows: Freehold buildings
Buildings  internal works
Leasehold buildings
Plant and machinery
Fixtures and fittings
    
    50 years
5 to 50 years
Period of lease
2 to 5 years
3 to 10 years
 Finance and operating leases
Costs in respect of operating leases are charged to the profit and loss account on a straight line
basis over the terms of the leases. Leasing agreements which transfer to the Company substantially
all the benefits and risks of ownership of an asset are treated as if the asset had been purchased
outright. The assets are included in fixed assets and the capital element of the leasing
commitments is shown as obligations under finance leases. The lease rentals are treated as
consisting of both a capital and interest element. The capital element is applied to reduce the
outstanding obligations under the leasing commitments and the interest element is charged against
profit in proportion to the reducing capital element outstanding. Assets held under finance leases
are depreciated over the shorter of the relevant lease term and the useful economic life of the
equivalent owned assets. Fixed asset investments
Investments in subsidiary and other undertakings are carried at cost less any impairment provision.
Such investments are subject to review, and any impairment is charged to the profit and loss
account. Impairments in listed undertakings are determined having regard to the evolution of the
market price of shares. Impairment in unlisted investments are determined using Directors
estimates of changes in the underlying investment and market movements. Current asset investments
Current asset investments are stated at the lower of cost and net realisable value at the balance
sheet date. Stock
Stocks are carried at the lower of cost and net realisable value. F-7




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##### Table of Contents



Vernalis plc Deferred taxation
Provision is made for deferred tax liabilities and assets, using full provision accounting,
otherwise known as the incremental liability method, when an event has taken place by the balance
sheet date which gives rise to an increased or reduced tax liability in the future in accordance
with FRS 19. Deferred tax is measured at the average tax rates that are expected to apply in the
periods in which the timing differences are expected to reverse, based on tax rates and laws that
have been enacted or substantially enacted by the balance sheet date. Deferred tax assets are only
recognised to the extent that it is considered probable that they will be recoverable. Deferred tax
is measured on a non-discounted basis. Pension costs
The Group operates several defined contribution pension schemes. The assets of the schemes are held
separately from those of the Group in independently administered funds. In addition, the Group
makes defined contributions to employees approved personal pension plans. Pension contributions
are charged to the profit and loss account in the period in which the costs are incurred. The Group
does not offer any other post-retirement benefits. Foreign currencies
Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at
the transaction date. Assets and liabilities in foreign currencies are retranslated into sterling
at the rate of exchange ruling at the balance sheet date. Differences arising due to exchange rate
fluctuations are taken to the profit and loss account in the period in which they arise. Employee benefits
Shares that were held for the continuing benefit of the Groups business under employee share
ownership plan (ESOP) arrangements were included in the financial statements of the Group, in
accordance with generally accepted accounting practices, and are classified as fixed assets and
carried at cost less provision for impairment in value. Following the closure of the plan, the
remaining shares were sold and the gain on sale over the book value was recognised in the profit
and loss account. The Company takes advantage of the exemption under UITF 17 in respect of SAYE schemes. Financial instruments
The Group enters into derivative financial instruments where necessary, to hedge against future
material foreign currency exposure. As at December 31, 2004, there were no derivative contracts
outstanding and the Group has no financial liabilities other than finance leases, loans and trade
creditors. Financial assets and liabilities are recognised and cease to be recognised on the basis
of when the related legal title or obligations pass to or from the Group. Financial assets and
liabilities are shown at the lower of cost to the Group and fair value, as determined by reference
to the market value of the asset or liability. Related party transactions
In accordance with FRS 8 (Related Party Disclosures), the Company discloses details of material
transactions between the reporting entity and related parties. However, transactions between the
Company and other Group companies have not been disclosed, in accordance with the exemption in FRS
8 paragraph 3(a). 3. Summary of differences between UK and US Generally Accepted Accounting Principles The financial statements of the Group are prepared in accordance with UK GAAP which differs in
certain respects from US GAAP. The tables below summarise the material adjustments to the loss for
the period and shareholders funds which would be required if US GAAP had been applied instead of
UK GAAP. F-8




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##### Table of Contents



Vernalis plc Reconciliation of loss for the period to US GAAP Eight monthsended
    
    
    Year endedYear ended April 30
    
    
    December 31
    
    
    December 312002
    
    
    2003
    
    
    2003
    
    
    2004Notes
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Loss under UK GAAP
    
    
    
    
    
    
    (27,091
    )
    
    
    (30,586
    )
    
    
    (34,219
    )
    
    
    (29,209
    )Adjustments in respect of purchase accounting for Vernalis
Group plc:
    
    iAdd back pre-acquisition losses
    
    
    
    
    
    
    9,857
    
    
    
    13,098
    
    
    
    4,634
    
    
    
    Add back expensed merger costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,289
    
    
    
    Amortisation
of discount arising on other creditors
    
    ii
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (998
    )Write back pre-acquisition fair value adjustment on
depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117Write-off: in-process research and development capitalised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,091
    )
    
    
    Expense acquired: fair value less book value of inventory
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    Redundancy provision included in acquisition balance sheet
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    560
    
    
    
    Amortisation in respect of pre-acquisition goodwill and
intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,072
    
    
    
    3,074Amortisation of acquired developed product
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,451
    )
    
    
    (5,291
    )9,857
    
    
    
    13,098
    
    
    
    3,949
    
    
    
    (3,098
    )Adjustments in respect of purchase accounting for
RiboTargets Holdings plc:
    
    ixWrite-off: in-process research and development capitalised
    
    
    
    
    
    
    
    
    
    
    (5,077
    )
    
    
    
    
    
    
    Redundancy provision included in acquisition balance sheet
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    Amortisation charge on reduced goodwill asset
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    1,837
    
    
    
    2,756Amortisation of acquired developed product
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (2,406
    )
    
    
    (60
    )
    
    
    
    (4,933
    )
    
    
    (569
    )
    
    
    2,696Other US GAAP adjustments:Payroll taxes payable on shared options
    
    iii
    
    
    (14
    )
    
    
    (107
    )
    
    
    
    
    
    
    Revaluation of marketable securities
    
    iv
    
    
    275
    
    
    
    17
    
    
    
    23
    
    
    
    (40
    )Intangible asset Amortisation
    
    v
    
    
    (898
    )
    
    
    210
    
    
    
    1,777
    
    
    
    24Share compensation charges
    
    vi
    
    
    148
    
    
    
    (257
    )
    
    
    
    
    
    
    Embedded option
    
    vii
    
    
    
    
    
    
    63
    
    
    
    (63
    )
    
    
    Revenue recognition
    
    viii
    
    
    
    
    
    
    
    
    
    
    (179
    )
    
    
    299Profit on lease back transaction
    
    
    
    
    
    
    248
    
    
    
    
    
    
    
    
    
    
    
    (241
    )
    
    
    (74
    )
    
    
    1,558
    
    
    
    283Net loss under US GAAP
    
    
    
    
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )
    
    
    (29,328
    )Loss per share under US GAAP
    
    
    
    
    
    
    (52.4)p
    
    
    
    (66.0)p
    
    
    
    (28.0)p
    
    
    
    (19.9)pOrdinary shares used in computing Net loss per ordinary share
(000s)
    
    
    
    
    
    
    33,362
    
    
    
    34,107
    
    
    
    104,439
    
    
    
    147,388
 F-9




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##### Table of Contents



Vernalis plc Reconciliation of shareholders funds to US GAAP April 30,
    
    
    December 31,
    
    
    December 31,2003
    
    
    2003
    
    
    2004Notes
    
    
    £000
    
    
    £000
    
    
    £000Shareholders funds under UK GAAP
    
    
    
    
    
    
    53,575
    
    
    
    33,789
    
    
    
    12,875Adjustments in respect of purchase accounting for
Vernalis Group plc:
    
    iImpact on loss for period
    
    
    
    
    
    
    13,098
    
    
    
    3,949
    
    
    
    (3,098
    )Impact on prior period losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,850
    )Less pre acquisition losses
    
    
    
    
    
    
    103,479
    
    
    
    116,577
    
    
    
    121,211Less other pre acquisition reserves
    
    
    
    
    
    
    (112,036
    )
    
    
    (126,496
    )
    
    
    (126,496
    )Fair value of shares issued in consideration
    
    
    
    
    
    
    
    
    
    
    46,302
    
    
    
    46,302Share issue costs on acquisition
    
    
    
    
    
    
    
    
    
    
    (1,165
    )
    
    
    4,541
    
    
    
    39,167
    
    
    
    36,069Adjustments in respect of purchase accounting for
RiboTargets Holdings plc:
    
    ixImpact on loss for period
    
    
    
    
    
    
    (4,933
    )
    
    
    (569
    )
    
    
    2,696Impact on prior period losses
    
    
    
    
    
    
    
    
    
    
    (4,933
    )
    
    
    (5,502
    )Increase in fair value of consideration
    
    
    
    
    
    
    4,005
    
    
    
    4,005
    
    
    
    4,005(928
    )
    
    
    (1,497
    )
    
    
    1,199Other US GAAP adjustments:Revaluation of marketable securities
    
    iv
    
    
    17
    
    
    
    40
    
    
    
    635In-process research and development
    
    v
    
    
    (1,777
    )
    
    
    
    
    
    
    Share compensation charges
    
    vi
    
    
    
    
    
    
    
    
    
    
    Embedded option
    
    vii
    
    
    63
    
    
    
    
    
    
    
    Fair value of intangible fixed assets
    
    viii
    
    
    
    
    
    
    
    
    
    
    144Revenue recognition
    
    viii
    
    
    
    
    
    
    (179
    )
    
    
    (1,697
    )
    
    
    (139
    )
    
    
    779Shareholders funds under US GAAP
    
    
    
    
    
    
    55,491
    
    
    
    71,320
    
    
    
    50,922
 Summary of material differences between UK and US GAAP (i) Purchase accounting
Under UK GAAP, the merger of British Biotech plc and Vernalis Group plc was accounted for as a
merger of equals (pooling of interests). Under US GAAP the merger was accounted for as the
acquisition of Vernalis Group plc by British Biotech plc using purchase accounting. Under
purchase accounting, the costs of the investment is calculated at the market value of the shares
issued together with incidental costs and the assets and liabilities of the acquired entity are
recorded at fair value. Details of the book value and fair value of the assets and liabilities of Vernalis Group plc as at
29 August 2003 are as set out below: Book values
    
    
    Adjustments
    
    
    Fair values£000
    
    
    £000
    
    
    £000Tangible fixed assets
    
    
    1,104
    
    
    
    (351
    )
    
    
    753Intangible fixed assets
    
    
    17,627
    
    
    
    42,924
    
    
    
    60,551Stock
    
    
    37
    
    
    
    64
    
    
    
    101Debtors
    
    
    2,340
    
    
    
    
    
    
    
    2,340Cash and liquid investments
    
    
    15,969
    
    
    
    
    
    
    
    15,969Creditors falling due within one year
    
    
    (15,310
    )
    
    
    (335
    )
    
    
    (15,645
    )Creditors falling due after more than one year
    
    
    (16,482
    )
    
    
    1,399
    
    
    
    (15,083
    )Provisions
    
    
    
    
    
    
    (560
    )
    
    
    (560
    )Net assets acquired
    
    
    5,285
    
    
    
    43,141
    
    
    
    48,426Satisfied by:Shares issued and to be issued
    
    
    
    
    
    
    
    
    
    
    46,302Expenses of acquisition
    
    
    
    
    
    
    
    
    
    
    2,124Total consideration
    
    
    
    
    
    
    
    
    
    
    48,426
 F-10




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##### Table of Contents



Vernalis plc On August 29, 2003, the Group announced the successful acquisition of Vernalis Group
plc. Under the terms of the offer made to Vernalis Group plc shareholders, 0.861 shares in British
Biotech plc have been issued in exchange for one share held in Vernalis Group plc. Based upon a
British Biotech plc average closing share price two days either side of the date of announcement of
July 3, 2003 of 61.5 pence this valued Vernalis Group plc at £46.3 million. In accordance with FAS 141, the acquired in-process research and development and developed
technology (frovatriptan) assets have been identified and valued. Following this valuation, the
initial negative goodwill arising of £28,600,000 has been allocated on a pro rata basis against all
non current assets such that the value of the net assets acquired is equal to the value of the
consideration and expenses paid. The net asset values included in the US GAAP balance sheet were
£56,460,000 in respect of the developed existing product and £4,091,000 in respect of the
in-process research and development programs. In accordance with US GAAP, the amount allocated to
in-process research and development was expensed in the eight month period ended December 31, 2003.
The developed existing product asset is being amortised on a straight line basis until the end of
the patent life in 2014. The fair value adjustment allocated against Tangible Fixed Assets is being
reversed over the remaining lives of the assets. An accounting policy adjustment has been made to the balance sheet values stated at August 29,
2003, in respect of upfront payments received and recognised as revenue, which under the Group
policy have been deferred and are recorded in deferred income. Stock, other creditors and others investments have been fair valued at the date of acquisition. A
provision of £560,000 has been recognised at the date of acquisition in respect of redundancy
payments. Intangible fixed assets acquired comprised goodwill in respect of the acquisition by
Vernalis Group plc of Cerebrus in 2001, which has not been capitalised separately from the assets
recognised on the acquisition of Vernalis Group plc by British Biotech plc. In addition to the
£2,124,000 of acquisition expenses, share issue costs of £1,164,000 were incurred. (ii) Amortisation of
discount arising on other creditors
Under UK GAAP, the outstanding payments to GSK of £10 million at December 31, 2004, have been
recognised at face value. Under US GAAP, these amounts were stated at
fair value, in September 2003 (acquisition of Vernalis Group) with the
discount being amortised to the statement of operations. (iii) Payroll taxes payable on share options
In accordance with the Urgent Issues Task Force Abstract 25, National Insurance Contributions on
Share Options Gains, the Group has provided for the employers National Insurance payable on
unapproved options granted after April 5, 1999. In accordance with US GAAP, taxation is only
charged upon exercise of the option. (iv) Revaluation of marketable securities
Under UK GAAP, an investment is written down where a permanent impairment has occurred and is
valued at the lower of cost and net realisable value. Under US GAAP, marketable securities are
classified as available for sale and carried at fair value, with changes in value being taken to
other comprehensive income and permanent diminutions taken to the statement of operations. (v) In-process research and development and intangible amortisation
Under UK GAAP, certain payments to acquire licenses to products are capitalised as intangible fixed
assets under FRS10 and amortised over their expected useful life. Under US GAAP these payments are
written off as in-process research and development in so far as these products are to be used in
research and development activities and have no future alternative use. In addition, the amount
capitalised in relation to the re-acquisition of rights to frovatriptan from Elan is £240,000
smaller under US GAAP due to the different level of deferred revenue obligations that were
cancelled by this agreement resulting in a reduced annual amortisation charge of £24,000 (see note
viii). (vi) Share compensation charges
Under UK GAAP, the cost of providing share options with performance criteria is recognised over the
period of the performance criteria using as measurement date the date of issue. Under US GAAP, the
measurement date remains open until it is known how many options will be available. (vii) Embedded option
Under US GAAP, FAS133, as amended, requires that all derivative financial instruments including
embedded derivative financial instruments be fair valued while any change in that fair value is
taken to the profit and loss account. F-11




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##### Table of Contents



Vernalis plc (viii) Revenue recognition
Until fiscal 2003 under UK GAAP, revenue related to non-refundable up-front fees and non-refundable
fees received in connection with the achievement of milestones in an effort to obtain regulatory
approval of new drugs is recognised upon receipt provided there are no related commitments of the
Group. Under US GAAP non-refundable up-front fees are deferred and recognised as revenue over the
estimated period of the project and fees earned for the achievement of substantive milestones are
recognised when the milestone is achieved and the payment is due and payable. Following the
re-acquisition of rights to frovatriptan from Elan in the year, the remaining obligations on
Vernalis were removed by this agreement. This resulted in £240,000 of additional deferred revenue
being credited against the intangible asset following the removal of the remaining obligations,
resulting from the re-acquisition of North American rights to frovatriptan from Elan, and an
additional £120,000 included within net assets (see note v). (ix) Goodwill and other intangible assets resulting from the acquisition of RiboTargets Holdings
plc
Under UK GAAP the shares issued to acquire RiboTargets were valued at the market price at the date
of acquisition on April 23, 2003. Under US GAAP the shares issued were valued at the average market
price for three days before and after the announcement of the acquisition on March 21, 2003. The
movement of the British Biotech share price between these dates and methods increases the value of
the purchase price by £4.0 million. In accordance with US GAAP (EITF 95-3) an adjustment was made
to the opening net assets position under UK GAAP to reflect the redundancy costs arising following
a reorganization of the Group after acquisition. In accordance with UK GAAP, these costs were
expensed in 2003. Under US GAAP, purchase price is allocated to all tangible and identifiable intangible assets based
upon estimated fair value at the date of acquisition. For US GAAP purposes, fair values have been
assigned to intangible assets which included in-process research and development (£5.0 million) and
technology platform (£2.5 million). The specifically identifiable intangible assets have not been
recognised under UK GAAP as they do not meet the criteria for recognition required by FRS 10,
Goodwill and intangible assets. Under US GAAP the amount of purchase consideration allocated to in-process research and development
is immediately written off to the profit and loss account. The portion of the purchase price
allocated to the technology platform under US GAAP is amortised over the estimated useful life.
Under UK GAAP these amounts are included in goodwill. The movement in goodwill represents the fair value of intangible assets under US GAAP less the
difference in consideration issued and the restructuring provision. Under UK GAAP, goodwill arising is capitalised and amortised over its estimated life. Goodwill is
impaired when judged to be irrecoverable. Under US GAAP, goodwill arising on acquisition is
capitalised but no longer amortised and is subject to regular review for impairment. Cash Flows Under UK GAAP, the cash flows are reported under a number of distinct headings. Under US GAAP
however, there are only three categories of cash flows: operating activities (including tax and
interest), investing activities (capital expenditure and including cash flows from sale or purchase
of short term deposits) and financing activities. Under UK GAAP, cash is defined as cash in hand and deposits, with a maturity period of no more than
24 hours which are repayable on demand. However, under US GAAP, the definition of cash and cash
equivalents includes deposits with a maturity period of less than three months when acquired. Consolidated Statement of Cash Flows under US GAAP Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Net cash (used in)/provided by operating activities
    
    
    (18,209
    )
    
    
    (19,751
    )
    
    
    (26,691
    )
    
    
    2,887Net cash provided/(used in) by investing activities
    
    
    4,109
    
    
    
    40,990
    
    
    
    25,436
    
    
    
    (34,275
    )Net cash (used in)/provided by financing activities
    
    
    (463
    )
    
    
    (845
    )
    
    
    (7,410
    )
    
    
    33,611Net (decrease)/increase in cash and cash equivalents
    
    
    (14,563
    )
    
    
    20,394
    
    
    
    (8,665
    )
    
    
    2,223Exchange rate adjustment on cash and cash equivalents
    
    
    18
    
    
    
    29
    
    
    
    (55
    )
    
    
    (48
    )Cash and cash equivalents at beginning of the year
    
    
    18,990
    
    
    
    4,445
    
    
    
    24,868
    
    
    
    16,148Cash and cash equivalents at the end of the year
    
    
    4,445
    
    
    
    24,868
    
    
    
    16,148
    
    
    
    18,323
 F-12




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##### Table of Contents



Vernalis plc Stock Compensation Plans The Group adopted the disclosure requirements of SFAS 123 in fiscal 1997 but has elected to
continue the recognition principles of APB No. 25 and therefore, the effect of the adoption of SFAS
123 has had no effect on the Groups results or financial position. Under US GAAP, the Group is required to disclose the compensation expense for the Share Option
Schemes. The compensation expense represents the difference between the exercise price of the share
options granted in the periods and the fair market value of the underlying Ordinary Shares at the
date of grant. The following assumptions were used under the Black-Scholes option pricing model to estimate the
fair values of the options granted in the period to: April 30,
    
    
    April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    77.7
    %
    
    
    65% - 68.5
    %
    
    
    79
    %
    
    
    72
    %Risk free investment rate
    
    
    5.11
    %
    
    
    3.7% - 4.25
    %
    
    
    4.6
    %
    
    
    4.78
    %Forfeiture rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life
    
    5 years
    
    2 - 6 years
    
    6 years
    
    6 years
 The impact of the compensation expense would have been to increase the net loss by £1,616,700
in 2002, by £1,577,711 in the year ended April 2003, by £2,290,919 in the eight months to December
31, 2003 and £999,432 in the year ended December 31, 2004. The impact on net loss per share would
have been an increase of 4.8p, 4.6p, 2.2 p and 0.7p respectively. Set out below is the Consolidated Statement of Operations, Consolidated Balance Sheet, and
Consolidated Statement of Cash Flows for fiscal 2002, fiscal 2003 and the transition period in
accordance with US GAAP. Consolidated Statements of Operations Eight monthsendedYear ended April 30,
    
    
    December 31,2002
    
    
    2003
    
    
    2003£000
    
    
    £000
    
    
    £000Revenues:Product sales and royalties
    
    
    
    
    
    
    
    
    
    
    2,022Collaborations
    
    
    1,450
    
    
    
    1,078
    
    
    
    2,987Total Revenues
    
    
    1,450
    
    
    
    1,078
    
    
    
    5,009Costs and expenses:Cost of sales
    
    
    
    
    
    
    
    
    
    
    (179
    )Research and development
    
    
    (20,782
    )
    
    
    (14,292
    )
    
    
    (22,084
    )Selling, general and administrative
    
    
    (3,377
    )
    
    
    (6,658
    )
    
    
    (5,497
    )Acquired in-process research and development
    
    
    (898
    )
    
    
    (5,077
    )
    
    
    (4,091
    )Amortization of intangibles
    
    
    (474
    )
    
    
    
    
    
    
    (2,739
    )Gain/(loss) on sale of property
    
    
    2,505
    
    
    
    
    
    
    
    (2,988
    )Total costs and expenses
    
    
    (23,026
    )
    
    
    (26,027
    )
    
    
    (37,578
    )Loss from operations
    
    
    (21,576
    )
    
    
    (24,949
    )
    
    
    (32,569
    )Other income (expense):Investment income
    
    
    2,542
    
    
    
    1,435
    
    
    
    1,941Realised (loss)/gain on marketable securities, net
    
    
    275
    
    
    
    80
    
    
    
    (40
    )Amounts written of investments
    
    
    (324
    )
    
    
    (799
    )
    
    
    (862
    )Net loss before income taxes
    
    
    (19,083
    )
    
    
    (24,233
    )
    
    
    (31,530
    )Research and development tax credit
    
    
    1,608
    
    
    
    1,738
    
    
    
    2,249Net loss attributable to shareholders
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )Net loss attributable to common shareholders, basic
and diluted
    
    
    (52.4)p
    
    
    
    (66.0)p
    
    
    
    (28.0)pWeighted average shares, basic and diluted (£000)
    
    
    33,362
    
    
    
    34,107
    
    
    
    104,439
 F-13




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##### Table of Contents



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




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##### Table of Contents



Vernalis plc Consolidated Statement of Cash Flows Eight monthsendedYear ended April 30,
    
    
    December 31,2002
    
    
    2003
    
    
    2003£000
    
    
    £000
    
    
    £000Cash flows from operating activities:Net loss
    
    
    (17,475
    )
    
    
    (22,495
    )
    
    
    (29,281
    )Adjustments to reconcile net loss to cash used in
operating activities:Acquired in-process research and development
    
    
    898
    
    
    
    
    
    
    
    4,758Depreciation and amortization
    
    
    1,743
    
    
    
    1,374
    
    
    
    3,723Realised (gain on marketable securities)
    
    
    (290
    )
    
    
    (29
    )
    
    
    Stock compensation expense
    
    
    40
    
    
    
    2,889
    
    
    
    Other non-cash expenses
    
    
    (3,223
    )
    
    
    775
    
    
    
    1,948Inventory
    
    
    
    
    
    
    
    
    
    
    8Prepaid expenses and other current assets
    
    
    2,306
    
    
    
    42
    
    
    
    1,624Accounts payable and accrued expenses
    
    
    (2,190
    )
    
    
    (2,307
    )
    
    
    (10,770
    )Deferred revenue
    
    
    (18
    )
    
    
    
    
    
    
    1,299Net cash used in operating activities
    
    
    (18,209
    )
    
    
    (19,751
    )
    
    
    (26,691
    )Cash flows from investing activities:Proceeds from sales and maturities of marketable
securities
    
    
    1,423
    
    
    
    39,798
    
    
    
    14,879Purchase of property and equipment
    
    
    2,686
    
    
    
    (775
    )
    
    
    (16
    )Net cash used in RiboTargets acquisition
    
    
    
    
    
    
    1,967
    
    
    
    Net cash used in Vernalis acquisition
    
    
    
    
    
    
    
    
    
    
    10,573Net cash provided by (used in) investing activities
    
    
    4,109
    
    
    
    40,990
    
    
    
    25,436Cash flows from financing activities:Repayment of principal of long term debt obligations
    
    
    (342
    )
    
    
    (665
    )
    
    
    (7,000
    )Principal payments on capital leases
    
    
    (121
    )
    
    
    (180
    )
    
    
    (410
    )Net cash provided by financing activities
    
    
    (463
    )
    
    
    (845
    )
    
    
    (7,410
    )Increase (decrease) in cash and cash equivalents
    
    
    (14,563
    )
    
    
    20,394
    
    
    
    (8,665
    )Equity adjustment from foreign currency translation
    
    
    18
    
    
    
    29
    
    
    
    (55
    )Cash and cash equivalents, beginning of period
    
    
    18,990
    
    
    
    4,445
    
    
    
    24,868Cash and cash equivalents, end of period
    
    
    4,445
    
    
    
    24,868
    
    
    
    16,148
 Recently issued accounting pronouncements FAS 123 (R) Share-Based Payment. In December 2004, the FASB issued SFAS 123R, Share-Based Payment (SFAS 123R). This Statement is
a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. FAS 123R establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on the fair value of the
entitys equity instruments or that may be settled by the issuance of those equity instruments.
This Statement focuses primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123R requires a public entity to measure the
cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That cost will be recognised over the
period during which an employee is required to provide service in exchange for the award  the
requisite service period (usually the vesting period). SFAS 123R will be effective as of the
beginning of the first reporting period beginning after June 15, 2005. We do not believe that the
implementation of this standard will have a material impact on our financial position, results of
operations or cash flows. F-15




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##### Table of Contents



Vernalis plc FAS 151 Inventory Costs an amendment of ARB No. 43, Chapter 4.  EITF 03-01-01 Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments  FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46)  4. Analysis of Revenues, Expenditure, Operating Results and Assets Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000(a) Revenues by activityContinuing operationsProduct sales and royalties
    
    
    799
    
    
    
    2,097
    
    
    
    2,592
    
    
    
    10,018Collaborations (Note (c))
    
    
    13,967
    
    
    
    7,046
    
    
    
    6,039
    
    
    
    5,17714,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195(b) Revenues by geographic areaUnited Kingdom
    
    
    602
    
    
    
    90
    
    
    
    49
    
    
    
    161United States
    
    
    
    
    
    
    420
    
    
    
    2,937
    
    
    
    11,207Rest of Europe
    
    
    14,164
    
    
    
    8,633
    
    
    
    5,645
    
    
    
    3,822Rest of World
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    514,766
    
    
    
    9,143
    
    
    
    8,631
    
    
    
    15,195
 F-16




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##### Table of Contents



Vernalis plc (c) Revenues by customer During the periods under review, the Group earned income under a number of collaborative agreements
as set out in the following table. The amounts received are non-refundable. Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Novartis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,385Biogen Idec Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,110Endo Pharmaceuticals Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327Oscient Corp.
    
    
    
    
    
    
    420
    
    
    
    2,820
    
    
    
    Serono Inc
    
    
    1,378
    
    
    
    568
    
    
    
    
    
    
    
    Roche
    
    
    530
    
    
    
    
    
    
    
    1,230
    
    
    
    487Elan
    
    
    12,059
    
    
    
    6,058
    
    
    
    1,872
    
    
    
    677Astra Zeneca
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    25Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16613,967
    
    
    
    7,046
    
    
    
    6,039
    
    
    
    5,177
 During fiscal 2004: four customers accounted for £9,480,000 of the Groups total revenues,
each customer comprising more than 10% of total revenues (transition period: three customers,
£7,977,000; fiscal 2003: one customer, £7,325,000; and fiscal 2002: one customer, £12,059,000). (d) Operating costs and expenses Operating loss for continuing operations is stated after charging: Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Wages and salaries
    
    
    (12,876
    )
    
    
    (12,059
    )
    
    
    (8,299
    )
    
    
    (7,845
    )Social Security costs
    
    
    (1,337
    )
    
    
    (1,271
    )
    
    
    (846
    )
    
    
    (1,062
    )Other pension costs
    
    
    (896
    )
    
    
    (806
    )
    
    
    (716
    )
    
    
    (621
    )Staff costs
    
    
    (15,109
    )
    
    
    (14,136
    )
    
    
    (9,861
    )
    
    
    (9,528
    )Average number of employees
    
    
    376
    
    
    
    217
    
    
    
    211
    
    
    
    131
 F-17




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##### Table of Contents



Vernalis plc Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Depreciation of property, plant
and equipment (including assets
under finance leases)
    
    
    (2,268
    )
    
    
    (2,197
    )
    
    
    (1,575
    )
    
    
    (2,327
    )Profit (Loss) on disposal of
fixed assets (excluding
exceptional profit)
    
    
    183
    
    
    
    (38
    )
    
    
    (171
    )
    
    
    Amortisation of intangible assets
    
    
    (2,242
    )
    
    
    (3,373
    )
    
    
    (3,985
    )
    
    
    (7,146
    )Impairment of intangible assets
    
    
    (301
    )
    
    
    
    
    
    
    
    
    
    
    Operating lease rentals:Property
    
    
    (1,651
    )
    
    
    (1,133
    )
    
    
    (1,495
    )
    
    
    (1,974
    )Plant, machinery and vehicles
    
    
    (130
    )
    
    
    (72
    )
    
    
    (48
    )
    
    
    (99
    )Auditors remunerationAudit fees
    
    
    (104
    )
    
    
    (134
    )
    
    
    (193
    )
    
    
    (122
    )Other services
    
    
    (340
    )
    
    
    (431
    )
    
    
    (314
    )
    
    
    (203
    )(444
    )
    
    
    (565
    )
    
    
    (507
    )
    
    
    (325
    )One-off chargesRestructuring costs
    
    
    
    
    
    
    (1,627
    )
    
    
    (2,269
    )
    
    
    (1,493
    )Asset write offs
    
    
    (582
    )
    
    
    (16
    )
    
    
    
    
    
    
    Terminated deal costs
    
    
    
    
    
    
    (1,454
    )
    
    
    
    
    
    
    (582
    )
    
    
    (3,097
    )
    
    
    (2,269
    )
    
    
    (1,493
    )
 One-off charges: Restructuring costs in fiscal 2003 were incurred in relation to the merger
with RiboTargets announced in April 2003 and related principally to redundancy costs. Restructuring
costs in the transition period ended December 31, 2003 and in fiscal 2004 relate to the merger with
Vernalis Group plc and consists primarily of redundancy costs. Terminated deal costs in fiscal 2003 were incurred in relation to the terminated merger discussion
with MorphoSys A.G. and relate principally to legal and professional fees. Auditors remuneration: Other services relates to fees for a proposed fundraising £90,000; fees
of £113,000 (December 2003: £149,000) that have been paid in relation to advice on collaborative
agreements and services on Securities and Exchange Commission filings and to other fees of £nil
(December 2003; £165,000) for proposed and completed acquisitions. In addition, fees of £70,000
(December 2003: £225,000) relate to professional services in relation to the reacquisition of
rights of frovatriptan from Elan in May 2004; and in respect of the fund raising by Vernalis Group
plc in May 2003. There were no fees paid in respect of management consultancy services. Administrative expenses Year ended
    
    
    Eight months ended
    
    
    Year endedApril 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004£000
    
    
    £000
    
    
    £000Other
    
    
    9,344
    
    
    
    5,601
    
    
    
    12,751Terminated deal costs
    
    
    1,454
    
    
    
    
    
    
    
    Restructuring costs
    
    
    1,627
    
    
    
    2,269
    
    
    
    1,493Amortisation of goodwill
    
    
    1,851
    
    
    
    3,031
    
    
    
    4,398Total administrative expenses
    
    
    14,276
    
    
    
    10,901
    
    
    
    18,642
 (e) Gain/Loss on disposal of fixed assets The loss on sale of property for the year ended December 31, 2004 of £836,000 is primarily due to
the sale of the Oxford facility for £3.3 million in October 2004. The loss on sale of property for
the transition period ended December 31, 2003 of £2,988,000 was due to the planned divestment of
the Oxford Facility. The profit on disposal of fixed assets of £2,505,000 in the year ended April 30, 2002, arises from
the agreement signed with OSI Pharmaceuticals, Inc. in August 2001 whereby the Group sold certain
of its pre-clinical facilities and 59 British Biotech employees transferred to OSI along with the
leases of two properties and certain fixed assets. F-18




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##### Table of Contents



Vernalis plc (f) Operating result by activity Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Continuing operationsPharmaceutical research and developments
    
    
    (34,954
    )
    
    
    (36,249
    )
    
    
    (29,388
    )
    
    
    (30,743
    )
 (g) Total net assets by activity April 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004£000
    
    
    £000
    
    
    £000Continuing operationsPharmaceutical research and development
    
    
    53,576
    
    
    
    33,789
    
    
    
    12,875
 All significant losses on ordinary activities before taxation and net assets arise in the UK
and relate to pharmaceutical research and development. (h) Analysis of capital expenditure by activity Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Continuing operationsPharmaceutical research and developments
    
    
    (2,644
    )
    
    
    (4,299
    )
    
    
    (680
    )
    
    
    (501
    )
 (i) Analysis of depreciation by activity Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Continuing operationsPharmaceutical research and developments
    
    
    (2,268
    )
    
    
    (2,197
    )
    
    
    (1,575
    )
    
    
    (2,327
    )
 5. Interest Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Interest incomeBank interest
    
    
    3,651
    
    
    
    2,129
    
    
    
    1,136
    
    
    
    664Exchange gains on other creditors
    
    
    
    
    
    
    1,413
    
    
    
    1,178
    
    
    
    468Exchange gains on long term loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266Unwinding of discount on other debtor
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    529Other Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,651
    
    
    
    3,542
    
    
    
    2,314
    
    
    
    2,933Interest expenseSecured loans
    
    
    (639
    )
    
    
    (656
    )
    
    
    (435
    )
    
    
    (866
    )Finance leases
    
    
    (132
    )
    
    
    (81
    )
    
    
    (109
    )
    
    
    (107
    )Bank overdraft
    
    
    (97
    )
    
    
    (2
    )
    
    
    
    
    
    
    Exchange loss on other debtor
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (686
    )Unwinding of discount on creditor
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (519
    )Other interest payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )(868
    )
    
    
    (739
    )
    
    
    (544
    )
    
    
    (2,250
    )Net Interest Receivable
    
    
    2,783
    
    
    
    2,803
    
    
    
    1,770
    
    
    
    683
 F-19




---



##### Table of Contents



Vernalis plc 6. Taxation Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Overseas taxation
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Research and development tax credits
    
    
    2,895
    
    
    
    3,659
    
    
    
    2,645
    
    
    
    1,7732,899
    
    
    
    3,659
    
    
    
    2,645
    
    
    
    1,758
 Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Factors affecting the tax charge for the period:Loss before tax at 30%
    
    
    (8,997
    )
    
    
    (10,274
    )
    
    
    (11,058
    )
    
    
    (9,291
    )Expenses not deductible for tax purposes
    
    
    507
    
    
    
    1,328
    
    
    
    752
    
    
    
    725Goodwill on consolidation
    
    
    537
    
    
    
    555
    
    
    
    909
    
    
    
    1,320Movement on deferred tax asset not recognised
    
    
    2,887
    
    
    
    4,133
    
    
    
    6,120
    
    
    
    5,976Research and development tax credit received at
24% of losses compared with 30% tax rate
    
    
    2,171
    
    
    
    1,039
    
    
    
    632
    
    
    
    488150 percent deduction for research and development
expenditure not surrendered for cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (657
    )Overseas taxation refunded
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    15Under provision in respect of prior year tax credit
    
    
    
    
    
    
    (440
    )
    
    
    
    
    
    
    (334
    )(2,899
    )
    
    
    (3,659
    )
    
    
    (2,645
    )
    
    
    (1,758
    )
 No liability for UK corporation tax has arisen in any of the periods to December 31, 2004. The
Group had losses, as computed for taxation purposes, of approximately £415 million at December 31,
2004, (£413 million at December 31, 2003), (£412 million at April 30, 2003) (2002: £393 million)
available to be carried forward to future periods. Tax losses can be carried forward with no expiry date against the profits of the same trade. In the
event that there is a change of ownership of the Group (where one party or a group of connected
parties gain control) then under current UK tax law, if there is also a major change in the nature
or conduct of the trade within a period of three years either side of the change of ownership, any
tax losses at the time of change of ownership may not be available for relief against future
trading profits. Available tax losses have not been recognised as assets. In accordance with the provisions of the Finance Act 2000 in respect of Research and Development
Allowances, the Group is entitled to claim tax credits for certain research and development
expenditure. The amount included in the financial statements in respect of the period ended
December 31, 2004 of £1,773,000 (eight months ended December 31, 2003: £2,645,000) represents the
tax credit receivable by the Group. There was no potential liability to deferred tax at December 31, 2004 or December 31, 2003. The
analysis, computed at the tax rate of 30 per cent, was as follows: Tax effect of timing differences Eight monthsYear ended
    
    
    ended
    
    
    Year endedApril 30,
    
    
    December 31,
    
    
    December 31,2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000Losses
    
    
    (123,461
    )
    
    
    (123,773
    )
    
    
    (124,428
    )Excess of depreciation over tax allowances
    
    
    (32
    )
    
    
    (2,074
    )
    
    
    (5,115
    )Short term timing differences
    
    
    
    
    
    
    
    
    
    
    (2,280
    )Tax losses
    
    
    (123,493
    )
    
    
    (125,847
    )
    
    
    (131,823
    )
 7. Dividends No dividends have been paid since inception. F-20




---



##### Table of Contents



Vernalis plc 8. Intangible Assets April 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004£000
    
    
    £000
    
    
    £000CostAt May 1/January 1
    
    
    28,738
    
    
    
    37,007
    
    
    
    34,400Additions
    
    
    8,269
    
    
    
    
    
    
    
    21,220Disposals
    
    
    
    
    
    
    (2,607
    )
    
    
    At April 30/December 31
    
    
    37,007
    
    
    
    34,400
    
    
    
    55,620AmortisationAt May 1/January 1
    
    
    4,947
    
    
    
    8,320
    
    
    
    11,475Charge for the year
    
    
    3,373
    
    
    
    3,985
    
    
    
    7,146Impairment
    
    
    
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    (830
    )
    
    
    At April 30/December 31
    
    
    8,320
    
    
    
    11,475
    
    
    
    18,621Net book value
    
    
    28,687
    
    
    
    22,925
    
    
    
    36,999
 Intangible assets comprise Goodwill, License Fees and Patents and other Intangibles Goodwill of £17.2 million arises on the acquisitions of RiboTargets Holdings plc in 2003 and
Cerebrus Pharmaceuticals Limited in 1999 and is being amortised over three years and five years
respectively, which is based on the directors estimate of its useful economic life. Other intangibles of
£38.4 million represent the Capitalisation of payments conditionally due to
GlaxoSmithKline (GSK) agreed in December 2000 to buy out royalties due to GSK on sales of
frovatriptan and the consideration paid to Elan in respect of the re-acquisition of the North
American rights to frovatriptan in May 2004. The costs associated with re-acquisition of the North
American rights to frovatriptan comprise £26,500,000 less £5,300,000 in relation to certain
obligations to Elan that were cancelled as part of the re-acquisition of the rights. Both are being
amortised on a straight-line basis to the end of the patent life of frovatriptan in 2014, which is
considered by the Directors to be the useful life of the asset. 9. Property, plant and equipment April 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004£000
    
    
    £000
    
    
    £000CostFreehold land and buildings
    
    
    9,165
    
    
    
    
    
    
    
    Leasehold land and buildings
    
    
    3,272
    
    
    
    3,804
    
    
    
    4,096Assets held for resale
    
    
    
    
    
    
    10,937
    
    
    
    Plant and machinery
    
    
    12,483
    
    
    
    8,105
    
    
    
    7,004Fixtures and fittings
    
    
    1,629
    
    
    
    820
    
    
    
    77226,549
    
    
    
    23,666
    
    
    
    11,872Accumulated DepreciationFreehold land and buildings
    
    
    2,612
    
    
    
    
    
    
    
    Lease land and buildings
    
    
    1,824
    
    
    
    2,034
    
    
    
    3,342Assets held for resale
    
    
    
    
    
    
    6,870
    
    
    
    Plant and machinery
    
    
    9,270
    
    
    
    6,561
    
    
    
    6,209Fixtures and fittings
    
    
    1,279
    
    
    
    693
    
    
    
    72514,985
    
    
    
    16,158
    
    
    
    10,276Net book value
    
    
    11,564
    
    
    
    7,508
    
    
    
    1,596
 The net book value of plant and machinery includes an amount of £13,000 (December 31, 2003:
£674,000) in respect of assets held under finance leases. The depreciation charge for the year period in respect of these assets was £120,000 (December 31,
2003: £392,000). F-21




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##### Table of Contents



Vernalis plc Capital commitments at December 31/April 30 were as follows: April 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004£000
    
    
    £000
    
    
    £000Contracted for but not provided
    
    
    102
    
    
    
    
    
    
    
    15
 10. Investments Quoted Companies
    
    
    Total£000
    
    
    £000CostAt January 1, 2004 and December 31, 2004
    
    
    649
    
    
    
    649ProvisionsAt January 1, 2004
    
    
    566
    
    
    
    566Charge for the year
    
    
    83
    
    
    
    83At December 31, 2004
    
    
    649
    
    
    
    649Net book value at December 31, 2004
    
    
    0
    
    
    
    0
 On February 2, 2004, the shareholders of Genesoft Pharmaceuticals Inc approved its merger with
Oscient Pharmaceuticals Corp (formerly Genome Therapeutics Corp., a NASDAQ quoted company). As a
result of the merger, the Groups holding in Genesoft has been exchanged for 424,118 shares in
Oscient. Of these, 93,141 will remain in escrow and will not be made available to the Company for
up to 18 months from February 2004. These shares are held at nil book value at December 31, 2004. Following the merger between Vernalis Plc and Vernalis Group Plc, the Group closed down the ESOP,
and sold the remaining 16,346 shares at market price of 87 pence resulting in a profit on disposal
of £12,000. 11. Accounts receivable April 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004£000
    
    
    £000
    
    
    £000Trade debtors
    
    
    843
    
    
    
    1,133
    
    
    
    860Interest receivable
    
    
    414
    
    
    
    136
    
    
    
    122Research and development tax credits
    
    
    5,942
    
    
    
    5,804
    
    
    
    6,433Other receivables
    
    
    2,571
    
    
    
    2,079
    
    
    
    15,681Prepayments and accrued income
    
    
    2,214
    
    
    
    1,839
    
    
    
    4,67711,984
    
    
    
    10,991
    
    
    
    27,773
 No reserves for doubtful debts are considered necessary. Included within other receivables is £15,200,000 in relation to the fair value of the $30 million
receivable from Endo in equal instalments in August 2005 and August 2006. During the year and exchange loss of £700,000 and an implicit interest receipt of £500,000 linked
to the unwinding of the discount has been recognised in the statement of operations in relation to
this asset. 12. Creditors: amounts falling due within one year April 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004£000
    
    
    £000
    
    
    £000Secured loan (see Note 13)
    
    
    270
    
    
    
    270
    
    
    
    Interest payable
    
    
    211
    
    
    
    
    
    
    
    Bank overdraft
    
    
    
    
    
    
    
    
    
    
    Current portion of obligations under finance leases
    
    
    1,027
    
    
    
    738
    
    
    
    18Trade creditors
    
    
    4,692
    
    
    
    2,538
    
    
    
    3,134Taxation and social security
    
    
    628
    
    
    
    458
    
    
    
    226Accruals
    
    
    6,688
    
    
    
    5,352
    
    
    
    5,134Other creditors
    
    
    3,179
    
    
    
    5,774
    
    
    
    2,699Deferred income
    
    
    4,292
    
    
    
    4,643
    
    
    
    4,83920,987
    
    
    
    19,773
    
    
    
    16,050
 F-22




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##### Table of Contents



Vernalis plc At December 31, 2004 the Group had a total deferred income balance of £36.1 million of which
£4.8 million was due within one year and £31.1 million due in more than one year. Of this total
balance £30.5 million relates to the initial $60 million payable from Endo in relation to the out
license of the North American rights to Frovatriptan, This income is being recognised on a straight
line basis over the patent life of the product to 2014. The remaining balance of deferred income
relates to the up-front payments received from Biogen Idec of $10 million and Novartis of $1.5
million in connection with the collaboration agreements entered into during the year. These are
being recognised over the expected useful lives of the respective agreements. Other creditors primarily relates to payments conditionally due to GlaxoSmithKline (GSK) under the
agreement of December 2000 to buy out royalties due to GSK on sales of frovatriptan. The Group is
committed to making 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. As a result, other creditors include $10 million in respect of GSK, as the directors
believe it is probable that cumulative global sales will exceed $300 million. During the period
ended December 31, 2004, exchange gains of £0.4 million (eight months ended December 31, 2003:
gain of £1.2 million) were recognised in the profit and loss account in relation to this liability. Included within other creditors is £58,000 in relation to money purchase pension contributions
payable. 13. Long term debt April 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004£000
    
    
    £000
    
    
    £000Secured loan
    
    
    1,350
    
    
    
    1,215
    
    
    
    26,3646.5% convertible loan
    
    
    7,000
    
    
    
    
    
    
    
    Obligations under finance leases
    
    
    549
    
    
    
    18
    
    
    
    Accruals, Other Creditors and Deferred Income (see note 12)
    
    
    15,874
    
    
    
    6,886
    
    
    
    33,92124,773
    
    
    
    8,119
    
    
    
    60,285Loans and obligations under finance leases are repayable as follows:Over one and under two years
    
    
    819
    
    
    
    288
    
    
    
    Over two and under three years
    
    
    270
    
    
    
    270
    
    
    
    Over three and under four years
    
    
    270
    
    
    
    270
    
    
    
    Over four and under five years
    
    
    270
    
    
    
    270
    
    
    
    26,364Repayable beyond five years, by instalments
    
    
    270
    
    
    
    135
    
    
    
    1,899
    
    
    
    1,233
    
    
    
    26,364
 The loan at April 30, 2003 of £7 million related to a convertible loan facility with Roche
that was entered into coincident with a strategic agreement to research and develop new drugs for
the treatment of depression in May 2002. Interest was paid bi-annually at 6.5 per cent and the loan
was originally fully repayable on May 13, 2007, or convertible at any time at the option of the
holder. Following the merger of Vernalis Group plc with the Company, the loan, plus accrued
interest, was repaid in full in November 2003. The secured loan at December 31, 2003 related to the mortgage on the Oxford site. Following the
sale of this site during the year this loan has been repaid in full. The secured loan at December
31,2004 relates to $50 million borrowed from Endo, net of the finance charge of £0.3 million,
together with interest payable which the Group has elected to roll up into the loan after the year
end. During the year, exchange gains of £1.3 million have been recognised in the profit and loss
account in relation to this liability. 14. Provisions for liabilities and charges Restructuring
    
    
    Vacant lease
    
    
    Dilapidation
    
    
    Returns and
    
    
    Totalprovision
    
    
    provision
    
    
    provision
    
    
    Rebates£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000At January 1, 2004
    
    
    717
    
    
    
    1,932
    
    
    
    1,440
    
    
    
    
    
    
    
    4,089Utilised during the period
    
    
    (2,080
    )
    
    
    (618
    )
    
    
    
    
    
    
    (192
    )
    
    
    (2,890
    )Change for the period
    
    
    1,493
    
    
    
    4,401
    
    
    
    283
    
    
    
    3,328
    
    
    
    9,505Movements on exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174
    )
    
    
    (174
    )At December 31, 2004
    
    
    130
    
    
    
    5,715
    
    
    
    1,723
    
    
    
    2,962
    
    
    
    10,530
 The restructuring provision at December 31, 2003 and further charges incurred during the year
related to redundancy costs incurred as part of the Groups ongoing restructuring following the
acquisition of RiboTargets Holdings plc and the merger of the Company and Vernalis plc on September
1, 2003. F-23




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##### Table of Contents



Vernalis plc Where leasehold properties become vacant the Group provides for all costs, net of anticipated
income, to the end of the lease or the anticipated date of the disposal or sublease. During the
year the Company received notice from a tenant in its property in Oxfordshire and has significantly
increased the provision as a result. In addition, based on professional advice, the Company has
increased its provision on a vacant property in Cambridge. This provision is expected to be
utilised over the life of the related leases to 2014 and 2020 respectively. The dilapidation provision relates principally to costs associated with the Groups obligation to
reinstate leased buildings to their original state. The provision is expected to be utilised on
vacation of the properties by 2014. The charge in the year has been capitalised to fixed assets and
is being depreciated over the life of the lease. On acquiring the rights from Elan the Group took on an obligation for certain product returns,
estimated at £1.9 million. In addition the Company is responsible for product returns, rebates and
chargebacks from the date it re-acquired the rights from Elan through to the date of the outlicense
to Endo. A further provision has been made in relation to sales made by the Group totalling £1.4
million. There are no further obligations to the Company in respect of these for sales made after
the Company outlicensed the rights to frovatriptan to Endo. The provision is to be utilised within
a four, year period. 15. Share capital April 30, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004Number
    
    
    £000
    
    
    Number
    
    
    £000
    
    
    Number
    
    
    £000AuthorisedNew Ordinary Shares of 5 pence each
    
    
    285,858,083
    
    
    
    14,293
    
    
    
    285,858,083
    
    
    
    14,293
    
    
    
    285,858,083
    
    
    
    14,293Deferred shares of 95p each
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    33,375,891
    
    
    
    31,707Allotted, called up and fully paidNew Ordinary shares of 5 pence each
    
    
    103,772,425
    
    
    
    5,188
    
    
    
    142,126,883
    
    
    
    7,106
    
    
    
    155,700,385
    
    
    
    7,785Deferred shares of 95p each
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    33,375,891
    
    
    
    31,70736,895
    
    
    
    
    
    
    
    38,813
    
    
    
    
    
    
    
    39,492
 Allotted, called up
    
    
    
    
    
    
    Allotted, called upAuthorised
    
    
    and fully paid
    
    
    Authorised
    
    
    and fully paidGroup
    
    
    
    
    
    
    GroupNumber of shares
    
    
    Number of shares
    
    
    £000
    
    
    £000At January 1, 2004Equity capital:Ordinary shares of 5p each
    
    
    285,858,083
    
    
    
    142,126,883
    
    
    
    14,293
    
    
    
    7,106285,858,083
    
    
    
    142,126,883
    
    
    
    14,293
    
    
    
    7,106Non equity capitalDeferred shares of 95p each
    
    
    33,375,891
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    31,707Total share capital at January 1, 2004
    
    
    319,233,974
    
    
    
    175,502,774
    
    
    
    46,000
    
    
    
    38,813AllotmentsEquity capitalOrdinary shares of 5p each
    
    
    
    
    
    
    13,573,502
    
    
    
    
    
    
    
    679Total allotments for the period ended December 31, 2004
    
    
    
    
    
    
    13,573,502
    
    
    
    
    
    
    
    679At December 31, 2004Equity capital:Ordinary shares of 5p each
    
    
    285,858,083
    
    
    
    155,700,385
    
    
    
    14,293
    
    
    
    7,785Non-equity capitalDeferred shares of 95p each
    
    
    33,375,891
    
    
    
    33,375,891
    
    
    
    31,707
    
    
    
    31,707Total share capital at December 31 2004
    
    
    319,233,974
    
    
    
    189,076,276
    
    
    
    46,000
    
    
    
    39,492
 F-24




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##### Table of Contents



Vernalis plc Allotments On June 24, 2004 6,218,487 shares were issued to Biogen Idec at a price of 53 pence per share. The
market price of the shares on the date which the terms of issue were fixed at 47.44 pence. In August 2004, the Novartis Institutes for Biomedical Research Inc. (Novartis) exercised its
option to subscribe for ordinary shares under the terms of the research collaboration agreement
formed in December 2003. Accordingly on September 23, 2004, 7,106,344 shares were issued at a price
of 71 pence per share. The market price of the shares at the date on which the terms of issue were
fixed was 74.61 pence. All other allotments relate to employee share options. Details of the Company options in issue are
shown in note 16. Rights and restrictions attaching to the Ordinary shares. The rights and restrictions attaching to the Ordinary shares are set out in the Articles of
Association. Rights and restrictions attaching to the Deferred Shares. Income
The Deferred shares carry no rights to participate in the profits of the Company. Capital
On a return of capital in a winding up or dissolution (but not otherwise) the holders of the
Deferred shares shall be entitled to participate in the distribution of the assets of the Company
pari passu with the holders of the Ordinary shares but only in respect of any excess of those
assets above £1,000,000,000,000. The holders of the Deferred shares shall not be entitled to any
further right of participation in the assets of the Company. Attendance and voting at general meetings
The holders of the Deferred shares are not entitled, in their capacity as holders of such shares,
to receive notice of any general meeting of the Company or to attend, speak or vote at any such
meeting. Form
The Deferred shares shall not be listed on any stock exchange nor shall any share certificates be
issued in respect of such shares. The Deferred Shares shall not be transferable, save as referred
to below or with the written consent of the directors. Class rights
The Company may from time to time create, allot and issue further shares, whether ranking pari
passu with or in priority to the Deferred shares, and on such creation, allotment or issue any such
further shares (whether or not ranking in any respect in priority to the Deferred shares) shall be
treated as being in accordance with the rights attaching to the Deferred shares and shall not
involve a variation of such rights for any purpose. A reduction by the Company of the capital paid
up on the Deferred shares shall be in accordance with the rights attaching to the Deferred shares
and shall 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. 16. Share option schemes The Company currently operates two share option schemes, the Share Option Plan (which comprises an
Inland Revenue approved company share option plan and an option plan that has not been approved by
the Inland Revenue) and the SAYE Plan, under which grants of options may be made. In addition
option incentive arrangements under the British Biotech Group 1992 Share Option Scheme (the 1992
Scheme), the British Biotech Executive Share Option Scheme (the Executive Scheme); the British
Biotech Deferred Share Bonus Scheme (the Bonus Scheme) remain in place but will not be operated
again. The options over the unissued Ordinary Shares of five pence that have been granted to Directors and
employees in the period from April 30, 2001 to December 31, 2004 are set out below. All of the
quotations and prices have been adjusted to reflect the effects of the capital reorganization in
April 2003. F-25




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##### Table of Contents



Vernalis plc Exercise
    
    
    Weighted averageNumber of
    
    
    price
    
    
    exercise priceShare options
    
    
    £
    
    
    £Balance at April 30, 2001
    
    
    2,124,249
    
    
    
    1-47
    
    
    
    7.60Exercisable at April 30, 2001
    
    
    374,787
    
    
    
    1-47
    
    
    
    13.40Exercised
    
    
    49,093
    
    
    
    1
    
    
    
    1.00Surrendered
    
    
    975,464
    
    
    
    1-42
    
    
    
    7.60Granted
    
    
    612,500
    
    
    
    1
    
    
    
    1.00Balance at April 30, 2002
    
    
    1,712,191
    
    
    
    1-47
    
    
    
    5.80Exercisable at April 30, 2002
    
    
    432,713
    
    
    
    1-47
    
    
    
    11.20Exercised
    
    
    1,233
    
    
    
    1
    
    
    
    1.00Surrendered
    
    
    400,138
    
    
    
    1-42
    
    
    
    10.147Granted
    
    
    5,422,911
    
    
    
    0.59-1
    
    
    
    0.80Balance at April 30, 2003
    
    
    6,733,731
    
    
    
    0.59-47
    
    
    
    1.31Exercisable at April 30, 2003
    
    
    405,354
    
    
    
    1-47
    
    
    
    10.67Exercised
    
    
    
    
    
    
    
    
    
    
    Surrendered
    
    
    (1,554,238
    )
    
    
    0.835-33.40
    
    
    
    2.19Granted
    
    
    4,846,036
    
    
    
    0.835
    
    
    
    0.835Balance at December 31, 2003
    
    
    10,025,529
    
    
    
    0.59-47
    
    
    
    1.07Exercisable at December 31, 2003
    
    
    321,823
    
    
    
    1-47
    
    
    
    8.27Exercised
    
    
    717,940
    
    
    
    0.585
    
    
    
    0.585Surrendered
    
    
    1,737,927
    
    
    
    0.835-42
    
    
    
    2.00Granted
    
    
    1,479,465
    
    
    
    0.71-0.88
    
    
    
    0.81Balance at December 31, 2004
    
    
    9,049,127
    
    
    
    0.59-42
    
    
    
    0.76Exercisable at December 31, 2004
    
    
    538,053
    
    
    
    0.835-42
    
    
    
    2.02
 The following table summarises information about the range of exercise prices for share
options outstanding at December 31, 2004. Weighted average
    
    
    
    
    
    
    
    
    
    
    Weighted averageremaining
    
    
    Weighted average
    
    
    
    
    
    
    exercise price ofNumber
    
    
    contractual life
    
    
    exercise price
    
    
    Exercisable
    
    
    exercisable optionsExercise prices
    
    outstanding
    
    
    (years)
    
    
    (£)
    
    
    options
    
    
    (£)£0.585-£0.88
    
    
    6,261,853
    
    
    
    6.87
    
    
    
    0.56
    
    
    
    433,350
    
    
    
    0.835£1-4.40
    
    
    2,744,435
    
    
    
    8.18
    
    
    
    1.04
    
    
    
    61,864
    
    
    
    2.64£6
    
    
    12,500
    
    
    
    5.07
    
    
    
    6.00
    
    
    
    12,500
    
    
    
    6.00£8
    
    
    17,500
    
    
    
    3.74
    
    
    
    8
    
    
    
    17,500
    
    
    
    8£16.387-£20.30
    
    
    8,800
    
    
    
    2.91
    
    
    
    20.23
    
    
    
    8,800
    
    
    
    20.23£31-£47
    
    
    4,039
    
    
    
    1.95
    
    
    
    42
    
    
    
    4,039
    
    
    
    42
 The weighted-average grant-date fair values of options granted in the period were: Weighted averagegrant-dateNumber of
    
    
    fair valuesshare options
    
    
    (£)Exercise price less than market value on day of grant
    
    
    482,543
    
    
    
    0.50Exercise price equal to market value on day of grant
    
    
    996,922
    
    
    
    0.54Exercise price greater than market value on day of grant
    
    Nil
 F-26




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##### Table of Contents



Vernalis plc 17. Pension schemes At December 31, 2004 the Groups pension schemes were defined contribution schemes under which the
Group had no obligations beyond the payment of the premiums. The pension costs for the schemes have
been as follows: Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Pension costs
    
    
    896
    
    
    
    806
    
    
    
    716
    
    
    
    621
 18. Commitments and contingencies (a) Operating lease commitments At December 31, 2004, the Group had the following commitments under operating leases, principally
relating to leased properties: Years ended December 31,
    
    
    £0002005
    
    
    2,3582006
    
    
    2,3572007
    
    
    2,3502008
    
    
    2,3122009
    
    
    2,290Later years
    
    
    18,160
 The future aggregated minimum lease commitment is £29,827,000 (b) Financial commitments and contingencies The Group has commitments of up to £6.1 million (December 31, 2003: £12.45 million) which are
contingent upon successful product development, registration and approval. Commercial Collaborations
The following section describes the Groups existing commercial collaborators and the commercial
agreements with respect to the Groups principal research and development programs and marketed
products. SmithKline Beecham (frovatriptan)
Frovatriptan is the Companys most advanced program and the Companys only currently marketed
product. Vernalis originally licensed frovatriptan from SmithKline Beecham in 1994. In 1998,
SmithKline Beecham waived its option to commercialise the compound and worldwide marketing rights
passed to Vernalis in return for a residual royalty payable to SmithKline Beecham on future
worldwide sales of frovatriptan. During 2000, in connection with SmithKline Beechams merger with
Glaxo Wellcome plc, Vernalis made two important amendments to the 1994 agreement:  

in July 2000, SmithKline Beecham assigned to Vernalis all of
SmithKline Beechams patents covering frovatriptan (with no
substantive changes in the royalty arrangements); and

in December 2000, SmithKline Beecham waived all of its rights to
royalties on sales of frovatriptan in return for a series of five
$5 million cash payments by Vernalis. The first 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 will be made in September 2005, with the final $5
million payment being conditional upon total sales exceeding £300
million. Elan (frovatriptan)
A license agreement was in place between Vernalis and Elan under which Elan was marketing
frovatriptan in North America. This agreement was terminated in May 2004. F-27




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##### Table of Contents



Vernalis plc Vernalis signed the original license agreement with Elan in 1998 granting Elan exclusive marketing
rights for frovatriptan in the United States, Canada and Mexico. On signing, Elan paid Vernalis a
fee of $7.5 million and made a $10 million investment in Vernalis Group ordinary shares at a
negotiated price of £6.25 per share. Elan subsequently paid Vernalis a further $7.5 million in 1999
when the FDA formally accepted Vernalis frovatriptan New Drug Application (NDA) for review, and a
further $15 million in the fourth quarter of 2001 following FDA marketing approval. Under the terms
of the 1998 license agreement, Vernalis could have potentially received three additional milestone
payments exceeding $30 million in total on achievement by Elan of agreed sales targets for
frovatriptan. In addition, Elan would pay Vernalis a royalty based on its net sales of
frovatriptan. In December 2000, Vernalis entered into a new financing agreement with Elan under
which Elan made a $10 million loan to Vernalis and a further equity investment of £4.96 million.
Following that investment, Elan held 2,943,396 Ordinary Shares, representing approximately 6.7 per
cent of Vernalis Groups issued share capital, which was subsequently sold in July 2002. Elan no
longer has any shareholding in Vernalis. In the first quarter of 2002 Elan appointed UCB as its co-promotion partner for frovatriptan in the
US market. The co-promotion agreement was between Elan and UCB and Vernalis had no contractual
relationship directly with UCB. In conjunction with the appointment of UCB, Vernalis agreed to
revised commercial arrangements with Elan. Under the new terms, Elan forgave the full amount of its
loan to Vernalis, including accrued interest, and accelerated a $5.4 million sales milestone
payment due under the restated 1998 license agreement to 30 days following the US launch. In
return, Vernalis would have received royalties at a reduced rate on US sales up to a pre-determined
level during the launch phase and early years of marketing of frovatriptan. At the end of an
initial three-year period following the US launch of frovatriptan, Elan would have had an option to
extend the reduced royalty period by up to four years by making an additional lump sum payment to
Vernalis. This payment replaced the second sales milestone payment due under the 1998 license
agreement. Thereafter, or if Elan elected not to the make the lump sum payment, the royalty rate due to
Vernalis would have reverted to the previous levels. The third sales milestone payment was not
affected by the new agreement. This was a payment of $15 million from Elan to Vernalis, which would
have been triggered when the net sales of frovatriptan by Elan and UCB in North America had
exceeded $100 million in any 12-month period. Elan made its first royalty payment to Vernalis in
August 2002 and payments were subsequently received on a quarterly basis (prior to the agreement
for the reacquisition of North American rights). For additional information on frovatriptan, see
above under Item 4B Business Overview. In March 2004, Vernalis announced that it has entered into an agreement to reacquire in their
entirety the North American rights for frovatriptan from Elan for a total of $50 million payable
over 21 months. The transaction was completed in May 2004. This figure was subsequently
renegotiated to $44 million and inventory was purchased for $4.5 million. Both these sums were
paid in full to Elan during the year. Endo (frovatriptan)
In August 2004, Vernalis licensed the North American rights to frovatriptan to Endo
Pharmaceuticals. Under the terms
of the licence agreement, 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 a $40 million milestone payment to
Vernalis if MRM approval is achieved as well as various milestone payments to Vernalis 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 make royalty payments to Vernalis
which will be tiered from 20 per cent if FDA approval of the MRM indication is obtained. In 2004, net sales of frovatriptan in the US amounted to $33.3 million and in February 2005 Endo
re-launched the product with an expanded sales force and a revised marketing focus on the benefits
of a long duration of action. Also in February 2005, Vernalis exercised its option to co-promote
frovatriptan alongside Endo, and Endo will substantially fund the Vernalis sales team of up to 25
speciality neurology sales representatives for up to five years, beginning January 1, 2006. This
sales team has the opportunity to market other prospective central nervous system products in
addition to frovatriptan, and will establish Vernalis commercial operations in North America for
the future sale of pharmaceuticals. The license previously granted by Vernalis to Menarini in respect of Europe and certain Central
American countries remains in place (see below). Menarini (frovatriptan)
Vernalis has also signed a license agreement with Menarini granting Menarini exclusive marketing
rights for frovatriptan in the European Union, Eastern Europe and specified countries in Central
America. Under this agreement Vernalis will supply Menarini with the finished packed product ready
for sale. Vernalis receives revenue on supply of product and also from royalties. F-28




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##### Table of Contents



Vernalis plc SK Chemicals (frovatriptan)
In September 2004, Vernalis signed an agreement with SK Chemicals Co., Ltd of Korea, granting them
exclusive distribution rights for frovatriptan in the Korean market. Vernalis received an upfront
fee on signature and is due a further payment on receipt of Korean marketing authorisation, in
addition to revenues from future product supply. SK will be responsible for managing and funding
the regulatory approval process and the subsequent marketing of the product in Korea. Potential Additional Marketing Partners (frovatriptan)
Vernalis is exploring opportunities to generate further revenues by selecting marketing partners
for frovatriptan in other geographic areas not covered by its existing marketing agreements. Diosynth and Evotec OAI (frovatriptan)
Vernalis also has agreements in place with Diosynth Limited and Evotec OAI, with respect to the
manufacture and supply of the bulk active pharmaceutical ingredient in frovatriptan. This bulk
active is used by PDMS Limited to produce finished product that is supplied by Vernalis to
Menarini. Pharmaceutical Development & Manufacturing Services Ltd (PDMS) (frovatriptan)
Vernalis has an agreement with PDMS Limited (by novation from Galen Limited who disposed of the
tableting and packaging business to PDMS) for tableting and packaging of frovatriptan, which is
supplied as finished product to Menarini. Following the reacquisition of the North American rights
to frovatriptan from Elan, Vernalis took assignment of an agreement under which PDMS supplied
tableting and packaging services with regard to North America. This agreement has novated to Endo
as part of the re-licensing of the rights to frovatriptan in North America. DSM Biologics Company Inc. (V10153)
Vernalis had a series of agreements with DSM Biologics, the most recent being January 1, 2003, all
of which concern the supply of V10153 for clinical trials. This agreement terminated in June 2004
and Vernalis is currently seeking a new supplier of V10153 to fulfil its requirements for future
clinical trials. Monash University (V140)
In October 2002, Vernalis was granted an exclusive license to develop and commercialise the
compound alphadolone (V140) for all human and animal prophylactic and therapeutic analgesic
indications from Monash University and Professor Colin Goodchild (Victoria, Australia). In return
for an exclusive license, Vernalis will pay Monash and Professor Goodchild success milestones and
royalties upon the sale of product. Following completion of an initial Phase 1 clinical programme,
further pre-clinical studies are being undertaken with a view to evaluating V140 in a Phase II
proof-of-concept trial. Roche (5-HT2C receptor)
In December 1999, Vernalis signed an agreement with Roche to collaborate on Vernalis research
program directed toward selective 5-HT2C agonists as potential anti-obesity agents. Under the terms of this agreement, Vernalis received funding for an initial two-year joint research
program with Roche. Vernalis also received a license fee on signature of the agreement and three
subsequent milestone payments from Roche. The first was received in November 2000 on the selection
of VR-1065 as the first lead development compound. The second was received in June 2001, when this
compound was confirmed as the first clinical development candidate. The third was received in May
2002 when this compound entered Phase I studies. The pharmacokinetic data on VR 1065 observed in
the Phase I trial did not meet the criteria for progression to Phase II. In February 2002, Vernalis and Roche entered into a further two-year research collaboration to
support the objective of bringing further product candidates into Phase I clinical trials. In an
amendment to the agreement made as of February 1, 2004, Roche agreed to an extension to the
collaboration until September 30, 2004, in order to continue pre-clinical development. Under the
terms of the amendment agreement, Vernalis received additional research funding for the period of
the new research collaboration. The research collaboration under the February 2002 agreement was
subsequently further extended until February 28, 2005 at each parties own research cost. The
research collaboration has now expired. Roche is currently characterising and evaluating molecules synthesised under the collaboration for
classification as lead candidate compounds. Roche has exclusive worldwide rights to develop, manufacture and market all the product candidates
coming out of the program for the treatment of obesity and related eating disorders, and will also
fund and conduct all aspects of the development program for each compound it elects to take into
development for this indication. F-29




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##### Table of Contents



Vernalis plc Biogen Idec (V2006)
In June 2004, Vernalis entered into an agreement with Biogen Idec to advance research into
Vernalis adenosine A2A receptor antagonist program, which targets Parkinsons disease and other
central nervous system disorders. Under the agreement, Biogen Idec received exclusive worldwide rights to develop and commercialise
Vernalis lead compound, V2006, which has completed an initial Phase I clinical study in healthy
volunteers. In addition, Biogen Idec has the right to develop one back-up compound to V2006 and
receives option rights over Vernalis A2A antagonist research program. Initially, the collaboration
will focus on completing the Phase I program for V2006, with the goal to begin Phase II proof of
concept studies of V2006 in Parkinsons disease patients in H2 2005. Biogen Idec paid Vernalis an initial license fee of $10 million, and will make a series of further
payments if program milestones are met, as well as royalties on commercial sales of collaboration
products. Biogen Idec made an immediate investment of $6 million through subscription in Vernalis
ordinary shares and committed to purchase up to an additional $4 million should Vernalis undergo a
fundraising. In March 2005, Biogen Idec took up 1,363,186 shares at 70 pence per share in the
Placing and Open Offer. Excluding royalties, total potential payments to Vernalis could exceed $100
million. Vernalis is responsible under the collaboration for the completion of certain Phase I clinical
trials. Vernalis has engaged Dr. Reddys Laboratories Inc. in respect of the manufacture of V2006
to complete such clinical trials. Biogen Idec will fund future development under the
collaboration. Vernalis retained an option to co-promote collaboration products in the United States. Novartis Institutes for Biomedical Research, Inc. (Hsp90)
In December 2003, Vernalis formed a research collaboration with the Novartis Institutes for
BioMedical Research, Inc., (Novartis) in Cambridge, MA, USA, to investigate inhibitors of a target
implicated in the progression of a range of cancers. Under that agreement with Novartis, Vernalis
provided elements of its ongoing oncology research to Novartis for an initial six-month evaluation
period. In August 2004 Novartis exercised its option under the December 2003 agreement to take an exclusive
licence of Vernalis rights to Hsp90 (therapeutic cancer target). The companies will conduct a
joint research programme under which Novartis will provide research funding to Vernalis over an
initial three-year period. In addition, Novartis is responsible for funding and conducting the
preclinical and clinical development of product candidates, and for commercialisation. Novartis paid Vernalis a signature fee of $1.5 million and will pay a series of further payments
upon achievement of development milestones for each product candidate that Novartis takes into
development. Vernalis will also receive royalties on commercial sales of collaboration products. In
addition, Novartis made an equity investment of approximately £5 million through the subscription
for 7,106,344 new Vernalis ordinary shares. In the event that two product candidates from the collaboration reach the market, total payments to
Vernalis from Novartis could exceed $75 million, excluding royalties. Pintex Pharmaceuticals Inc (Pin1)
In March 2005 Vernalis acquired the intellectual property rights, know how and associated assets
related to an emerging oncology target, Pin1, from Pintex Pharmaceuticals Inc. Pintex received
initial cash payments on signature and transfer of know how. Vernalis will issue Pintex with a
maximum of 1.5 million new ordinary shares should a drug candidate progress into human clinical
trials, which is not expected before 2008. Vernalis will make an additional cash milestone payment
to Pintex on marketing approval, bringing total cash payments to $6.5m, but has no royalty
obligations to Pintex for any resultant products and, should a drug candidate reach the market, the
total cash liability to Pintex would be $6.5 million. Serono S.A. (MEIs: inflammation)
In October 2000, Vernalis and Serono S.A. signed a two-year agreement to jointly research, develop
and commercialise metalloenzyme inhibitors for the treatment of various inflammatory diseases.
Under the terms of the agreement, Vernalis received from Serono an up-front payment of $5 million. F-30




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##### Table of Contents



Vernalis plc The agreement with Serono covered BB-2827, BB-76163 and research activities. The clinical
development, manufacture and commercialization of BB-2827, a collagenase inhibitor with potential
application in rheumatoid arthritis, and the pre-clinical research of BB-76163, an aminopeptidase
inhibitor, with potential application in multiple sclerosis, were terminated in 2001. In October 2002, the term of the research agreement was extended, terminating in October 2003,
subject to the exercise by Serono of its option of develop and commercialise certain compounds from
the research agreement on terms whereby Vernalis receive milestone and royalty payments. In January 2005 Serono started a phase I clinical trial of a selective inhibitor of MMP-12 (matrix
metalloprotease inhibitor-12); the first compound to enter the clinic resulting from the research
collaboration between Vernalis and Serono. Under the terms of the agreement Vernalis is entitled
to receive a milestone payment. Serono will conduct and fund all development activities associated
with the programme, with Vernalis receiving milestone payments and royalties upon successful
commercialisation of any product. Oscient Pharmaceuticals Corp. (MEIs: infection)
In August 2002, Vernalis signed agreements with GeneSoft Pharmaceuticals Inc. (now part of the
Oscient Pharmaceuticals Corp group) for a broad-based collaboration to discover and develop novel
anti-infective drugs based on Vernalis proprietary bacterial metalloenzyme inhibitors. The
collaboration combined Vernalis novel targets, chemistry and clinical development with GeneSofts
experience in antibiotic lead optimization and clinical expertise. GeneSoft made an initial payment to Vernalis in August 2002 of $4 million. Upon initiation of the
initial Phase I study of the lead compound, BB-83698, in October 2002, Vernalis received a further
payment from GeneSoft of $1 million and one million shares of convertible-preferred stock
(representing approximately 3.45 per cent of GeneSofts outstanding equity as of the date of the
transaction, on a fully-diluted basis). In September 2003, the parties terminated the August 2002 agreements and replaced them with a new
Research Agreement relating to four anti-infective projects in respect of Vernalis proprietary
bacterial metalloenzyme inhibitors, and a new agreement relating to the development and
commercialization of BB-83698. Under the revised September 2003 arrangements, GeneSoft will
conduct all further research and development at no cost to Vernalis and Vernalis may receive
milestone and royalty payments (dependent on progression of development and sales respectively). On February 2, 2004 the shareholders of Genesoft Pharmaceuticals Inc. approved its merger with
Oscient Pharmaceuticals Corp. (formerly Genome Therapeutics Corp.), a NASDAQ quoted company. As a
result of the merger, the Groups holding in Genesoft has been exchanged for 424,118 shares in
Oscient. Of these, 93,141 shares will remain in escrow and will not be made available to the
Company for up to 18 months from February 2004 In September 2004, Vernalis agreed with Oscient, subject to certain pre-conditions which have not
yet been met, to assign certain patent rights to Oscient and to terminate certain other patent
rights licenced to Oscient. To date, this agreement is not effective. Chroma Therapeutics Limited (BB-76163)
On November 24, 2003, Vernalis entered into an agreement with Chroma Therapeutics Limited under
which Vernalis granted Chroma an exclusive license covering BB-76163 for use in cancer. Vernalis
was paid a small sum on signature and will receive royalties if Chroma progresses development and
sells product. Institute of Cancer Research (Hsp90 inhibitors)
Vernalis entered into a research collaboration and option agreement with the Institute of Cancer
Research (ICR) and Cancer Research Ventures Ltd, now Cancer Research Technologies Ltd (CRT) in
March 2002 in respect of the discovery and evaluation of Hsp90 inhibitors. In August 2004, Vernalis exercised its option to enter into an exclusive licence with ICR and CRT
under which Vernalis is licensed to develop and commercialize the results of the collaboration.
The research programme with ICR, under the research collaboration agreement, terminated in October
2004. Vernalis is now developing the results of the research programme with ICR under its collaborator
and sub-licence agreement with Novartis (see earlier), subject to payment to CRT of 25% of
sub-licence income and royalties on sales of product. F-31




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##### Table of Contents



Vernalis plc Autogen Research (ChemGenex)
In August 2004, Vernalis entered into a research and development option agreement with Autogen
Research Pty Ltd pursuant to which Vernalis funds research into the discovery and validation of
genes and proteins involved in depression and anxiety. Under the agreement Vernalis initially
funded research for a period of 6 months, such period extendable for a further 6 months at Vernalis
option. Vernalis extended its right to fund a further 6 months of research in February 2005.
Under the agreement, Vernalis has the exclusive option to negotiate a license and collaboration
agreement. Rhinopharma
In February 2005, Vernalis assigned certain patents and licensed exclusively its know how relating
to its phosphodiesterase inhibitor research programme, previously abandoned, to Rhinopharma Limited
in Canada to research, develop and commercialise phosphodiesterase inhibitors for treating allergic
or inflammatory disorders. If Rhinopharma is successful, Vernalis will receive milestones and
royalties on sales from Rhinopharma. 19. Reconciliation of operating loss to operating cash flows Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Operating loss
    
    
    (34,954
    )
    
    
    (36,249
    )
    
    
    (29,388
    )
    
    
    (30,743
    )Depreciation
    
    
    2,268
    
    
    
    2,197
    
    
    
    1,575
    
    
    
    2,327Amortisation of intangible fixed assets
    
    
    2,242
    
    
    
    3,373
    
    
    
    3,985
    
    
    
    7,146Amortisation of investment in own shares
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    Impairment of intangible fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Credit for deferred shares awarded
    
    
    
    
    
    
    (611
    )
    
    
    
    
    
    
    Adjustment for exchange gain
    
    
    (22
    )
    
    
    (29
    )
    
    
    
    
    
    
    Other profit/(loss) on disposal of fixed tangible assets
    
    
    171
    
    
    
    (38
    )
    
    
    171
    
    
    
    Loss on disposal of intangible fixed assets
    
    
    
    
    
    
    
    
    
    
    1,777
    
    
    
    Tangible fixed assets written off
    
    
    582
    
    
    
    16
    
    
    
    
    
    
    
    (Increase)/decrease in debtors
    
    
    (3,960
    )
    
    
    (3,143
    )
    
    
    578
    
    
    
    (16,178
    )Decrease in creditors
    
    
    748
    
    
    
    (3,273
    )
    
    
    (4,133
    )
    
    
    370Decrease/(increase) in provisions
    
    
    (413
    )
    
    
    915
    
    
    
    1,572
    
    
    
    4,260Increase/(decrease) in deferred income
    
    
    3,039
    
    
    
    396
    
    
    
    (4,838
    )
    
    
    35,299(Increase)/decrease in stock
    
    
    (3
    )
    
    
    (57
    )
    
    
    8
    
    
    
    Merger transaction expenses paid
    
    
    
    
    
    
    
    
    
    
    (5,396
    )
    
    
    Adjustment for exchange gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (391
    )Net cash outflow from operating activities
    
    
    (30,302
    )
    
    
    (36,448
    )
    
    
    (34,089
    )
    
    
    2,090
 20. Returns on investments and servicing of finance Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Interest received
    
    
    3,484
    
    
    
    2,480
    
    
    
    1,414
    
    
    
    684Interest paid,
including interest
element of finance
lease payments
    
    
    (458
    )
    
    
    (528
    )
    
    
    (755
    )
    
    
    (977
    )Net cash inflow
from returns on
investments and
servicing of
finance
    
    
    3,026
    
    
    
    1,952
    
    
    
    659
    
    
    
    (293
    )
 F-32




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##### Table of Contents



Vernalis plc 21. Capital expenditure Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Purchase of tangible fixed assets
    
    
    (2,623
    )
    
    
    (1,310
    )
    
    
    (180
    )
    
    
    (101
    )Sale of tangible fixed assets
    
    
    7,275
    
    
    
    238
    
    
    
    2
    
    
    
    3,250Purchase of fixed asset investments
    
    
    (1,406
    )
    
    
    
    
    
    
    
    
    
    
    Sale of fixed asset investments
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    12Purchase of intangible fixed assets
    
    
    (2,447
    )
    
    
    (3,227
    )
    
    
    
    
    
    
    (30,541
    )Net cash inflow/(outflow) from capital expenditure
    
    
    799
    
    
    
    (4,299
    )
    
    
    (16
    )
    
    
    (27,380
    )
 22. Financing Eight monthsended
    
    
    Year endedYears ended April 30,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2003
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000Issue of ordinary share capital
    
    
    375
    
    
    
    139
    
    
    
    15,960
    
    
    
    8,295Share issue costs
    
    
    
    
    
    
    (216
    )
    
    
    (1,527
    )
    
    
    Debt due within one year: Repayment of secured loan
    
    
    (270
    )
    
    
    (270
    )
    
    
    (135
    )
    
    
    (1,485
    )Capital element of finance lease payments
    
    
    (392
    )
    
    
    (438
    )
    
    
    (820
    )
    
    
    (738
    )Receipt/(repayment) of loans
    
    
    5,044
    
    
    
    7,000
    
    
    
    (7,000
    )
    
    
    Receipt of US dollar secured loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,539Net cash inflow from financing
    
    
    4,757
    
    
    
    6,215
    
    
    
    6,478
    
    
    
    33,611
 23. Analysis of changes in net funds At May 01,
    
    
    Cash flow
    
    
    Acquisitions
    
    
    Exchange
    
    
    At April 30,2002
    
    
    movement
    
    
    (excluding cash)
    
    
    movement
    
    
    2003£000
    
    
    £000
    
    
    
    
    
    £000
    
    
    £000Cash
    
    
    273
    
    
    
    (1
    )
    
    
    
    
    
    
    67
    
    
    
    339Short-term deposits and investments
    
    
    62,709
    
    
    
    (27,443
    )
    
    
    12,903
    
    
    
    (54
    )
    
    
    48,115Bank overdraft
    
    
    (16
    )
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    62,966
    
    
    
    (27,428
    )
    
    
    12,903
    
    
    
    13
    
    
    
    48,454Secured loan due within one year
    
    
    (270
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (270
    )Secured loan due after one year
    
    
    (1,620
    )
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )Convertible 6.5% loan
    
    
    
    
    
    
    (7,000
    )
    
    
    
    
    
    
    
    
    
    
    (7,000
    )Finance leases
    
    
    (746
    )
    
    
    439
    
    
    
    (1,269
    )
    
    
    
    
    
    
    (1,576
    )60,330
    
    
    
    (33,719
    )
    
    
    11,634
    
    
    
    13
    
    
    
    38,258
 At May 1,
    
    
    Cash flow
    
    
    Exchange
    
    
    Other
    
    
    At December 31,2003
    
    
    
    
    
    movement
    
    
    movements
    
    
    2003£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Cash
    
    
    339
    
    
    
    1,601
    
    
    
    (55
    )
    
    
    
    
    
    
    1,885Short-term deposits and investments
    
    
    48,115
    
    
    
    (25,786
    )
    
    
    
    
    
    
    
    
    
    
    22,32948,454
    
    
    
    (24,185
    )
    
    
    (55
    )
    
    
    
    
    
    
    24,214Secured loan due within one year
    
    
    (270
    )
    
    
    135
    
    
    
    
    
    
    
    (135
    )
    
    
    (270
    )Secured loan due after one year
    
    
    (1,350
    )
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    (1,215
    )Convertible 6.5% loan
    
    
    (7,000
    )
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    Finance leases
    
    
    (1,576
    )
    
    
    820
    
    
    
    
    
    
    
    
    
    
    
    (756
    )38,258
    
    
    
    (16,230
    )
    
    
    (55
    )
    
    
    
    
    
    
    21,973
 F-33




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##### Table of Contents



Vernalis plc At December 31,
    
    
    
    
    
    Exchange
    
    
    Other non-cash
    
    
    At 31 December,2003
    
    
    Cashflow
    
    
    movement
    
    
    movements
    
    
    2004£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Cash
    
    
    1,885
    
    
    
    (528
    )
    
    
    (48
    )
    
    
    
    
    
    
    1,309Short term deposits and investments
    
    
    22,329
    
    
    
    9,685
    
    
    
    
    
    
    
    
    
    
    
    32,01424,214
    
    
    
    9,157
    
    
    
    (48
    )
    
    
    
    
    
    
    33,323Secured loan due within one year
    
    
    (270
    )
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    Secured loan due after one year
    
    
    (1,215
    )
    
    
    1,215
    
    
    
    
    
    
    
    
    
    
    
    US dollar secured loan (including
finance charges of £372,000)
    
    
    
    
    
    
    (27,167
    )
    
    
    1,266
    
    
    
    (463
    )
    
    
    (26,364
    )Finance leases
    
    
    (756
    )
    
    
    738
    
    
    
    
    
    
    
    
    
    
    
    (18
    )21,973
    
    
    
    (15,787
    )
    
    
    1,218
    
    
    
    (463
    )
    
    
    6,941
 Short-term deposits and short-term investments are aggregated on the balance sheet. Cash
flow from short-term deposits and short-term investments are reported in the cash flow statement
under the heading management of liquid resources. Short-term deposits have a maturity period of
more than 24 hours but less than 12 months. They are repayable on demand subject, in some
instances, to the payment of certain expenses. Short-term investments are investments in a money
market managed fund that are repayable within 48 hours. 24. Financial instruments related disclosure The Groups financial instruments comprise cash, liquid resources, finance leases, loans and
various debtors and creditors, such as trade debtors and trade and other creditors that arise
directly from its operations. The Group does not enter into derivative transactions. In addition,
it is, and has been throughout the period under review, the Groups policy that no trading in
financial instruments shall be undertaken except in accordance with strict and prudent investment
criteria, principally that funds are actively managed by reputable independent fund managers and
investments are only made in low-risk funds with fixed rates of return. The main risks arising from the Groups financial instruments are interest rate risk, liquidity
risk and foreign currency risk. The Board reviews and agrees policies for managing each of these
risks and they are summarised below. These policies have remained unchanged throughout the period
under review and since the year end. Interest rate risk The Group finances its operations through reserves of cash and liquid resources. The funds are held
in sterling, euro and US dollar managed funds and sterling treasury deposits. The funds are
actively managed by reputable independent fund managers to provide the highest rate of return with
a neutral risk profile. Liquidity risk The Boards policy is to ensure that sufficient funds are held on a short term basis in order to
meet operational needs without the use of an overdraft facility. Foreign currency risk The Groups functional currency is sterling. The Group has transactional currency exposures. Such
exposures arise from sales or purchases in currencies other than the Groups functional currency,
which include royalty and milestone receipts in US dollars from Endo, the Groups North American
licensee from frovatriptan, royalty and product sale receipts in euros from Menarini, the Groups
European licensee for frovatriptan and payments in US dollars to various clinical research
organizations in respect of ongoing trials. In addition the Group has currency exposures to
balances in currencies other than the Groups functional currency. In particular, the Group has a
loan for $50 million, that is repayable in August 2009 and included within other creditors is $10
million due to GSK. The group considers selectively hedging against specific significant currency
exposures where the dates of future payments or receipts in foreign currency are known. There were
no hedging transactions in place at December 31, 2004 or December 31, 2003. All the Groups debtors and creditors falling due within one year (other than the bank overdraft,
other debtors in relation to amounts receivable from Endo, secured loans and other credits) have
been excluded from the disclosures below either due to the exclusion of short-term items or because
they do not meet the definition of a financial liability, or asset. The weighted average period for
GSK cannot be calculated due to the payments being conditional to future events. The Directors
estimate that this will not be before 2007. The weighted average period for the Endo receivable is
14 months. F-34




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##### Table of Contents



Vernalis plc Interest rate risk profile The interest rate profile of the Groups financial assets and liabilities are: April 30,2002
    
    
    2003Floating
    
    
    Fixed
    
    
    Total
    
    
    Floating
    
    
    Fixed
    
    
    Totalrate
    
    
    rate
    
    
    
    
    
    rate
    
    
    rate£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Financial liabilitiesUS dollar bank overdraft
    
    
    16
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    Sterling secured loan (i)
    
    
    
    
    
    
    1,890
    
    
    
    1,890
    
    
    
    
    
    
    
    1,620
    
    
    
    1,620Convertible loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    7,000Finance leases (ii)
    
    
    
    
    
    
    746
    
    
    
    746
    
    
    
    
    
    
    
    1,576
    
    
    
    1,57616
    
    
    
    2,636
    
    
    
    2,652
    
    
    
    
    
    
    
    10,196
    
    
    
    10,196Financial assetsSterling cash at bank and in hand (v)
    
    
    238
    
    
    
    
    
    
    
    238
    
    
    
    180
    
    
    
    
    
    
    
    180Euro cash at bank and in hand
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    11
    
    
    
    
    
    
    
    11US dollar cash at bank and in hand
    
    
    33
    
    
    
    
    
    
    
    33
    
    
    
    147
    
    
    
    
    
    
    
    147Sterling short-term investments (iii)(v)
    
    
    2,137
    
    
    
    
    
    
    
    2,137
    
    
    
    16,491
    
    
    
    
    
    
    
    16,491Sterling short-term deposits (iv)
    
    
    
    
    
    
    60,572
    
    
    
    60,572
    
    
    
    4,483
    
    
    
    27,141
    
    
    
    31,624US dollar investment
    
    
    98
    
    
    
    
    
    
    
    98
    
    
    
    70
    
    
    
    
    
    
    
    70Australian Dollar investment
    
    
    402
    
    
    
    
    
    
    
    402
    
    
    
    109
    
    
    
    
    
    
    
    109Canadian dollar investment
    
    
    1,406
    
    
    
    
    
    
    
    1,406
    
    
    
    928
    
    
    
    
    
    
    
    928Sterling investment
    
    
    55
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    4,371
    
    
    
    60,572
    
    
    
    64,943
    
    
    
    22,419
    
    
    
    27,141
    
    
    
    49,560
 December 31, 2003
    
    
    December 31, 2004Floating
    
    
    Fixed
    
    
    Total
    
    
    Floating
    
    
    Fixed
    
    
    Totalrate
    
    
    rate
    
    
    
    
    
    rate
    
    
    rate£000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000
    
    
    £000Financial liabilitiesSterling secured loan (i)
    
    
    
    
    
    
    1,485
    
    
    
    1,485
    
    
    
    
    
    
    
    
    
    
    
    US dollars secured loan (vi)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,711
    
    
    
    26,711Finance leases (ii)
    
    
    
    
    
    
    756
    
    
    
    756
    
    
    
    
    
    
    
    18
    
    
    
    18
    
    
    
    2,241
    
    
    
    2,241
    
    
    
    26,729
    
    
    
    26,729Financial assetsSterling cash at bank and in hand (v)
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )
    
    
    (83
    )
    
    
    
    
    
    
    (83
    )Euro cash at bank and in hand
    
    
    99
    
    
    
    
    
    
    
    99
    
    
    
    5
    
    
    
    
    
    
    
    5US dollar cash at bank and in hand
    
    
    1,802
    
    
    
    
    
    
    
    1,802
    
    
    
    1,387
    
    
    
    
    
    
    
    1,387Sterling short-term investment (iii)(v)
    
    
    10,360
    
    
    
    
    
    
    
    10,360
    
    
    
    13,295
    
    
    
    
    
    
    
    13,295Sterling short-term deposits (iv)
    
    
    
    
    
    
    11,969
    
    
    
    11,969
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000US dollar investment (iii)(v)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,455
    
    
    
    
    
    
    
    2,455Australian Dollar investment
    
    
    83
    
    
    
    
    
    
    
    83
    
    
    
    
    
    
    
    
    
    
    
    Euro short term investments (iii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,264
    
    
    
    
    
    
    
    1,26412,328
    
    
    
    11,969
    
    
    
    24,297
    
    
    
    18,323
    
    
    
    15,000
    
    
    
    33,323
 The Groups provisions and other creditors are non interest-bearing  (i)

The secured loan is for a term of 20 years from April 14, 1989, and is secured by a fixed
charge over three of the Groups freehold properties. Interest is fixed at 12.13 per cent per
annum throughout the term. Following the sale of the Oxford site, the loan was repaid in full.(ii)

The finance leases were all in sterling at fixed rates of interest. The weighted average
interest rate and period remaining on liabilities at December 31, 2004 was 9.2 per cent and
two months. F-35




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##### Table of Contents



Vernalis plc    (iii)

The floating rate short term investments are invested in a money market managed fund with a
weighted average maturity of less than 120 days by reference to seven-day LIBID and three
month LIBID and repayable within 48 hours.(iv)

The fixed rate short-term deposits are placed with a range of banks and building societies at
fixed terms with a weighted average maturity of 129 days and a weighted average fixed rate of
4.816 per cent.(v)

Short-term investments are used to maintain a positive bank balance, in sterling, US dollar
and euro.(vi)

The US dollar secured loan was for a term of five years from August 31, 2004 and was secured
against all royalty and milestone income receivable by Vernalis in respect of the license deal
with Endo. The weighted average interest rate is 5 per cent fixed for the term of the loan. Foreign currency exposure
At December 31, 2004 the Groups operating companies had net monetary liabilities of £22.9 million
(December 31, 2003: net monetary assets £1.8 million) denominated in US dollars, £nil (December 31,
2003: £0.1 million) denominated in Australian dollars,
£1.3 million (December 31, 2003: £0.1 million)
denominated in euros. Fair value of financial assets and liabilities
There is no significant difference between the fair value and the carrying value of the Groups
financial assets and liabilities at December 31, 2004 and December 31, 2003, except for the
sterling secured loan, other creditors and fixed asset investments. The fair value of the loan at
£nil (December 31, 2003: £1.7 million) and other creditors at £4.8 million (December 31, 2003: £9.5
million) was calculated using a discounted cash flow method as market values were unavailable. The
book value of the loan at December 31, 2004 was £nil (December 31, 2003: £1.5 million). The book
value of other creditors at December 31, 2004 was £5.2 million (December 31, 2003: £11.4 million).
The market value of the Groups listed investments at December 31, 2004 was £0.6 million (December
31, 2003: £0.1 million). Borrowing facilities
The Group had no significant undrawn committed borrowing facilities at December 31, 2004. 25. Post balance sheet events On January 19, 2005 Vernalis collaborator Serono started a Phase 1 clinical study of a selective
inhibitor of matrix metalloprotease inhibitor 12. On February 24, 2005 Vernalis exercised its option under its agreement with Endo Pharmaceuticals to
co-promote frovatriptan in the US. On March 21, 2005 shareholders approved the Placing and Open Offer announced on February 24, 2005.
This raised net funds of approximately £27.6 million by way of a fully underwritten Placing and
Open Offer of 43,250,107 new ordinary shares representing approximately 27.8 per cent of Vernalis
existing issued ordinary share capital, full details of which were contained in a circular (with
notice of EGM) sent out to shareholders on February 24, 2005. Trading in the new shares commenced
on March 22, 2005, bringing the total number of shares in issue to 198,950,492. On March 30, 2005 Vernalis acquired the intellectual property rights, know how and associated
assets related to an emerging oncology target, Pin1, from Pintex Pharmaceuticals Inc. Pintex
received initial cash payments on signature and transfer of know how and, should a drug candidate
reach the market, the total cash liability to Pintex would be $6.5 million. 26. Related party transaction There have been no related party transactions through the year. F-36