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l Vernalis plc i s p l c Annual report and accounts 2006 A n n u a l r e p o r t a n d a c c o u n t s 2 0 0 6 Vernalis plc Annual report and accounts 2006 Contents

01 Who we are 02 Highlights 03 Chairman’s statement 04 Chief Executive’s review of operations 20 Financial review 24 Board of directors s 26 Report of the directors 29 Corporate governance 35 Remuneration report 42 Statement of directors’ t responsibilities s 43 Independent auditor’s report to the members of Vernalis plc 44 Consolidated income statement 45 Balance sheets 46 Statement of changes in c shareholders’ equity s 47 Cash flow statements 48 Notes to the financial statements 78 Shareholder information 80 Addresses and advisers e e e l r p p g s o o o r r e P P P Our employees are our Over the course of the 2007 potentially a most valuable asset as we year Vernalis has made transforming year for Vernalis work towards our goal of significant progress with the label expansion for improving patients’ lives in advancing its drug Frova ® into the short-term candidates, establishing its prevention of menstrual US commercial operations migraine as well as significant and relaunching Apokyn ® clinical news flow Vernalis plc Annual report and accounts 2006 01 Who we are

Vernalis’ strategic goal is to become a sustainable, self-funding, R&D driven speciality bio-pharmaceutical company focused on the treatment of Central Nervous System (CNS) disorders. In January of last year Vernalis established its commercial operations in North America to promote Apokyn ® and Frova ® to neurologists. Vernalis has eight product candidates progressing through clinical development and a strong research capability adding novel pre-clinical candidates. Vernalis intends to retain North American marketing rights to its development candidates which may be marketed to neurologists and to enter into out-licensing or co-promotion agreements for products in other territories or marketed to different physician groups.

CAUTIONARY STATEMENT This annual report has been prepared for, and only for, the members of the Company as a body and no other persons.This annual report contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this annual report and the Company undertakes no obligation to update these forward -looking statements. Nothing in this annual report should be construed as a profit forecast. Vernalis plc Annual report and accounts 2006 02 Highlights in 2006

• Established US commercial organisation • Launched Apokyn ® • Frova ® supplemental New Drug Application (sNDA) for short-term prevention of menstrual migraine (MM) accepted for review by the US Food and Drug Administration (FDA) • Progressed portfolio and initiated a number of key clinical trials; three of which will be reporting data in mid-2007

Significant news flow expected in 2007:

® V10153 V24343 FPDUrFAodatve foa r MM Phase II data VP3hase3II d8ata 1 Phase I data

Two marketed products Frova ® Apokyn ®

Frova ® belongs to a class of drugs called Apokyn ® is the only acute, intermittent triptans. It is approved as an acute oral therapy available in the US for the treatment treatment for migraine headache and of “off” episodes (re-emergence of is distinguished from other triptans by Parkinson’s disease symptoms) associated its long half-life. with advanced Parkinson’s disease. Vernalis co-promotes Frova ® in the US Designated an Orphan Drug to treat alongside Endo Pharmaceuticals and approximately 112,000 Parkinson’s it is marketed in Europe by Menarini. disease patients in the US. Frova ® sNDA for short-term prevention Relaunched in the US in February 2006 by of MM accepted for FDA review – response Vernalis’ own North American sales force. expected 19 August 2007 ( PDUFA date) . Several new marketing initiatives to make Two highly statistically significant efficacy physicians and patients aware of the studies meeting all primary and secondary benefits of Apokyn ® at optimal dosing levels. end points. The APOKYN ® Circle of Care TM which Significance for Vernalis: includes a nurse call centre, home • $40 million milestone from Endo healthcare visits and a pilot nurse on MM approval. clinical liaison programme. • Large patient population – 12 million women suffer from MM in the US. Vernalis plc Annual report and accounts 2006 03 Chairman’s statement

A key achievement was the successful completion of a second Phase III pivotal study of the long-acting triptan, Frova ®, for the treatment of MM. Following receipt of these results, Vernalis’ partner, Endo Pharmaceuticals, submitted a supplementary New Drug Application (sNDA) in July 2006, which was subsequently accepted for filing by the FDA. The outcome of the FDA review of this sNDA is now expected during the third quarter of 2007.

In addition to Frova ® and the recently relaunched Apokyn ®, Vernalis has eight product candidates now progressing through clinical development, a number of which are expected to report clinical milestones during this year. Several of these are being pursued with major collaborators, which include Novartis and Biogen Idec. Others are retained in entirety by Vernalis including our innovative thrombolytic product for ischaemic stroke, V10153, which is undergoing initial Peter Fellner proof-of-concept Phase II studies, and the product V1512, shortly to enter Chairman Phase III studies in Parkinson’s disease.

Vernalis continued to grow and reinforce its US commercial organisation during 2006. The Vernalis sales force is currently co-promoting Frova ® with Endo Pharmaceuticals for the treatment of acute migraine. It is also selling Apokyn ® to treat movement disorders in late-stage Parkinson’s disease. In time we believe it will be an important distributor channel for our own and acquired neurology drugs.

In this connection, in order to further strengthen the level of US commercial experience within our Board, we appointed Ian Clark as a non-executive “Throughout 2006 Director in January 2007. He currently serves as Executive VP, Commercial, at Genentech’s South San Francisco headquarters. His extensive experience Vernalis continued to of the pharmaceutical and biotechnology sectors will be invaluable to Vernalis advance its core strategy as it seeks to grow its US operations. In summary, Vernalis continued to make strong progress during 2006. of building a leading Important advances were achieved both with its product portfolio, and with the expansion and development of the North American sales and marketing R&D-based speciality organisation. 2007 will be a year of significant news flow for the Company bio-pharmaceutical as it progresses its promising pipeline of drug candidates. business focused Finally, on behalf of the Board, I would like to thank again this year our shareholders for their continued support, and our employees for their upon innovative consistent commitment throughout the year. new treatments for Peter Fellner neurological disorders.” Chairman Vernalis plc Annual report and accounts 2006 04 Chief Executive’s review of operations

Twelve months ago, I reported on Vernalis’ accomplishments in building a strong foundation on which to grow the top-line of the business that would allow us to invest in our pipeline and deliver a constant stream of products onto the market. Let me remind you that 2005 was a year in which we actively bolstered our marketed products and late-stage pipeline through M&A and in -licensing. In the past year, we assimilated these assets and launched a strong North American sales and marketing organisation that currently sells our two marketed products to specialist neurologists. We also continued to advance our pipeline of products through the clinic, as well as progressing an exciting obesity programme from pre-clinical research into Phase I clinical testing. With the strong progress that we achieved in 2006, we are making good progress on our long-term goal of becoming a sustainable, self-funding Company, providing valuable returns for you, our shareholders. Simon Sturge Chief Executive Officer Areas of expertise Vernalis is primarily focused on treating Central Nervous System (CNS) disorders, with a franchise of product candidates targeted at Parkinson’s disease and pain management. In addition, we have a number of valuable assets in other therapeutic categories, including stroke, which is an area of significant unmet medical need and one in which there are very few effective treatment options. We have a strong research organisation that continues to provide novel compounds in CNS and oncology for Vernalis and its partners to develop.

Commercial organisation “Vernalis’ strategic Vernalis’ North American sales force, launched in January 2006, markets the Company’s two products, Frova ® and Apokyn ®, and these two products are the goal is to become a key growth driver for the top-line of the business. Frova ® sales during the year remained constant; however, if we are successful in expanding the label for sustainable, self-funding, the prevention of MM, we expect to see an increase in revenues in 2007. We relaunched Apokyn ® in February 2006, and subsequently established new R&D-driven speciality marketing and patient assistance initiatives in the second half of the year to support the product. In the last quarter our sales efforts and new marketing bio-pharmaceutical initiatives resulted in a significant turnaround in both new prescriptions and company focused increased dose level, which underscores our confidence in the potential for this product and we expect Apokyn ® sales to continue to grow in 2007. on the treatment of Central Nervous System (CNS) disorders.” Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 05 continued Two marketed products Broad clinical Vernalis expects clinical portfolio data from three proof of principle studies in 2007. This provides significant potential for value creation in addition to generating partnering opportunities.

Product portfolio

Product Indication Late Pre- Phase I Phase II Phase III Market Marketing rights research clinical

® US co-promotion, milestones and Frova Acute migraine royalties End o/EU royalties – Menarini

® US co-promotion, milestones and Frova Menstrual migraine royalties End o/EU royalties – Menarini

Acute post-operative pain US profit share option V1003 Reckitt Benckiser

V3381 Neuropathic pain Worldwide

Parkinson’s disease Apokyn ® North America (advanced) Parkinson’s disease V1512 Worldwide (excl. Italy) (moderat e/ advanced)

V10153 Ischaemic stroke Worldwide

Parkinson’s disease V2006 (mild/moderate) US co-promotion Biogen Idec

MMPI Multiple sclerosis Milestones and royalties – Serono

V24343 Obesity Worldwide

Hsp90 inhib. Cancer IV Milestones and royalties – Novartis

Hsp90 inhib. Cancer Oral Milestones and royalties – Novartis Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 06 continued Vernalis staff Vernalis’ employees are our most valuable asset as we work towards our goal of improving patients’ lives. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 07 continued Patients 12 million women in the US suffer from Menstrual Migraine (MM). Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 08 continued Financial Vernalis is a speciality bio-pharmaceutical company with £37.6 million of cash as of the end of 2006 and the prospect of a significant milestone if Frova ® is approved for the MM indication. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 09 continued Pipeline Vernalis has two marketed products and eight product candidates across all phases of development. As these product candidates progress through the clinic, the Company expects significant news flow from three proof of principle studies over the course of 2007, as well as the potential label expansion for Frova ® for short-term prevention of MM Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 10 continued Apokyn ® 2006 was a year of significant investment, both in our US sales and marketing operation, and in progressing our clinical portfolio. In the US we launched a number of new marketing initiatives for Apokyn ®and we expect sales to grow in 2007. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 11 continued Frova ® We eagerly await the potential label expansion of Frova ® for MM and expect to see the benefit from our investment in the development portfolio with a number of programmes finishing clinical trials and significant news flow in the middle of the year. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 12 continued Chief Executive’s review of operations

Future prospects Vernalis initiated a number of clinical trials during 2006 and, as a result, we expect 2007 to be a period of significant news flow. We have several important clinical milestones over the course of the year and expect to announce data from a number of trials. One of the most significant is the result of our Phase II trial of V10153 for the treatment of stroke. We have already completed one Phase II trial that demonstrated that V10153 was effective at dissolving clots in heart attack patients and we now await the read-out of the Phase II trial in stroke patients. The only currently approved therapy is recombinant tissue Plasminogen Activator (rtPA), which is limited in its usage since it must be administered within the first three hours after a stroke has occurred. The goal of the current V10153 Phase II trial is to assess whether our product can safely benefit patients who have experienced an acute ischaemic stroke if it is administered up to nine hours after the stroke has occurred. In addition to the trial in stroke, we will present data from a Phase II trial of V3381 for the treatment of neuropathic pain, a Phase I study of V24343, a novel treatment for obesity that originated from Vernalis’ own drug discovery platform, as well as a bridging pharmacokinetic study of V1512 for the treatment of Parkinson’s disease.

Whilst the data from these trials is significant for Vernalis’ long-term success, the most important near-term milestone is the Frova ® PDUFA date in August. We have worked hard over the past four years to build a robust data package to submit to the US Food and Drug Administration (FDA) in order to expand Frova ®’s label for the short-term prevention of MM. If successful, Frova ® will be the only triptan approved for this indication. With 12 million women estimated to suffer from MM in the US alone, the potential market opportunity is significant. Upon approval, Vernalis will receive a $40 million milestone payment from its partner, Endo Pharmaceuticals.

You will see that we have highlighted in our annual report some principal measures, or Key Performance Indicators (KPIs), that our Board uses to assess the development, performance and position of the business. While these KPIs help illustrate the progress of our development pipeline and Vernalis’ financial strength, it is important to understand that precise forecasts of the outcome and impact of our business activities are difficult to determine due to the nature of our business and industry. We have also listed key factors that could cause our actual results to differ materially from those reflected in our forward-looking statements.

Fair review of the business Vernalis’ strategic goal is to become a sustainable, self-funding, R&D driven speciality bio-pharmaceutical company focused on the treatment of CNS disorders. In January of last year, Vernalis established its commercial operations in North America to promote Apokyn ® and Frova ® to neurologists. Vernalis has eight product candidates progressing through clinical development and a strong research capability adding novel pre-clinical candidates. Vernalis intends to retain North American marketing rights to its development candidates which may be marketed to neurologists and to enter into out-licensing or co -promotion agreements for products in other territories or marketed to different physician groups. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 13 continued

Marketed products Apokyn ® – Advanced Parkinson’s Disease Apokyn ® is the only acute, intermittent therapy available in the US for the treatment of “off” episodes (re -emergence of Parkinson’s disease symptoms) associated with advanced Parkinson’s disease. It is used as an adjunct to other Parkinson’s disease medications and is administered, as needed, by means of an injector pen to treat periods of poor mobility in people with advanced disease.

In April 2004, Apokyn ® received FDA approval with Orphan Drug designation to treat advanced Parkinson’s disease patients in the US who experience the severe “on/off” motor fluctuations that are unresponsive to oral Parkinson’s disease therapies. Approximately 112,000 patients with Parkinson’s disease experience such “off” episodes despite optimal oral Parkinson’s disease therapy. Apokyn ® was launched in the US in July 2004 and Vernalis acquired the North American commercial rights from Mylan in November 2005.

Mylan stopped promoting Apokyn ® in July 2005. When Vernalis re-launched this promotion-sensitive product in February 2006, new prescriptions had ® Apokyn is the only diminished to almost zero. Apokyn ® is sensitive to promotion due to the need to clarify appropriate patient candidates and to assist physicians and their acute, intermittent staff with the Apokyn ® initiation and titration process. Proper initiation and titration is important to ensure that each patient is individually titrated to therapy available in the their optimal dose and to help minimise the risk of first dose side effects.

US for the treatment Gross sales for Apokyn ® for the full year 2006 amount to $5.6 million of which $3.3 million were reported in the second half. The revenues were of “off” episodes marginally below previously announced guidance of around $6 million predominantly as a consequence of an under-reporting of patients who (re-emergence of had discontinued treatment during the period prior to acquisition by Vernalis. Parkinson’s disease This reporting deficit was identified in mid-2006 and a true picture of the patient population was established in the second half of 2006. The primary symptoms) associated reason for the high discontinuation rate was that a number of patients were originally titrated to a sub-optimal dose and were therefore not receiving the with advanced full clinical benefit from Apokyn ®. The resulting lower drug usage also reduced revenues. In addition, the introduction of a sampling programme for new Parkinson’s disease. patient initiations, while key for establishing patients on an appropriate dose regime, has had the short-term impact of delaying initiation prescriptions. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 14 continued Chief Executive’s review of operations

During H2 2006, Vernalis established several marketing initiatives to make physicians and patients aware of the benefits of Apokyn ® at optimal dosing levels and help reduce the barriers that prevent patients from starting to use the product. These efforts include a comprehensive support programme (The APOKYN ® Circle of Care TM ) which includes a nurse call centre, home healthcare visits and a pilot clinical liaison programme where nurses assist both physicians and patients through the initiation process. These initiatives are expected to become effective over the course of the year and to improve prescription levels during 2007.

Vernalis’ US sales efforts and new marketing initiatives have already resulted in a significant turnaround in both new prescriptions and increased dose levels, which reinforces our confidence in the potential of Apokyn ® and the Company expects sales to grow in 2007.

Apokyn ® is indicated for the acute, intermittent treatment of hypomobility or “off” episodes associated with advanced Parkinson’s disease. It is used as an adjunct to other Parkinson’s disease medications. Apokyn ® is associated with severe nausea and vomiting and should be given with a concomitant antiemetic (trimethobenzamide).

Key performance indicator: Performance of Vernalis’ marketed products

Status at 1 January 2006 Vernalis introduced ● Two marketed products ● Apokyn ® a number of initiatives ● Frova ® in 2006 including a nurse Achievement during the year call centre, home ● Apokyn ® ● Relaunched product with new marketing initiatives including healthcare visits and the APOKYN ® Circle of Care™ a pilot clinical liaison ● Sales increased to $5.6 million, slightly below guidance of $6.0 million ● Frova ® programme. ● Completed trials to expand the label for the short-term prevention of MM ● sNDA accepted by the FDA

Status at 31 December 2006 Two marketed products. Label extension of Frova ® into a new indication – the short-term prevention of MM under consideration by FDA

Target for coming year Continue to seek to in-license additional marketed or late-stage development products/programmes

● Apokyn ® ● Further grow sales

● Frova ® ● Endo to launch for short-term prevention of MM if sNDA approved by FDA

® ® Frova – Acute Migraine Frova is a selective 5-H T1B/1D receptor agonist approved as an acute oral treatment for migraine headache and its associated symptoms. Frova ® belongs to the triptan class of drugs and is distinguished from other triptans by its exceptionally long half-life. Frova ® is also being developed for the short-term prevention of menstrual migraine (MM). Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 15 continued

Vernalis has licensed North American rights for Frova ® to Endo Pharmaceuticals (Endo) which reported US net sales of the product of $40.6 million for 2006 (2005: $38.1 million). Vernalis is co-promoting Frova ® in the U.S. with Endo under an arrangement that started in January 2006. Vernalis received a fixed payment of $15 million from Endo in September 2006 and from 1 January 2007 Vernalis’ return is a variable royalty, at an initial rate of 20 per cent should the label be expanded for the intermittent, short-term prevention of MM.

In Europe, frovatriptan is marketed in 13 countries by Menarini. The drug was approved throughout the then 15 member states of the European Union via the mutual recognition procedure (MRP) in January 2002. In 2006, Menarini launched frovatriptan in Slovakia, Finland, Czech Republic, Slovenia, Portugal, Switzerland and all seven Central American countries. Menarini also launched the drug in Turkey in March 2007, and applied for marketing authorisation in Russia, with approval expected 1H 2007. Importantly, Menarini received reimbursement and pricing approval for frovatriptan in France and launched the product in April 2007. Vernalis revenues for 2006 from Menarini amounted to £3.6 million (£3.0 million in 2005).

Development portfolio Pain franchise Frova ® – Prevention of Menstrual Migraine (MM) Vernalis has completed a series of studies aimed at obtaining approval for Frova ® for the intermittent, short-term prevention of MM and Vernalis’ partner, Endo, filed a Supplemental New Drug Application (sNDA) in the US with the FDA in July 2006. The FDA has accepted this submission and has now informed us that it will provide its response by 19 August 2007 (the PDUFA date). Vernalis originally expected a response from the FDA by 19 May 2007; however, in March 2006 the agency requested a three month extension. We noted at this time that the FDA’s request related solely to the presentation of the data and not its content and that no additional data had been requested. If this application is successful a $40 million milestone is due to Vernalis from Endo who has reserved the right to pay $20 million in cash and retain the remaining $20 million as partial payment due on its outstanding loan to Vernalis.

The Frova ® sNDA is supported by data from four clinical studies (two double- blind, placebo-controlled efficacy studies, an open-label safety study and a pharmacokinetic study). The results from three of these studies were reported in prior years, with the positive results from the second efficacy study, the last of the four studies, being reported in May 2006.

In 2H 2007, Vernalis’ European partner, Menarini, plans to submit an application to extend the current indication to include prevention of MM throughout Europe under the mutual recognition procedure with France acting as the reference member state. If successful it would lead to an extension of the existing acute treatment indication to include MM in 25 EU countries.

V3381 – Neuropathic Pain V3381 is a novel drug candidate that was licensed from Chiesi Farmaceutici (Chiesi) which is being developed as a treatment for neuropathic pain. It has a dual mechanism of action (an NMDA antagonist and an MAO-A inhibitor) which gives it the potential to modulate pain at both central and peripheral sites.

In August 2006 Vernalis started a Phase IIa trial of V3381 in patients with neuropathic pain resulting from long-standing diabetes. The randomised, double-blind, placebo-controlled crossover study is designed to assess safety, pharmacokinetics and preliminary efficacy of repeat dosing of V3381, with efficacy being assessed on a numerical point pain rating scale recorded using daily diaries. The trial, which is being conducted in the US and Canada, will include approximately 30 patients and is planned to complete in mid-2007. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 16 continued Chief Executive’s review of operations

Key performance indicator: Licensed/partnered product candidates Status at 1 January 2006 ● One product in Phase II (V1003) ● Two products in Phase I (V2006, MMPI) ● One product pre-clinical (Hsp90 – IV)

Achievement during the year ● V1003 – Achieved primary end point in Phase II. Future development uncertain – under discussion with Reckitt Benckiser ● V2006 – Transferred Phase I package of data to Biogen Idec ● MMPI – Serono completed Phase I ● Hsp90 – Novartis selected an oral follow-on to IV

Status at 31 December 2006 ● One product completed Phase II (V1003) ● One product in Phase II (V2006) ● One product completed Phase I (MMPI) ● Two Hsp90 inhibitors (IV and oral) in pre-clinical development

Target for coming year Continued progress of product candidates Expected news flow for 2007 ● Hsp90 – Novartis to start Phase I with IV compound ● V2006 – Phase II to progress ● Other product progress to be reported by partners when achieved

V1003 – Post-Operative Pain In March 2006, Vernalis completed a Phase IIa study of V1003 for the management of post-operative pain. The study achieved its primary end point of pain relief over the period of eight hours from drug administration. Despite this initial positive efficacy result, there is uncertainty surrounding the future development of V1003 as Vernalis and its partner, Reckitt Benckiser, continue to discuss the most appropriate path forwards for nasal delivery of buprenorphine.

Vernalis has two other pre-clinical programmes based on the proprietary intranasal formulation for the delivery of buprenorphine in partnership with Reckitt Benckiser; V1004 for the treatment of chronic pain and V1005 for the treatment of opiate addiction.

Neurology franchise V10153 – Ischaemic Stroke V10153 is a novel thrombolytic protein which is being developed for the treatment of acute ischaemic stroke. Ischaemic stroke is the most common type of stroke, accounting for over 80 per cent of all strokes and occurs when a blood clot forms and blocks blood flow in an artery supplying blood to a part of the brain (as distinct from a haemorrhagic stroke which is caused by bleeding). Current therapeutic options for stroke sufferers are limited since the only current approved therapy, recombinant tissue plasminogen activator (rtPA), must be administered within the first three hours after a stroke has occurred.

In late 2005 Vernalis started a multi-centre Phase II clinical study of V10153 to determine whether this novel thrombolytic can safely benefit patients who have recently experienced an acute ischaemic stroke if administered up to nine hours after the stroke has occurred. The study is designed to identify a safe and potentially efficacious dose of V10153 and is targeted to complete in 2007. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 17 continued

Vernalis has contracted the process development, scale-up and cGMP manufacturing of V10153 to Diosynth Biotechnology.

Key performance indicator: Performance of Vernalis’ proprietary product candidates Status at 1 January 2006

● Two products in Phase II (V10153, V1512 completed) ● One product in Phase I (V3381)

Achievement during the year ● V10153 – Completed manufacture of Phase III material ● V1512 – Started comparator PK study ● V3381 – Started Phase II in diabetic neuropathic pain ● V24343 – Started Phase I in mildly obese volunteers

Status at 31 December 2006 ● Three products in Phase II (V10153 and V3381 in Phase II, V1512 completed) ● One product in Phase I (V24343)

Target for coming year Continued progress of product candidates Expected news flow for 2007 ● V10153 – Complete Phase II in stroke. ● If positive explore out-licensing opportunities ● V3381 – Complete Phase II in neuropathic pain ● If positive explore out-licensing opportunities ● V24343 – Complete Phase I in mildly obese volunteers ● If positive explore out-licensing opportunities ● V1512 – Initiate Phase III in Parkinson’s disease

V1512 – Parkinson’s Disease V1512 combines Levodopa (L-dopa) methylester, an enhanced soluble form of L-dopa, with Carbidopa that was licensed from Chiesi. V1512 is fully soluble in water and is presented in a patented, effervescent formulation as a potential novel treatment for Parkinson’s disease. L-dopa has been the cornerstone of Parkinson’s disease treatment for four decades; however, after many years of treatment it may become less effective, and other problems such as motor complications and unwanted movements, known as dyskinesias, can emerge. There is evidence that some of these problems, such as a delay in the onset of effect of some L-dopa doses during the day, may be due to erratic absorption of the drug into the bloodstream caused by impaired functioning of the stomach and small intestine. Normal gut motility, called peristalsis, is essential for passage of food and solid dose form drugs (tablets and capsules) through the stomach to the parts of the intestine where absorption into the bloodstream takes place. V1512, being fully soluble in water, is administered in liquid form and therefore would be less susceptible to impaired gut motility as it could quickly pass through to the small intestine assisted only by gravity.

In November 2006, Vernalis started a bridging study to evaluate the pharmacokinetics and efficacy of V1512 in patients with Parkinson’s disease comparing the plasma profiles of the drug following repeated doses, with those of Sinemet ®, the most widely-prescribed form of L-dopa and Carbidopa combination in the US. Regulatory submissions will be targeted for North America and Europe. It is intended to submit to the FDA for a Special Protocol Assessment (SPA) prior to starting the Phase III programme in mid-2007. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 18 continued Chief Executive’s review of operations

Under Section 119(a) of the US FDA Modernization Act the SPA process allows a protocol to be adequately assessed by the FDA in terms of study size and design in order to determine whether the study design is adequate to form the basis of an efficacy claim in the proposed indication. A written agreement on the protocol, which occurs before the study commences, becomes part of the administrative record.

V2006 – Parkinson’s Disease V2006 is an adenosine A 2A receptor antagonist in development as a novel treatment for Parkinson’s disease. A2A receptor antagonists act indirectly on dopaminergic systems and may possess advantages over conventional dopaminergic therapies.

Vernalis has completed a suite of Phase I trials and its partner, Biogen Idec, will start patient dosing in a Phase II trial of V2006 imminently. Vernalis received a milestone payment of $3 million at the end of 2006 in recognition of the start of the Phase II programme. Vernalis has an option to co-promote products arising out of this collaboration in the US.

Apomorphine – Parkinson’s Disease In November 2005, Vernalis entered into a collaboration with Britannia Pharmaceuticals Limited (Britannia) to explore the development of new formulations of apomorphine for the US market. Vernalis has rights to Britannia’s technology to develop a continuous sub- cutaneous infusion of apomorphine and rights to negotiate terms for a nasal powder formulation of apomorphine, which is currently in clinical development in Europe.

Other programmes V24343 – Obesity In December 2006 Vernalis started a Phase I trial of V24343, a cannabinoid type 1 receptor (CB 1) antagonist, as a potential treatment for obesity, type II diabetes and related disorders. CB 1 receptors are widely expressed both in peripheral tissues involved in lipid and glucose metabolism and in the brain regions controlling appetite. Blockade of these receptors by selective CB 1 receptor antagonists is thought to cause weight loss and help attenuate risk factors for obesity related disorders such as cardiovascular disease and type II diabetes. The efficacy of CB 1 receptor antagonists in the treatment of obesity, type II diabetes and associated disorders has been clinically demonstrated in recent trials of the Sanofi Aventis product, Rimonabant.

The Phase I double-blind, randomised, placebo-controlled study in overweight and mildly obese volunteers is being conducted in two parts; a single ascending dose followed by a multiple ascending doses and is expected to complete in mid-2007. The primary objectives of the Phase I programme are to evaluate the safety, tolerability and pharmacokinetics of single and multiple doses of V24343. Overweight and mildly obese subjects are being recruited into the trial to ensure that the evaluation of V24343 is carried out in a clinically relevant population.

Hsp90 inhibitors – Oncology Inhibition of Hsp90 is believed to have significant potential in the treatment of a broad range of cancers. Vernalis has a research collaboration with Novartis utilising Vernalis’ structure-based design technology to identify potent and specific inhibitors of this novel drug target for use against various cancers. The two companies are conducting a joint research programme under which Novartis provides research funding to Vernalis for an initial three-year period from August 2004. In addition, Novartis is responsible for funding and conducting the development of product candidates as well as for commercialisation.

In December 2006, Vernalis announced that Novartis had selected a second clinical development candidate; an oral follow on to an intra-venous (IV) compound, triggering a milestone payment of $1.5 million to Vernalis. Novartis expects to start a Phase I clinical trial with the IV compound in mid-2007. Vernalis plc Chief Executive’s review of operations Annual report and accounts 2006 19 continued

Research Vernalis has a strong research capability focused on the discovery of drug development candidates to treat CNS disorders and cancer. The current therapeutic focus in CNS is pain and Parkinson’s disease, where, for the latter, both symptomatic and disease modifying strategies are being pursued. Emphasis is placed on drug targets for which there is both strong evidence of therapeutic relevance and which are amenable to the Group’s drug candidate discovery technology. Where appropriate, Vernalis seeks collaborations in this area, an example of which is its adenosine A 2A receptor antagonist programme partnered with Biogen Idec. In cancer the emphasis is on targets that are capable of having pleiotropic effects on cancer cells, i.e. single targets that can modulate the action of multiple growth promoting pathways used by cancer cells. With this approach it is hoped to produce effective treatments by preventing a tumour’s survival through the use of a different complementary growth pathway. This pleiotropic approach to targets is illustrated by the Group’s Hsp90 programme partnered with Novartis.

Vernalis uses and develops structure-based drug discovery methods for its programmes in order to increase the quality and discovery rate of drug candidate compounds. The Group’s approach is to generate as much 3-dimensional protein-molecule structural information as possible in the hit identification phase using virtual screening, a distinctive fragment (small parts of molecules) based discovery process, and molecular modelling. In turn, this structural information is used to design novel hit compounds, often combining key interaction features from a number of fragments and compounds together. These hits are then optimised using structure-guided medicinal chemistry. Drug candidate compounds emerging from this discovery process in both therapeutic areas are regularly reviewed and considered for partnering or internal development.

Simon Sturge Chief Executive Officer

Principal risks and uncertainties facing the business – Risk factors 1 Vernalis is a pharmaceutical Company with a small portfolio of products. Success or failure with individual products could have a significant impact on the share price. Prospective investors and shareholders should therefore be aware that any investment in the Company involves a high degree of risk and should be made only by those with the necessary expertise to appraise the investment. 2 For the foreseeable future, the Group will be highly dependent on the success of its marketed products, Frova ® and Apokyn ®. 3 The Group may experience delay or failure in achieving approval for Frova ® in the MM indication. 4 The Group may be unable to repay Endo’s $50 million loan by August 2009 particularly if approval for Frova ® in the MM indication is not obtained. 5 While the Group has sufficient working capital to fund its operations for at least the next twelve months, additional funding is likely to be required to give the Group time to reach profitability. If the Group is unable to raise additional funds, it may have to curtail its operations. 6 The Group may be unable to retain certain important employees which could weaken the Group’s scientific and management capabilities. 7 The Group may be unable to secure rights to additional products for promotion by its US sales force. 8 More drugs fail in development than progress to market. The Group may be unable to bring any of the drug candidates it is developing to market and the drugs that the Group does bring to market may not be commercially successful. 9 There can be no assurance that the Group’s products will receive and maintain regulatory approval. 10 The Group may be unable to successfully establish and protect its intellectual property which is significant to the Group’s competitive position. 11 Foreign exchange rate fluctuations may adversely affect the Group’s results of operations and financial condition, particularly as a significant element its costs and revenues are denominated in US dollars. 12 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. 13 The Group is dependent on single sources of supply for its compounds in research and development and for Apokyn ® and Frova ® and some of their components. 14 The Group’s suppliers may encounter unexpected difficulties in the design and construction of manufacturing processes and the scale-up of production to viable commercial levels. 15 The Group may be unable to secure adequate insurance at an acceptable cost. 16 Competition regulation may have an impact on the way the Group conducts its business and its dealings with private counterparties and government collaborators. 17 The Group may face product liability claims. Vernalis plc Annual report and accounts 2006 20 Financial review

Income statement Revenue was £16.3 million (2005: £14.1 million) and comprised £2.6 million (2005: £0.5 million) in respect of Apokyn ®, £3.9 million (2005: £3.0 million) in respect of Frova ®, £9.7 million (2005: £10.4 million) in respect of revenues recognised under collaboration and similar agreements and other revenue of £0.1 million (2005: £0.2 million).

The rights to Apokyn ® were acquired from Mylan in November 2005. Revenues for 2006 amounted to gross sales of $5.6 million less provisions of $0.8 million for potential returns, rebates and allowances.

The Frova ® revenues comprised £3.6 million (2005: £3.0 million) from Europe where the product is promoted by Menarini, and the release of a provision of Tony Weir £0.3 million (2005: £nil) relating to North American returns and rebates in Chief Financial Officer respect of the period prior to the licensing agreement with Endo. During 2006, an anniversary payment of $15 million was received from Endo, part of which is accounted for within collaboration income. The variable royalty on North American sales of Frova ® commenced on 1 January 2007.

Revenues from collaborations and similar agreements included £3.2 million (2005: £3.2 million) in respect of Frova ®, including recognition of a proportion of the $15 million anniversary payment from Endo that was received in September 2006. In addition, £1.5 million (2005: £Nil) was recognised following initiation of the V2006 Phase II programme by Biogen Idec and consequent payment of $3 million to Vernalis. Other collaboration income ® Growing sales of Frova amounted to £5.1 million (2005: £7.2 million) and related to the release ® of deferred income of previously received initial payments from Biogen Idec and Apokyn . and Novartis and the funding from Endo in respect of the US co-promotion of Frova ®.

Cost of sales increased to £6.8 million (2005: £5.0 million). This comprised Revenues £0.5 million (2005: £0.1 million) in respect of Apokyn ®, reflecting product US$m costs and royalties payable to Britannia, £1.2 million (2005: £1.2 million) in respect of European sales of Frova ® and £5.1 million (2005: £3.7 million) of other charges, principally amortisation of the acquisition costs of Frova ® and Apokyn ® incurred in prior years.

● Apokyn® ● Frova® Other income of £0.6 million (2005: £nil) results from compensation received ● Collaboration for damaged inventory of Frova ®. ● Other Research and development expenditure increased to £38.9 million (2005: £26.5 million). The 2006 expenditure includes an impairment charge of £9.8 million in respect of V1003. The valuation of V1003 has been reduced to zero due to the uncertainty surrounding its future development. Excluding this amount, research and development expenditure increased to £29.1 million 2005 2006 (2005: £26.5 million) and comprised £17.5 million (2005: £17.3 million) on internally funded R&D and £11.6 million (2005: £9.2 million) on external costs associated with development of the product portfolio. The increase in external costs is due to investment across the broader portfolio, particularly V1512 and V3381, and manufacture of Phase III material for V10153; this was offset by reduced costs, compared with 2005, on the clinical development of Frova ® for the short-term prevention of MM.

Sales and marketing expenditure increased to £9.0 million (2005: £1.6 million) reflecting the launch of Apokyn ® in February 2006 and the full operation of the US commercial business.

General and administrative expenditure was £12.2 million (2005: £14.4 million) and comprised goodwill impairment of £0.7 million (2005: £6.4 million), vacant lease provisions of £1.2 million (2005: £Nil) and other expenditure of £10.3 million (2005: £8.0 million). The increase in other expenditure was due to the overhead costs of operating in the USA and Canada (£2.1 million), and increases in professional fees (£0.6 million). Vernalis plc Financial review Annual report and accounts 2006 21 continued

The operating loss before exceptional items was £38.3 million (2005: £26.9 million). The total operating loss for the year was £50.0 million (2005: £33.3 million).

Interest receivable and similar income increased to £8.1 million (2005: £4.4 million). Bank interest was £2.3 million (2005: £2.0 million) with the increase due to both slightly higher average cash balances during the year and slightly higher interest rates. Exchange gains increased to £5.7 million (2005: £1.8 million) and relates principally to the retranslation of the dollar- dominated loan from Endo (£3.9 million) and retranslation of the dollar- dominated contingent deferred consideration that may become due pursuant to the acquisition of Cita (£1.4 million). These amounts arise due to the strengthening of sterling from $1.72 at the beginning of the year to $1.96 at the end of the year. The exchange gains and losses are not matched under hedge accounting because, in the case of the loan from Endo, it is expected to be repaid out of future dollar receipts from Endo and, in the case of the contingent deferred consideration, it is not certain when or what amount will be due. In 2005, an implicit interest receipt of £0.5 million was recorded relating to the fair value accounting for the $15 million anniversary payment from Endo in September 2006.

Interest payable and similar charges reduced to £3.6 million (2005: £5.5 million). The reduction was due to lower exchange losses of £1.3 million (2005: £3.7 million). The principal exchange loss recorded in 2005 related to the loan from Endo and occurred due to the weakening of sterling against the Investing for the future dollar in 2005. Loan interest was unchanged at £1.5 million. Charges relating to the fair value accounting for deferred obligations increased to £0.8 million through R&D, sales (2005: £0.3 million). and marketing. The tax credit of £3.1 million (2005: £1.6 million) represents amounts that are expected to be received in the UK and Canada under current legislation on research and development tax credits for small and medium sized companies.

R&D 29.1 The loss for the year ended 31 December 2006 before exceptional items was spend £m 26.5 £30.7 million (2005: £26.4 million). The increase is due to higher sales and marketing costs resulting from the acquisition of Apokyn ® and establishment of the US commercial organisation. The total loss for the year was £42.4 million (2005: £32.8 million).

Balance sheet Non-current assets decreased to £71.6 million (2005: £91.7 million). The principal factor was the reduction of intangible assets to £66.4 million (2005: £84.3 million). This reduction resulted from the regular amortisation charge of £4.7 million, the impairment in respect of V1003 of £9.8 million and an 2005 2006 exchange adjustment on Canadian intangibles of £3.4 million. In addition, goodwill reduced to £3.4 million (2005: £4.9 million) as a result of adjustment to the price paid to acquire Cita relating to the tax credits receivable and the likely timing of the satisfaction of the contingent deferred consideration.

Sales and marketing 9 Current assets reduced to £50.8 million (2005: £93.1 million). Trade and spend £m other receivables decreased to £12.3 million (2005: £24.0 million). Trade receivables increased to £3.1 million (2005: £2.3 million) due principally to the amounts due in respect of sales of Apokyn ®. Research and development tax credits receivable increased to £5.0 million (2005: £4.0 million) due to the higher claim in the year, principally in respect of the Canadian operations. Other receivables decreased to £0.6 million (2005: £13.0 million). The 2005 1.6 balance included the second anniversary payment of £8.7 million from Endo, received in September 2006, and the unwinding of £3.6 million in respect of tax-assisted finance arrangements entered into by Cita prior to its acquisition by Vernalis. In addition, prepayments and accrued income decreased to 2005 2006 £3.0 million (2005: £4.2 million). Cash resources, comprising held-to- maturity financial assets of £16.1 million (2005: £28.1 million) and cash and cash equivalents of £21.5 million (2005: £40.2 million), decreased to £37.6 million (2005: £68.3 million). The reasons for the decreases are explained in the cash flow section below. Vernalis plc Financial review Annual report and accounts 2006 22 continued Financial review

Non-current liabilities were reduced to £47.8 million (2005: £69.6 million). The reduction is principally due to the classification of £14.9 million in respect of the Endo loan within current liabilities. For the purpose of classification of creditors, it is assumed that Frova ® will be approved by the FDA for the short- term prevention of MM during 2007. This event would trigger a payment of $40 million from Endo to Vernalis. Endo has the right to withhold 50 per cent of this payment, together with 50 per cent of any royalty payments, and use them to reduce the balance outstanding on the loan. In addition, following recognition of another year’s deferred revenue in the income statement, £4.5 million of deferred income has been transferred from non-current to current liabilities.

Current liabilities increased to £36.8 million (2005: £32.3 million) with the increase due to the reclassification of £14.9 million in respect of the Endo loan within current liabilities. This was offset by a reduction of £2.6 million in trade creditors and accruals, due principally to unpaid transaction costs in 2005, a reduction of £3.6 million in respect of the Cita tax-assisted financing referred to above and a reduction of £1.2 million to the deferred consideration that could become payable pursuant to the acquisition of Cita. In addition, provisions reduced by £2.8 million due to the occupancy of part of the premises at Granta Park by Pfizer and the resolution of rebates and returns in respect of Frova ®.

Cash flow Cash resources, comprising held-to-maturity financial assets and cash and cash equivalents decreased to £37.6 million (2005: £68.3 million). The decrease in cash resources was £30.7 million (2005: £34.0 million) which comprises £31.9 million (2005: £15.8 million) utilised in the operations of the business offset by £1.6 million generated from investing activities (2005: utilisation of £18.7 million) and £0.6 million of exchange losses (2005: £0.5 million gains). The increase in the amount utilised in the operations of this business is consistent with the expenditure analysis above and principally relates to the additional costs of the US and Canadian operations, sales and marketing support for Apokyn ® and investment in the broader portfolio of development candidates. The amount generated from investments is principally interest received on financial assets and cash deposits. In 2005, the amount used in investing activities arose due to the acquisition of Apokyn ® from Mylan for $23 million, a payment of £2.8 million to GSK in respect of the royalty buy-out for Frova ® and £3.1 million of costs associated with business combinations during 2005.

Key performance indicator: Cash and liquid resources

Demonstrating Vernalis’ ability to fund the future development of its business and to deliver value to shareholders

Status At 1 January 2006 £68.3 million

Change during the year £30.7 million

Status at 31 December 2006 £37.6 million

Target for coming year If Frova ® approved for MM indication cash resources expected to fund operations for approximately two years Vernalis plc Financial review Annual report and accounts 2006 23 continued

Outlook for 2007 The potential approval of Frova ® for the short-term prevention of MM is the most significant factor affecting the financial position of the Company. The FDA has indicated it will provide its response to the Company’s sNDA submission by 19 August 2007 (PDUFA date). If this application is successful, a $40 million milestone is due to Vernalis from Endo, who has reserved the right to pay $20 million in cash and retain the remaining $20 million as partial payment due on its outstanding loan to Vernalis.

Vernalis’ variable royalty on Frova ® sales in North America commenced on 1 January 2007 and Apokyn ® revenues are expected to increase in 2007. There is also the potential to generate income from new collaborative arrangements for V10153, V3381 and V24343 if the ongoing trials with these products, all of which are expected to complete in the summer, are positive.

Key performance indicator: Share price

Status at 1 January 2006 61.0 pence

Change during the year

160

120 0 0 1 o t 80 d e s a b e R 40

0 Dec Jan Feb March April May June July Aug Sep Oct Nov Dec D 2005 2006

Vernalis FTSE Techmark Mediscience NASDAQ Biotechnology

Status at 31 December 2006 62.5 pence

Target for coming year Vernalis will continue to monitor its share price performance against the indices listed above

External development costs are expected to be similar to 2006 with the largest element of expenditure being the Phase III programmes with V1512. This Phase III programme is expected to start in the second half of the year, after the FDA has responded on the Frova ® sNDA. Internal R&D costs and general costs are expected to be at similar levels to 2006 and it is anticipated there will be a small increase to sales and marketing costs reflecting a full year’s charge in respect of infrastructure established in 2006.

Tony Weir Chief Financial Officer Vernalis plc Annual report and accounts 2006 24 Board of directors

1 1 Peter Fellner (63) ‡ Dr Fellner was appointed as Chairman in January 2003, and as executive Chairman in April 2003. He was Chairman of Celltech Group plc until its acquisition by UCB in mid-2004, having previously been Chief Executive since 1990. Before joining Celltech he was Chief Executive of Roche UK from 1986 to 1990. Prior to this he was director of the Roche UK Research Centre. Dr Fellner is also Chairman of Acambis plc and the privately-held biotechnology company Astex Therapeutics Ltd, and is a director of UCB SA, QinetiQ Group plc, Evotec AG, Bespak plc and Isis Innovation Ltd. He is also a member of the Medical Research Council.

2 Simon Sturge (48) ‡ Mr Sturge was appointed to the Board as Chief Executive Officer in April 2003. 2 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.

3 Tony Weir (46) Mr Weir was promoted to the Board as Finance Director in April 1999, with responsibility for finance, corporate communications, facilities and IT, having 3 previously joined the Company in 1990 as Chief Accountant and Company Secretary. Following the combinations with RiboTargets and Vernalis Group plc he continues as Chief Financial Officer. Mr Weir is a non-executive director of Biocompatibles International Plc. He 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.

4 John Hutchison (51) Dr Hutchison was appointed as Development Director on 1 September 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 4 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 16 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.

5 John Slater (54) Mr Slater was appointed to the Board in November 2004 as General Counsel 5 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. Vernalis plc Board of directors Annual report and accounts 2006 25

6 6 George Kennedy (66) * † ‡ Mr Kennedy was appointed as Deputy Chairman and Senior Independent Director on 1 September 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 Chairman of Eschmann Holdings Limited, a manufacturer of medical equipment; Chairman of E2V Technologies plc; Deputy Chairman of Spacelabs Healthcare Inc and non-executive director of Bespak Plc and Isotron PLC. His previous appointments include non-executive Chairman of Carclo PLC; Chairman of the Inprint Group, a privately-held specialist printing company and from August 2000 to December 2003 he was Chairman of the Trade Advisory Group for Africa and the Middle East. He was 7 awarded a CBE in 1997 for services to the healthcare industry and exports.

7 Carol Ferguson (60) * † Ms Ferguson was appointed as a non-executive director on 1 September 2003. She joined the Board of Vernalis Group plc as a non-executive director in May 2002. She is a former partner and lead oil analyst at stockbrokers Wood Mackenzie, and was Finance Director of a textiles company. She is currently non-executive director and Chairman of the Audit Committees of Ardana plc, Gartmore Smaller Companies Investment Trust, Merrill Lynch Greater Europe Investment Trust and the Association of Investment Trust Companies where she is also a Deputy Chairman. She is also non-executive director of Monks Investment Trust and the Chartered Accountants Compensation Scheme. She is a graduate of St Andrews University 8 and a member of the Institute of Chartered Accountants of Scotland.

8 Peter Read (68) * † ‡ Dr Read was appointed as a non-executive director on 1 September 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. In addition, until December 2006 he was a member of the South East of England Development Agency. He is a Fellow of the Royal College of Physicians and of the Faculty of Pharmaceutical Medicine. In January 2000 he was awarded a CBE for services to the pharmaceutical industry. 9 9 Allan Baxter (57) * † Dr Baxter was appointed as a non-executive director on 19 May 2004. He is Senior Vice President of Medicines Development at GlaxoSmithKline with responsibility for GlaxoSmithKline’s worldwide late stage development effort, responsible for life cycle management of Marketed Medicines from the time they have demonstrated clinical proof-of-concept.

10 Ian Clark (46) Ian Clark was appointed as a non-executive director on 1 January 2007. He currently serves as Executive Vice President, Commercial at Genentech, and is responsible for leading their commercial organisation, including the Sales, Marketing, Managed Care, Market Development, and Commercial Operations 10 functions. Before joining Genentech in 2004, he served as president of Novartis Canada, overseeing all of the company’s country operations. Before assuming his post in Canada, he served as Chief Operating Officer for Novartis in the UK. Prior to joining Novartis in 1999, Ian worked in Vice Presidential roles in sales and marketing for Sanofi-Aventis and Ivax in the UK and Eastern Europe. He received a Bachelor of Science degree in Biological Sciences from Southampton University.

Board changes During the year, Mr Merrifield retired following the Annual General Meeting on 24 May 2006. Mr Clark was appointed as non-executive director on 1 January 2007.

* Audit Committee † Remuneration Committee ‡ Nominations and Corporate Governance Committee Vernalis plc Annual report and accounts 2006 26 Report of the directors

The directors are pleased to present their annual report on the affairs of the Group, together with the financial statements and auditor’s report, for the year ended 31 December 2006. The remuneration report can be found on pages 35 to 41 and the corporate governance report, including the corporate social responsibility statement, can be found on pages 29 to 34. Business review A review of the development and performance of the Group, including important events, progress during the year, the financial performance during the year, and likely future developments, can be found in the Chairman’s statement and the Chief Executive’s review and the financial review of operations on pages 3 to 23. The principal risks and uncertainties facing the Group can be found on page 19 and key performance indicators relating to the performance of the Group can be found on pages 14 to 23, all of which are incorporated in the director’s report by reference. Principal activities Vernalis is a speciality bio-pharmaceutical company primarily focused on drugs for the treatment of CNS disorders. It has two marketed products and a strong pipeline of clinical drug candidates and research programmes. For further details regarding the Group’s activities, please refer to the Chairman’s statement and Chief Executive’s review of operations. Key events Key events during the past year are referred to in the Chairman’s statement and the Chief Executive’s review of operations. These events include the following:

G On 24 January Vernalis announced the launch of its United States speciality neurology sales force. This team is promoting Vernalis’ Parkinson’s disease drug Apokyn ®, as well as co-promoting the Company’s migraine drug, Frova ®, alongside Endo Pharmaceuticals.

G On 16 March Vernalis announced positive results of a Phase IIa study of V1003, a novel proprietary intranasal formulation of buprenorphine for the management of post-operative pain.

G On 8 May Vernalis announced that Frova ® had met its primary endpoint in a second Phase III study for the prevention of MM.

G On 19 July Vernalis announced that along with its partner, Endo Pharmaceuticals, they had filed the supplemental NDA (sNDA) for Frova ® in order to expand the label for the short-term prevention of MM.

G On 28 July Vernalis announced that it had made application to the UK Listing Authority and to the London Stock Exchange for 1,837,271 Ordinary Shares of 5 pence each to be admitted to the Official List as part of the consideration for the acquisition of Ionix Pharmaceuticals Limited which was completed in July 2005.

G On 3 August Vernalis started a Phase IIa trial of V3381 in diabetic neuropathic pain.

G On 20 September Vernalis announced that the FDA had accepted the sNDA filing of Frova ® for the short-term prevention of MM.

G On 20 November Vernalis announced that its partner, Novartis, had selected a second compound as a preclinical development candidate under the joint research and development collaboration for the Hsp90 oncology target.

G On 11 December Vernalis initiated a phase I trial of V24343, a new approach to treating obesity and related disorders including Type II diabetes. Results and dividends The revenue of the Group during the year ended 31 December 2006 was £16,327,000 (12 months ended 31 December 2005: £14,131,000). The loss after taxation during the year ended 31 December 2006 amounted to £42,431,000 (12 months ended 31 December 2005: £32,848,000). The directors do not recommend the payment of a dividend (2005: nil). Important events since the year end On 16 March Vernalis announced the FDA had requested a three-month extension of the PDUFA date for Frova ® sNDA. Future developments The future developments of the Company are described in the Chairman’s statement, the Chief Executive’s review of operations and the Financial review. Vernalis plc Report of the directors Annual report and accounts 2006 27 continued

Substantial shareholdings At 30 March 2007, the directors had been notified of the following disclosable holdings representing 3 per cent, or more, of the voting rights of the issued share capital of the Company.

Shareholder having a major interest Number of shares held % of voting rights Invesco Perpetual 87,911,573 28.06 Apax Partners & Co Limited 28,752,106 9.18 Aberforth Partners 18,049,226 5.76 Jupiter Asset Management Limited 15,674,791 5.00 Hunter Hall Investment Management 11,972,079 3.82 Legal & General Investment Management Limited 11,011,947 3.51 AXA (Institutional Group) 9,448,820 3.02

Directors The directors of the Company who served during the year were: Executive Dr P J Fellner (Executive Chairman), Mr S J Sturge (Chief Executive Officer), Dr J B Hutchison, Mr J A D Slater, Mr A J Weir. Non-executive Dr A Baxter, Ms C C Ferguson, Mr K J Merrifield (who retired on 24 June 2006), Mr GMKennedy, Dr P R Read, Mr I Clark was appointed 1 January 2007. Biographical details of the directors, including those seeking re-election at the forthcoming Annual General Meeting, are set out on pages 24 and 25. Re-election At the forthcoming Annual General Meeting, in accordance with the Company’s Articles of Association and the provisions of the Combined Code, Dr Baxter, Ms Ferguson and Mr Slater will retire. Being eligible, and with the Board’s recommendation, they offer themselves for re-election. Mr Clark, who has been appointed to the Board since the last Annual General Meeting, will retire. Being eligible, and with the Board’s recommendation, he offers himself for election. Mr Slater has a service contract with the Company. All of the other retiring directors are non-executives and each has a letter of appointment with the Company. The Board considers that in evaluating the performance of Dr Baxter, Ms Ferguson and Mr Clark to date, as non-executive directors offering themselves for re-election, they continue to make a valuable contribution to the Company’s performance and carry out their duties as non-executive directors in an effective, independent and constructive manner including commitment of the necessary time for Board and committee meetings. Directors’ interests Details of the interests of the directors and their families in the ordinary shares of the Company, as disclosed in the register of directors’ interests, are given in the remuneration report. During the financial period under review, Dr Fellner, Ms Ferguson and Mr Slater increased their shareholdings. These additional shares are included within the schedule of directors’ interests in shares in the remuneration report. There were no changes in the directors’ shareholdings between 31 December 2006 and the date of this report. Directors’ indemnities The Company has entered into qualifying third party indemnity arrangements for the benefit of all its directors in a form and scope which comply with requirements of the Companies Act 1985. Charitable and political donations The Group made no charitable donations during the year (2005: £2,118.15) and no political donations during the year (2005: nil). Employees Equal opportunities The Group operates an equal opportunities policy. Full consideration is given to all job applicants, irrespective of gender, age, marital status, disability, sexuality, race, colour, religion, political belief, ethnic or national origin or any other conditions not relevant to the performance of the job, who can demonstrate that they have the necessary skills and abilities. Disabled employees With regard to existing employees and those who may become disabled, the Group’s policy is to examine ways and means to provide continuing employment under its existing terms and conditions and to provide training and career development, including promotion, wherever appropriate. All employees accept the commitment within this policy that the Group will not allow pressure to discriminate against or harassment by employees or others acting on the Group’s behalf, in respect of gender, age, marital status, disability, sexuality, race, colour, religion, political belief, ethnic or national origin or any other conditions not relevant to the performance of the job, to any employee who can demonstrate that they have the necessary skills and abilities. Vernalis plc Report of the directors Annual report and accounts 2006 28 continued Report of the directors

Employee involvement The Group believes it is important that employees are aware of the Group’s business strategy and objectives to assist them to focus on working towards these goals. Communications at the time of key announcements, including presentations by directors to all employees, together with briefings throughout the year, are part of the communication and consultation programme. In addition, regular meetings are held with staff and managers, both to raise issues and to assist with the two-way flow of information. The Company has an elected staff consultative group, which meets on a regular basis, and e-mail and the Company’s intranet site are used to update employees. The Company also actively encourages and financially supports a wide range of sports and social functions, many of which are organised by the Sports and Social Club. Further education, training and development Continuing education, training and development are important to ensure the future success of the Group. The Group supports individuals who wish to obtain appropriate further education qualifications. Share option schemes The directors remain committed to the principle that all employees should be able to participate in the Group’s progress through share ownership schemes. Details of the Company’s share option schemes are given on pages 36 to 37 and 40 to 41. Details of a new bonus long-term incentive plan to be proposed for approval by shareholders at the forthcoming AGM are contained in the accompanying circular to shareholders. Financial risk management The financial risk management and objectives of the Group and the exposure of the Group to price, credit liquidity and cash flow risk are set out on pages 4 to 23 and in Note 25 (Financial instruments related disclosure) to the Accounts. Payment of creditors The Company has negligible trade creditors. The Group does not follow a specific payment code but has a policy to pay its suppliers in accordance with the specific terms agreed with each supplier. The number of days’ purchases outstanding at 31 December 2006 for the Group was 33 days (31 December 2005: 32 days). Auditors PricewaterhouseCoopers LLP have expressed their willingness to continue in office as auditors and a resolution proposing their re -appointment and authorising the directors to determine their remuneration will be proposed at the AGM. So far as each person currently serving as a director at the date this report is approved is aware, there is no relevant audit information which the Company’s auditors are unaware. Each director believes that he/she has taken all reasonable steps that he/she ought to have taken in order to make him/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Annual General Meeting A circular to shareholders incorporating the Notice convening the AGM of the Company accompanies this report. The meeting will be held at 11am on 23 May 2007 at Barber-Surgeons’ Hall, Monkwell Square, London EC2Y 5BL. International Financial Reporting Standards This report has been prepared in compliance with IFRS as detailed within the financial review and note 1 of the accounts.

By order of the Board

John Slater Company Secretary 10 April 2007 Vernalis plc Annual report and accounts 2006 29 Corporate governance

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, unless disclosed otherwise 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 and was compliant throughout the financial period under review. 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 in the remuneration 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 31 December 2006, the Board comprised nine directors: an Executive Chairman, Dr P J Fellner; a Chief Executive Officer, Mr S J Sturge; three other executive directors and four non-executive directors. Prior to the retirement of Mr Merrifield, at least half the Board comprised non-executive directors, in compliance with Combined Code Provision A.3.2. This position has been restored following the appointment of Mr I Clark on 1 January 2007. 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. 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. 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 23 April 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 has six scheduled meetings per year (approximately every two months), with additional meetings when circumstances and urgent business dictate. In the financial period under review, seven regular meetings of the full Board and one Board Committee meeting was held. Of these, apologies for Board meetings were received from: Dr Baxter for 24 May; and Mr Merrifield for 8 and 21 March. 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. Vernalis plc Corporate governance Annual report and accounts 2006 30 continued Corporate governance

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, the Research Director, the Director of Business Development and the Senior VP US Commercial Operations) 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. This year, an evaluation was undertaken by means of a detailed questionnaire completed by individual Board members followed by Board discussion and debate. As part of the evaluation, the Board reviewed the responsibilities and the roles of individual directors and the Board as a whole; the separate roles of non -executive directors and executive directors; the conduct of Board meetings and committees of the Board; the Board’s role in monitoring the performance of the Company, the Company’s leadership and culture; and corporate governance practices. Non-executive directors are encouraged to meet without the presence of executive directors as appropriate. Board committees In accordance with best practice, the Company has established Audit, Remuneration and Nominations and Corporate Governance 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. Audit Committee The Audit Committee is comprised entirely of independent non-executive directors. During the financial period it was chaired 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. 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, and the effectiveness of the internal financial control systems and financial reporting procedures. The Audit Committee provides a forum through which the Group’s external auditors report to the Board. The auditors attend their meetings and have the opportunity to meet privately with Committee members in the absence of executive management. In addition, the Audit Committee is responsible for recommending the appointment and removal of the auditors and agrees the level of audit fees. The Committee also monitors the scope and results of the audit, the independence and objectivity of the auditors and their performance. In order to safeguard the auditors’ objectivity and independence, the Audit Committee pre-approves any non-audit services to be performed by the auditor and has done so throughout the term of office. These include services relating to tax, the issue of investment circulars, accounting and auditing-related advice. The independent auditors continue to operate procedures to safeguard against the possibility that the auditors’ objectivity and independence could be compromised. This includes the use of quality review partners, use of a technical review board (where appropriate) and annual independence procedures, including confirmations by all staff. The auditors report to the Audit Committee on matters including independence and non-audit fees on an annual basis. In addition, the role of the audit partner is rotated on a periodic basis. The Audit Committee held five meetings during the period under review. Of these, apologies for Audit meetings were received from: Dr Baxter for 31 May; Mr Kennedy for 24 February and 31 May; and Dr Read for 31 March. Otherwise, meetings were attended by all members. The Audit Committee’s terms of reference were reviewed in April 2005 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:

G To review the effectiveness of the Company’s internal financial control systems and financial reporting procedures.

G To review the internal management of financial matters.

G To review annually the need for an internal audit function.

G To consider and make recommendations regarding the appointment of the Company’s external auditors including the pre-approval of non-audit services.

G To establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing matters.

G To review the consistency and application of accounting policies.

G To review annual financial statements and interim and preliminary announcements before submission for Board approval. Vernalis plc Corporate governance Annual report and accounts 2006 31 continued

Remuneration Committee The Remuneration Committee is made up entirely of independent non-executive directors and was chaired by Mr Merrifield until his retirement on 24 May 2006. Thereafter, it was chaired by Dr Read. The other current members are Dr Baxter (appointed 24 May 2006), Ms Ferguson (appointed 24 May 2006), Mr Kennedy and Dr Read. 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. Of these, apologies for meetings were received from: Mr Merrifield for 21 March; and Dr Baxter for 24 and 31 May. Otherwise, meetings were attended by all members. The terms of reference of the Remuneration Committee include the following responsibilities:

G To determine the framework and policy and the individual packages for the remuneration of the executive directors, Chairman and members of the executive management.

G To determine targets for any performance-related pay schemes.

G To approve overall remuneration policy.

G To review employee benefit structures.

G To produce an annual report of the Committee’s remuneration policy. Nominations and Corporate Governance Committee The Nominations and Corporate Governance Committee is chaired by Mr Kennedy. The other members are Dr Fellner, Mr Sturge, Dr Read and Mr Merrifield until his retirement on 24 May 2006. The Committee is responsible to the full Board for determining the qualities and experience required of the Company’s executive and non-executive directors and for identifying suitable candidates. In appropriate cases, recruitment consultants assist in the process. The Committee is also responsible for succession planning and for reviewing, and making recommendations in relation to, the Company’s corporate governance procedures. The committee appointed independent search consultants to identify a new non-executive director following the retirement of Mr Merrifield. Committee members met with Mr I Clark and recommended to the Board his appointment as a non-executive director. Following Mr Merrifield’s retirement it is intended to appoint at least one of the independent non-executive directors to the committee to ensure compliance with the Combined Code provision A.4.1. All corporate governance issues were addressed by the full Board during the year and no separate meetings of this Committee were held. The terms of reference of the Nominations and Corporate Governance Committee include the following responsibilities:

G To review the structure, size and composition of the Board.

G To prepare a description of the role and capabilities required for a particular appointment.

G To identify and nominate candidates to fill Board vacancies as and when they arise.

G To satisfy itself with regard to succession planning.

G To keep the effectiveness of the corporate governance and system of internal non-financial controls under regular review. Accountability and audit The Board is responsible for the preparation of financial statements that present a balanced assessment of the Group’s financial position and prospects. This responsibility is administered primarily by the Audit Committee, the terms of reference for which are referred to above. Internal controls The Board is ultimately responsible for establishing and monitoring internal control systems throughout the Group and reviewing their effectiveness at least annually. It recognises that rigorous systems of internal control are critical to the Group’s achievement of its business objectives, that those systems are designed to manage rather than eliminate risk and that they can only provide reasonable and not absolute assurance against material misstatement or loss. An ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place for the financial period under review and up to the date of approval of the annual report and accounts. The Audit Committee’s terms of reference include the review of the Group’s internal financial controls and the Nominations and Corporate Governance Committee’s terms of reference include responsibility for review of the non-financial controls. The effectiveness of all the Group’s internal controls including operational and compliance controls and risk management systems in effect during the year has been reviewed by the Board. The Group’s internal controls are regularly reviewed as part of the risk management process and in compliance with the Turnbull guidelines. The Board organised a process by which internal controls were reviewed during the year. Where any significant weakness or failing was identified appropriate remedial actions were recommended for implementation. The directors consider that in view of the control procedures in place in the Company, and given the size of the Group’s operations at this time, it is inappropriate to appoint an internal audit function. Vernalis plc Corporate governance Annual report and accounts 2006 32 continued Corporate governance

This process involved a review of each area of the business to identify material risks and controls in place to manage these risks. Material controls including financial, operational, business and compliance controls and risk management processes were reviewed. The process provided a means for prioritising those risks and evaluating those controls and assessing whether improvements were necessary. The process was undertaken in consultation with senior managers with responsibility for particular controls. Communication and reporting The Group’s strategy and business objectives are communicated to all levels of the organisation. The executive directors hold regular all-employee meetings to exchange information with staff. Information Board members and members of the other committees and groups which discuss risk issues are provided with timely and detailed briefings on relevant matters. Human resources The Group endeavours to appoint employees with appropriate skills, knowledge and experience for the roles they undertake. The Group has a range of policies which are aimed at retaining and incentivising key staff. Objectives are set for departments and employees that are derived from the Group’s business objectives. The Group has a clear and well-understood organisational structure and each employee knows his or her line of accountability. Regulatory framework Documented quality procedures are in place to ensure the maintenance of regulatory compliance. These are subject to periodic review to ensure current standards of quality compliance are maintained. A quality group monitors compliance of contractors to Good Laboratory Practice (GLP), Good Clinical Practice (GCP) and Good Manufacturing Practice (GMP) through the implementation of a compliance programme for relevant in-house and contracted-out activities. A pharmacovigilance contractor is responsible for monitoring and reporting adverse events in support of the Group’s marketed products and development programmes. These are managed in accordance with formally documented procedures which comply with current regulatory requirements. Announcements All major announcements are approved by the Chairman, the executive directors and a panel of senior executive management and then circulated to the Board prior to issue. The Group also has internal and external checks to guard against unauthorised release of information. Operational reviews The Group has procedures that are designed to ensure that key documents, decision points and investment decisions are reviewed by the right people. Decision points include each significant clinical development decision. Financial A comprehensive budgeting system operates whereby managers submit detailed budgets, which are reviewed and amended by executive directors prior to submission to the Board for approval. Each month, actual results are reported against budget and distributed to managers and the Board. Insurance The Group has reviewed its portfolio of insurance policies with its insurance broker to ensure that the policies are appropriate to the Group’s activities and exposures. Shareholder relations The Company reports formally to shareholders twice a year, around March (preliminary announcement of annual results) and September (interim statement). The Annual Report is usually mailed to shareholders in April. Separate announcements of all material events are made as necessary. Regular communications are maintained with institutional shareholders and, in particular, presentations are given to shareholders when the half-year and full-year financial results are announced. In addition to the Chairman, Chief Executive Officer and Chief Financial Officer who have regular contact with investors, Mr Kennedy, as Senior Independent Director, is available to meet with shareholders if and when required. The whole Board is kept up to date at its regular meetings with the views of shareholders and analysts. The Company’s website (www.vernalis.com) provides an overview of the business including its strategy, products and objectives. All Group announcements are available on the website and new announcements are published without delay. The terms of reference of each of the Board’s three Committees and other important corporate governance documents are displayed on the Company’s website. Additionally, the Group’s corporate communications department and Chief Financial Officer provide a focal point for shareholders’ enquiries and dialogue throughout the year. Annual General Meeting The Annual General Meeting (AGM) provides the opportunity for the Board to meet with all shareholders and their participation is encouraged. Papers are sent out to shareholders at least 20 working days before the date of the meeting. At the meeting, in addition to the statutory business, the Board has a policy of holding business presentations to ensure that an up-to-date picture of the Group’s activities is given, following which the Board is available for questions from shareholders. In accordance with the Combined Code recommendations, the Company counts all proxy votes. On each resolution which is voted on a show of hands, the Company indicates the level of proxies lodged, the number of proxy votes for and against such resolution and the number of abstentions. A separate resolution is proposed for each substantive issue and the Chairs of the Audit, Remuneration, and Nominations and Corporate Governance Committees attend to answer questions. Vernalis plc Corporate governance Annual report and accounts 2006 33 continued

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

G The Board takes account of the significance of social, ethical and HS&E issues.

G Business practices are managed ethically.

G Positive contributions are made to the scientific and medical communities.

G The business is focused on delivering value to stakeholders.

G Existing legislation, regulations and guidelines are adhered to as a minimum.

G Employees are recognised as key to the business with individual skills and experience being valued and developed.

G All employees are educated as to the significance of CSR risks and opportunities.

G HS&E issues are treated as critical areas of importance 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 ethically. Ethical – Investing in pharmaceutical research and development with the aim of establishing and sustaining a business model designed to secure a fair return for shareholders. Health, safety – Ensuring employee health and safety risk prevention and limiting the environmental impact of the and environment 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 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 Company sites 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 programmes. An elected 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 employees. 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 which is available on the Company’s website. Vernalis plc Corporate governance Annual report and accounts 2006 34 continued Corporate governance

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 in the UK. Arrangements in North America are appropriate for the current organisations in the US and Canada 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. The Company has in place practices which give regard to protection to the environment, particularly relating to waste management and utility consumption. The Company’s Code of Business Conduct and Ethics is available on the Company’s website. 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 Vernalis’ Certificate of Authorisation from the Environment Agency. Going concern Vernalis is a research and development-based speciality bio-pharmaceuticals business which expects to incur further losses until revenues from sales, royalty income and milestone receipts exceed expenditure on the product portfolio. The directors have prepared projections which, by their nature, are inherently subject to some uncertainty, particularly in respect of revenues, but they have reasonable expectations that the Group anticipates having sufficient cash resources to continue in operation for the foreseeable future as further explained in note 1 to the financial statements. Accordingly, the Group and Company continue to adopt the going concern basis in preparing the financial statements. Vernalis plc Annual report and accounts 2006 35 Remuneration report

This report covers the 12 month period ended 31 December 2006 with comparative figures provided for the 12 months ended 31 December 2005. It has been prepared in compliance with the Listing Rules of the Financial Services Authority and the Companies Act 1985. In accordance with the Companies Act 1985, a resolution to approve the remuneration report will be proposed at the Company’s AGM on 23 May 2007. Details of the resolution may be found in the notice of the meeting accompanying this annual report. The vote will be advisory and will be considered carefully by the members of the Remuneration Committee in the formulation and approval of the Company’s future remuneration policies. The Remuneration Committee The Remuneration Committee (“the Committee”) is made up entirely of independent non-executive directors of the Company and it met five times in 2006. Dr P R Read became the Chairman of the Committee on the retirement of Mr K J Merrifield at the AGM in 2006 and sits with Ms C Ferguson, Mr G M Kennedy and Dr A Baxter. The Committee invited the views of the Executive Chairman, Chief Executive Officer and Director of Human Resources at appropriate times and from Deloitte and Touche LLP, who were retained as independent remuneration consultants. Deloitte have not provided any other services to the Company during the financial period. The philosophy of the Committee is that remuneration programmes should apply to all staff working for the Company. When the Committee reviews pay levels, share awards and bonus scheme payments it considers awards for staff at the same time as it considers awards for the executive directors. 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 policy is to ensure that all employees receive remuneration tailored to their performance, scale of responsibility, skills and experience. Remuneration packages are intended to enable the Company to attract and retain key employees by ensuring they are rewarded competitively and that they are incentivised to achieve the highest level of Company performance in line with the best interests of shareholders. A significant proportion of remuneration is performance- related. Performance conditions for performance-related bonus and long-term incentives are designed with a view to alignment of executive, employee and shareholder interests. The Company’s policy on remuneration takes account of the pay structure and employment conditions within the Group and also the industry sector and geographical location. To determine the elements and level of remuneration appropriate to each employee and executive director, the Committee considers remuneration levels in comparable biotechnology and pharmaceutical companies, reviews pay and benefits surveys relating to industry sector or professional specialism and considers individual skills, experience and performance. In 2006 basic pay was increased in line with inflation and targeted bonuses reflected the success of the phase 3 clinical trials for Frova and no new share option awards were made except for new recruits. The following report is divided into sections giving details of basic pay and benefits, performance related bonus schemes and longer term share option incentive schemes. The final pages feature details of the directors’ contracts, tables showing the remuneration of the directors and their current share and share option holdings. A graph showing Total Shareholder Return (TSR) over the past five years is also included. Basic pay and benefits At the beginning of the reporting period all employees (including executive directors) received base pay rises in line with inflation reported by the Government at that time of 3 per cent. An additional 0.5 per cent was provided for staff promotions and market rate adjustments for specialists (these excluded the executive directors). Market rates amongst UK scientists are compared with UK biotech data produced by New Bridge Street Consultants and pharma data produced by Allan Jones & Associates. All employees in the UK 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 schemes beyond the payment of contributions. In the USA a market competitive pension scheme is supported by the Company whilst in Canada contributions are made through the State scheme. All UK and US based employees are entitled to private health insurance, the cover being extended to spouse and family for executive directors and some senior employees. In Canada healthcare provision is provided by the State. Vernalis plc Remuneration report Annual report and accounts 2006 36 continued Remuneration report

Performance-related bonus All employees participate in a performance-related cash bonus scheme. The level of bonus is based on overall Group performance and, in the case of executive directors and senior employees, on individual performance measured against criteria established with the Remuneration Committee at the beginning of the financial year. In the United States, bonus levels for sales staff are directly related to the achievement of Frova ® sales details and to increases in sales of Apokyn ®. 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. This practice has been further refined in 2005 and 2006. The Committee has ensured that challenging and clearly assessable objectives are set for the CEO linked to a 100 per cent bonus maximum (as a percentage of salary), with similarly demanding objectives for the other executive directors, linked to a 60 per cent maximum bonus. The objectives relate directly to shareholder value, the growth of the portfolio and operational effectiveness as follows: 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 FTSE Pharmaceutical & Biotech and FTSE Small Cap indices, Bloomberg Biotech and NASDAQ), investor feedback and analysts ratings. Growth of the portfolio: the progress of key strategic products, the licensing in or out of compounds, the development of new technologies or the acquisition of new products through mergers and acquisitions. Operational effectiveness: related to the performance of the business, ensuring appropriate financial controls, managing staffing levels, whilst ensuring good corporate governance. As a further direct link between executive remuneration and the interests of shareholders, the Committee has asked that a proportion of bonuses paid to executive directors 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. The tables on pages 38 to 40 show progress towards this target. Maximum bonus levels range between 10 and 50 per cent for all other employees based on their role and market requirement. 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. The Company currently operates two share option schemes and will propose for approval by shareholders at the forthcoming AGM a new Vernalis plc Bonus Long-Term Incentive Plan. Share option schemes: the Company’s two current share option schemes are the Vernalis Share Option Plan (which comprises both an HMRC approved and an unapproved scheme) and the Vernalis SAYE Plan, under which grants of options may be made. Option incentive arrangements under the British Biotech Executive Share Option Scheme and the British Biotech Deferred Bonus Scheme remain in place but will not be operated again. During 2006 option awards over ordinary shares in the Company were made to newly recruited employees in the UK and North America and a small number of staff who were promoted during the year. No options were granted in 2006 to executive directors. The total number of unissued Ordinary Shares in the capital of the Company which may be placed under option on any day under the Vernalis share option schemes and the Vernalis plc Bonus Long-Term Incentive Plan may not exceed, when added to the aggregate number of shares that have been or may be issued pursuant to rights granted for the past ten years under the Vernalis Share Option Plans, the Vernalis SAYE Plan, the Vernalis plc Bonus Long-Term Incentive Plan, the British Biotech Executive Share Option Scheme and the British Biotech Deferred Bonus Scheme, 10 per cent of the issued ordinary share capital of the Company immediately prior to that day. The performance criteria for awards made under British Biotech Executive Share Option Scheme relate directly to share price performance using the following comparators: Median FTSE 100 and Upper-quartile FTSE 100. These criteria were chosen as being in the best interests of shareholders after consideration of the particular circumstances of the Company at the time they were set. All employees and executive directors of the Company are eligible to participate in the Vernalis Share Option Plans at the discretion of the Committee. Options will normally be exercisable between three and ten years following grant provided that any performance target set by the Committee has been satisfied. The current performance condition for options granted under the Vernalis Share Option Plans is share price growth against the FTSE Small Cap Index. No options will vest if performance is below median; 50% 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). The Vernalis SAYE Plan is a save-as-you-earn share option scheme approved by the Inland Revenue which has been offered to UK employees and executive directors. The last offer under the Vernalis SAYE Plan was made on 29 October 2004 and vests in December 2007. Vernalis plc Remuneration report Annual report and accounts 2006 37 continued

Vernalis plc Bonus Long-Term Incentive Plan: During the year, the Company reviewed the effectiveness and appropriateness of the Company’s long-term incentive arrangements. It was concluded that the current Vernalis Share Option Plan is no longer meeting the objectives of the Company’s remuneration philosophy and providing good value in terms of the Company’s incentive spend. It is therefore proposed that a new long-term incentive arrangement be introduced. Going forward, the proposed Vernalis plc Bonus Long-Term Incentive Plan is intended to be the primary means by which executive directors and employees will be incentivised. The proposed Plan has been prepared in consultation with the Company’s major shareholders. The existing Vernalis Share Option Plan will be retained in amended form but it will only be used in future in certain exceptional circumstances and it is proposed that, in order to bring this Plan in line with best practice, the re-testing of the performance condition will be removed for any future grants. Further details of the proposed new arrangements are contained in the circular to shareholders accompanying this report. 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 option referred to below and such payment being equal to approximately half of the option price payable by the Chairman in respect of such options Directors 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 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. However, if an executive director is guilty of serious misconduct, serious breach (after due warning) or persistent 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. If an executive director’s service contract is terminated he would receive a sum equal to 12 months’ pay and benefits. The service agreements of Dr Fellner and Mr Sturge were made on 21 March 2003 and came into effect on 23 April 2003. The service agreement of Mr Weir was made on 24 June 1999. The service agreement of Dr Hutchison was made on 2 July 2003 and came into effect on 1 September 2003. The service agreement of Mr Slater came into effect on 20 October 2004. During the year, the Board approved the appointment of Mr Weir as a non-executive director of Biocompatibles International plc. His remuneration for this position is £30,500 and he retains such earnings. 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 fees to reflect his additional responsibilities as Deputy Chairman and Senior Independent Director. The level of fees is determined by the Board after taking into account appropriate advice. Mr Merrifield, who was first appointed in December 1995, retired at the AGM in 2006. Ms Ferguson, Mr Kennedy and Dr Read signed appointment letters dated 17 July 2003, each of which became effective on 1 September 2003. Each of Ms Ferguson, Mr Kennedy and Dr Read had an appointment for a fixed term of three years to 30 August 2006. These contracts have been extended until 29 August 2009. Dr Baxter signed a letter effective 19 May 2004 for a fixed term of three years to 18 May 2007. On 20 December 2006 the Company announced the appointment of Ian Clark as a non-executive director with effect from 1 January 2007. He currently serves as Executive Vice President, Commercial at Genentech, and he is responsible for leading their commercial organisation, including the Sales, Marketing, Managed Care, Market Development, and Commercial Operations functions. Mr Clark’s appointment letter was effective as of 1 January 2007 for a fixed term of three years to 31 December 2009. Vernalis plc Remuneration report Annual report and accounts 2006 38 continued Remuneration report

All of these appointments are subject to the directors being re-elected under the provisions in the Company’s Articles of Association, and in compliance with the Combined Code. 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. The Company has entered into qualifying third party indemnity arrangements for the benefit of all its directors in a form and scope which comply with requirements of the Companies Act 1985. TSR performance The chart below shows the Company’s total shareholder return (TSR) performance over the period 1 May 2002 to 31 December 2006 alongside the performance of the FTSE Small Cap Index and meets the requirements of Schedule 7A to the Companies Act 1985. This index is considered suitable as the Company was a constituent member during the period.

180 ) 1

0 160 0 2

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0 100 0 1 80 o t d

e 60 s a b

e 40 r (

R 20 S T 0 April 2002 April 2003 Dec 2003 Dec 2004 Dec 2005 Dec 2006

Financial year end Vernalis FTSE Small Cap (excluding investment trusts) Source: Datastream Directors’ remuneration (audited)

December December 2005 December December Performance- 2006 Total 2006 2005 Salary/fees Benefits related bonus Total (v) Pension Pension £000 £000 £000 £000 £000 £000 £000 Executive Dr P J Fellner (i) 210 ––210 208 – – S J Sturge (ii) 342 1 170 513 781 63 59 Dr J B Hutchison (ii) 218 1 60 279 369 39 37 A J Weir (ii) 218 1 65 284 367 39 37 J Slater (ii) 252 1 78 331 383 45 44 Non-executive G M Kennedy 63 ––63 60 – – Dr P R Read 37 ––37 33 – – C C Ferguson 42 ––42 40 – – Dr A Baxter (iii) –––– – – – K J Merrifield (iv) 16 ––16 38 – – Total 1,398 4 373 1,775 2,279 186 177 i) Dr Fellner is entitled to receive certain fixed bonus payments once the Company’s share price has reached pre-determined levels. The bonus payments are conditional on the exercise of a part of the Option Deed granted to him on 23 April 2003 and are approximately half of the price payable to exercise the option. An accrual of £277,000 (2005: £200,000) has been made at 31 December 2006 based on the expected fair value of the bonus payments. ii) Salaries/fees for Mr Sturge, Dr Hutchison, Mr Weir and Mr Slater include a car allowance at the rate of £12,600 per annum. iii) Dr Baxter has waived any fees. iv) Remuneration for the year was until Mr Merrifield’s date of resignation, from 1 January until 24 May 2006. v) Remuneration for 2005 included an accrual for 100 per cent of the potential bonus payable to executive directors, for the eight months to 31 December 2005. Bonuses were paid at a lower rate in May 2006 relating to the bonus year ended 30 April 2006. Vernalis plc Remuneration report Annual report and accounts 2006 39 continued

Directors’ options (audited)

At 1 At 31 January Granted Lapsed December Exercise Date from 2006 in the year in the year 2006 price which Performance Number Number Number Number £ exercisable Expiry date conditions Dr P J Fellner Option Deed 2,670,071 ––2,670,071 1.00 Apr 2003 Apr 2013 (iv) 2,670,071 ––2,670,071 Dr J B Hutchison Share Option Plan 431,138 ––431,138 0.835 Oct 2006 Oct 2013 (iii) 400,809 ––400,809 0.6925 Apr 2008 Apr 2015 (iii) SAYE Plan 13,345 ––13,345 0.71 Dec 2007 June 2008 845,292 ––845,292 John Slater Share Option Plan 538,922 ––538,922 0.835 Oct 2007 Oct 2014 (iii) 162,455 – 162,455 0.6925 Apr 2008 Apr 2015 (iii) 701,377 ––701,377 S J Sturge Share Option Plan 1,367,520 ––1,367,520 0.585 Apr 2006 Apr 2013 (iii) 668,014 ––668,014 0.6925 Apr 2008 Apr 2015 (iii) 2,035,534 ––2,035,534 A J Weir Executive Scheme 1,202 – (1,202) 42.00 Dec 2000 Dec 2006 (i) 1,202 – (1,202) 42.00 Dec 2001 Dec 2006 (ii) 3,078 ––3,078 20.30 Dec 2000 Dec 2007 (i) 3,078 ––3,078 20.30 Dec 2002 Dec 2007 (ii) 6,250 ––6,250 8.00 Sep 2001 Sep 2008 (i) 6,250 ––6,250 8.00 Sep 2003 Sep 2008 (ii) 12,500 ––12,500 4.40 Jul 2002 Jul 2009 (i) 12,500 ––12,500 4.40 Jul 2004 Jul 2009 (ii) Share Option Plan 615,380 ––615,380 0.585 Apr 2006 Apr 2013 (iii) 400,809 ––400,809 0.6925 Apr 2008 Apr 2015 (iii) 1,062,249 – (2,404) 1,059,845 Total 7,314,523 – (2,404) 7,312,119

None of the non-executive directors who served during the financial period held share options at any time during the period. The option awards listed above are subject to share price growth performance as compared with the following various comparators: i) Median FTSE 100. ii) Upper quartile FTSE 100. iii) See Share Option Plan description on page 40. iv) See Option Deed in respect of the Chairman on page 41. 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 31 December 2006, the last working day of the financial year, was 62.5 pence. During the year, the market price of the Company’s shares ranged from 52.75 pence to 86.0 pence (12 months to 31 December 2005: 56.8 pence to 84.2 pence). Vernalis plc Remuneration report Annual report and accounts 2006 40 continued Remuneration report

Directors’ interests in shares The table below sets out the interests of the directors in the Company’s shares.

Ordinary shares owned Ordinary shares held at 31 December 2006 at 31 December 2005 Number Number Dr A Baxter 2,899 2,899 Dr P J Fellner 163,888 80,888 C C Ferguson 76,639 46,639 Dr J B Hutchison 45,757 45,757 G M Kennedy 49,094 49,094 Dr P R Read 4,331 4,331 J Slater 45,495 28,828 S J Sturge 68,340 68,340 A J Weir* 86,747 86,747

*In addition, Mr A J Weir has a non-beneficial interest in 33,375,891 deferred shares of 95 pence each which he holds on behalf of the Company following the capital reorganisation in April 2003.

Mr Merrifield held 1,500 shares at the end of December 2005 and 1,500 shares on the last day of his service as a non-executive director. Share option schemes The Company currently operates two share option schemes under which grants of options can be made. These are the Share Option Plan (which comprises an HMRC approved section and an unapproved section) and the SAYE Plan. In addition, an Option Deed has been granted in favour of the Chairman, Dr P J Fellner. a) Share Option Plan i) Eligibility Employees and executive directors of the Company are eligible to participate in the Share Option Plan at the discretion of the Remuneration Committee. ii) Exercise of options Options will normally be exercisable between three and ten years following grant, provided that any performance target set by the Remuneration Committee has been satisfied. The current performance condition for options granted under the Share Option Plan is share price growth against the FTSE Small Cap Index. No options will vest if performance is below median; 50 per cent of the shares under option will vest at median and there will only be full vesting if the Company’s share price performance is in the upper quartile (with options vesting pro rata between median and upper quartile). iii) Award limits The Remuneration Committee has currently limited the number of options granted to a maximum of twice basic salary for executive directors on appointment or one and a half times basic salary in any subsequent year. Actual figures can be found in the tables above. b) SAYE Plan The SAYE Plan is a save-as-you-earn share option scheme approved by the Inland Revenue. The last offer under the SAYE Plan was made to all employees and executive directors on 29 October 2004. Vernalis plc Remuneration report Annual report and accounts 2006 41 continued

c) Chairman’s Option Deed A share option over 2,670,071 ordinary shares was granted to the Chairman in April 2003. The grant was made under an option deed made by the Company with the Chairman. The exercise price is 100 pence per share. The option will vest and become exercisable as follows:

Shares subject to the option vesting % Vernalis share price equal to or greater than 50 100p 25 200p 25 300p

For the option to vest in respect of any of the percentages of shares, the Vernalis target share price must be met (using the closing price) 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. Under the terms of his contract, the Chairman 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 25 April 2003 and such payment being equal to approximately half of the option price payable in respect of such options. Accordingly, the Chairman is entitled to receive, in each case after the deduction of income tax and employees’ 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. Approved by the Board of Directors

Peter Read Chairman, Remuneration Committee 10 April 2007 Vernalis plc Annual report and accounts 2006 42 Statement of directors’ responsibilities

The directors are required, in accordance with company law to prepare financial statements which comply with International Financial Reporting Standards (IFRS) as adopted by the European Union, the annual report and directors’ remuneration report for each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss of the Group for the financial period. The directors are required to prepare the financial statements on the going concern basis, unless it is inappropriate to presume the Group will continue in business. The directors confirm that in preparing the financial statements, the Company and the Group have used appropriate accounting policies, consistently applied, and supported by reasonable and prudent judgements and estimates, and that all accounting standards which they consider to be applicable have been followed subject to any explanations and material departures disclosed in the notes to the financial statements and comply with IFRS as adopted by the European Union. The directors have responsibility for ensuring that the Company and the Group keep proper accounting records which disclose, with reasonable accuracy at any time, the financial position of the Company and Group, and which enable them to ensure that the financial statements and the Remuneration report comply with the Companies Act 1985, and as regards the Group financial statements, Article 4 of the IAS Regulation. The directors have responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and the Group and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Group’s website, and acknowledge that information published on the internet is accessible in countries with different legal requirements relating to the preparation and dissemination of financial statements. Vernalis plc Annual report and accounts 2006 43 Independent auditors’ report to the members of Vernalis plc

We have audited the Group and parent company financial statements (the “financial statements”) of Vernalis plc for the year ended 31 December 2006 which comprise the consolidated income statement, the Group and parent company balance sheets, the Group and parent company cash flow statements, the Group and parent company statements of changes in shareholders’ equity and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Remuneration report that is described as having been audited. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report, the Remuneration report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of directors’ responsibilities. Our responsibility is to audit the financial statements and the part of the Remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the report of the directors’ is consistent with the financial statements. The information in the Report of the directors includes the specific information given in the Chairman’s statement and Chief Executive’s review of operations that is cross referenced from the business review section of the Report of the directors. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the Combined Code 2003 specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read other information contained in the annual report and consider whether it is consistent with the audited financial statements. The other information comprises only the directors’ report, the unaudited part of the Remuneration report, the Chairman’s statement, the Chief Executive’s review of operations, the Financial review and the Corporate governance statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Remuneration report to be audited. Opinion In our opinion: G the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2006 and of its loss and cash flows for the year then ended; G the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 December 2006 and cash flows for the year then ended; G the financial statements and the part of the Remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation; and G the information given in the Report of the directors is consistent with the financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors, London 10 April 2007 Vernalis plc Annual report and accounts 2006 44 Consolidated income statement for the year ended 31 December 2006

2006 2005 Pre- Exceptional Pre- Exceptional exceptional items exceptional items items (Note 3) Total items (Note 3) Total Note £000 £000 £000 £000 £000 £000 Revenue 2 16,327 – 16,327 14,131 – 14,131 Cost of sales 4 (6,799) – (6,799) (4,991) – (4,991) Other income 621 – 621 – – – Research and development expenditure (29,105) (9,781) (38,886) (26,491) – (26,491) Selling and marketing (9,036) – (9,036) (1,601) – (1,601) General and administrative expenses (10,275) (1,943) (12,218) (7,993) (6,400) (14,393) Operating loss 4 (38,267) (11,724) (49,991) (26,945) (6,400) (33,345) Interest receivable and similar income 5 8,132 – 8,132 4,403 – 4,403 Interest payable and similar charges 5 (3,642) – (3,642) (5,490) – (5,490) Loss on ordinary activities before taxation (33,777) (11,724) (45,501) (28,032) (6,400) (34,432) Tax credit on loss on ordinary activities 6 3,070 – 3,070 1,584 – 1,584 Loss for the year (30,707) (11,724) (42,431) (26,448) (6,400) (32,848) Loss per share (basic and diluted) 7 (9.8)p (3.8)p (13.6)p (13.1)p (3.2)p (16.3)p

The notes form part of these financial statements. Vernalis plc Annual report and accounts 2006 45 Balance sheets as at 31 December 2006

Group Company 2006 2005 2006 2005 Note £000 £000 £000 £000 Assets Property, plant and equipment 8 1,689 1,910 – – Intangible assets 9 69,795 89,196 – – Available-for-sale financial assets 10 135 601 – – Investments in subsidiary undertakings 11 – – 279,540 252,159 Non-current assets 71,619 91,707 279,540 252,159 Inventories 12 927 752 – – Trade and other receivables 13 12,322 24,013 616 528 Held-to-maturity financial assets 14 16,087 28,052 15,821 27,761 Cash and cash equivalents 15 21,469 40,243 20,738 37,982 Current assets 50,805 93,060 37,175 66,271 Total assets 122,424 184,767 316,715 318,430 Liabilities Borrowings 16 (13,806) (30,938) – – Other non-current liabilities 17 (6,564) (7,412) (129,814) (130,382) Deferred income 18 (21,937) (26,457) – – Provisions 19 (5,540) (4,780) – – Non-current liabilities (47,847) (69,587) (129,814) (130,382) Borrowings 16 (15,074) (33) – – Trade and other liabilities 17 (15,305) (22,971) (6,540) (8,827) Deferred income 18 (5,012) (5,147) – – Provisions 19 (1,373) (4,169) – – Current liabilities (36,764) (32,320) (6,540) (8,827) Total liabilities (84,611) (101,907) (136,354) (139,209) Net assets 37,813 82,860 180,361 179,221 Shareholders’ equity Share capital 21 47,372 47,280 47,372 47,280 Share premium 24 369,633 369,324* 369,633 369,324* Other reserves 23 177,941 180,958* 93,361 92,207* Retained deficit (557,133) (514,702) (330,005) (329,590) Total shareholders’ equity 37,813 82,860 180,361 179,221

*Restated – see note 1.

Approved by the Board of Directors Tony Weir Chief Financial Officer 10 April 2007

The notes form part of these financial statements. Vernalis plc Annual report and accounts 2006 46 Statements of changes in shareholders’ equity

Share Share Other Retained capital premium reserves deficit Total Group £000 £000 £000 £000 £000 Balance at 1 January 2005 39,492 305,842 154,417 (481,854) 17,897 Revaluation of assets available for sale – – (79) – (79) Exchange loss on translation of overseas subsidiaries – – (31) – (31) Net income recognised directly in equity – – (110) – (110) Loss for the year – – – (32,848) (32,848) Total recognised income and expense for the period – – (110) (32,848) (32,958) Issue of equity share capital 7,788 91,903 – – 99,691 Reclassification of share premium to other reserve – (24,400) 24,400 – – Expenses on issue of share capital – (4,021) – – (4,021) Shares to be issued – – 1,034 – 1,034 Equity share options charge – – 1,217 – 1,217 Balance at 31 December 2005 47,280 369,324 180,958 (514,702) 82,860 Revaluation of assets available for sale (see note 10) – – (382) – (382) Exchange loss on translation of overseas subsidiaries – – (3,789) – (3,789) Net income recognised directly in equity – – (4,171) – (4,171) Loss for the year – ––(42,431) (42,431) Total recognised income and expense for the period – – (4,171) (42,431) (46,602) Issue of equity share capital 92 – (92) – – Refunded expenses on issue of share capital – 309 – – 309 Equity share options charge – – 1,246 – 1,246 Balance at 31 December 2006 47,372 369,633 177,941 (557,133) 37,813

Share Share Other Retained capital premium reserves deficit Total Company £000 £000 £000 £000 £000 Balance at 1 January 2005 39,492 305,842 65,556 (329,659) 81,231 Revaluation of assets available for sale – – – – – Net income recognised directly in equity – – – – – Profit for the year – – – 69 69 Total recognised income and expense for the period – – – 69 69 Issue of equity share capital 7,788 91,903 – – 99,691 Reclassification of share premium to other reserve – (24,400) 24,400 – – Expenses on issue of share capital – (4,021) – – (4,021) Shares to be issued – – 1,034 – 1,034 Equity share options charge – – 1,217 – 1,217 Balance at 31 December 2005 47,280 369,324 92,207 (329,590) 179,221 Revaluation of assets available for sale – – – – – Net income recognised directly in equity – – – – – Loss for the year – – – (415) (415) Total recognised income and expense for the period – – – (415) (415) Issue of equity share capital 92 – (92) – – Refunded expenses on issue of share capital – 309 – – 309 Equity share options charge – – 1,246 – 1,246 Balance at 31 December 2006 47,372 369,633 93,361 (330,005) 180,361

The notes form part of these financial statements. Vernalis plc Annual report and accounts 2006 47 Cash flow statements for the year ended 31 December 2006

Group Company 2006 2005 2006 2005 £000 £000 £000 £000 Cash flows from operating activities (Loss)/profit for the period (42,431) (32,848) (415) 69 Taxation (3,070) (1,584) – – Depreciation 1,318 921 – – Loss on disposal of property, plant and equipment 3 12 – – Adjustments to/amounts written off goodwill 747 6,371 – – Amortisation, impairment and disposal of intangible assets 14,543 3,983 – – Charged to provision 1,293 – – Loss on sale of available-for-sale asset 22 – – – Option charge 1,246 1,217 – – Interest receivable (8,132) (4,403) (2,271) (1,993) Interest payable 3,642 5,490 – – Exchange loss/(gain) 41 – (584) (269) (30,778) (20,841) (3,270) (2,193) Changes in working capital Increase in inventories (175) (703) – – Decrease in receivables 11,969 7,914 (14) 34 Decrease in liabilities (6,590) (133) (3,306) 362 Decrease in provisions (3,678) (1,807) – – Decrease in deferred income (4,655) (4,529) – – Cash used in operations (33,907) (20,099) (6,590) (1,797) Taxation received 2,073 4,284 – – Taxation paid (28) – – – Interest paid (50) (8) – – Net cash used in operating activities (31,912) (15,823) (6,590) (1,797) Cash flows from investing activities Purchase of property, plant and equipment (351) (589) – – Acquisition of subsidiary undertakings net of cash acquired – (3,104) – – Purchase of intangible assets – (16,570) – – Purchase of investment in subsidiary undertakings (395) – (18) (2,416) Loans (to)/from subsidiary undertakings – – (25,702) (33,349) Sale of available-for-sale asset 62 – – – Interest received 1,002 710 919 693 Interest received on financial assets held-to-maturity 1,276 898 1,276 898 Net cash generated from/(used in) investing activities 1,594 (18,655) (23,525) (34,174) Cash flows from financing activities Movement in held-to-maturity financial assets 11,965 (13,052) 11,940 (12,761) Issue of shares – 72,958 – 72,958 Share issue refunds (costs) 309 (3,996) 309 (3,996) Capital element of finance lease payments (140) (23) – – Net cash generated from financing activities 12,134 55,887 12,249 56,201 Foreign exchange on cash and cash equivalents (loss)/gain (590) 511 622 494 Movements in cash and cash equivalents in the period (18,774) 21,920 (17,244) 20,724 Cash and cash equivalents at the beginning of the period 40,243 18,323 37,982 17,258 Cash and cash equivalents at the end of the period (21,469) 40,243 20,738 37,982

The notes form part of these financial statements. Vernalis plc Annual report and accounts 2006 48 Notes to the financial statements for the year ended 31 December 2006

1 Accounting policies and basis of preparation The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. The potential approval of Frova ® for the short-term prevention of MM is the most significant factor affecting the financial position of the Company. Basis of preparation These financial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS. A summary of the more important Group accounting policies is set out below. In 2005 the Group acquired Cita NeuroPharmaceuticals Inc. and Ionix Pharmaceuticals Limited. Both acquisitions included consideration satisfied by the issue of equity shares in the Group, in exchange for 100 per cent of the equity share capital of the acquired companies. These shares qualified for merger relief (s131) under the Companies Act, and any premium is required to be credited to a merger reserve. This was credited to the share premium reserve in the 2005 financial statements. Accordingly, the comparative figures as at 31 December 2005 for share premium and other reserves have been restated. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the financial statements, are disclosed later in this note. Certain comparative figures as at 31 December 2005 have been reclassified to be consistent with the presentation of financial information for the year ended 31 December 2006. Going concern The FDA has indicated a PDUFA date of 19 August 2007 for the application and approval will trigger a milestone from Endo of $40 million which Endo has reserved the right to pay half in cash and half as partial repayment of its outstanding loan to Vernalis. If Frova ® is not approved for the short-term prevention of MM, or if any issues cannot be readily resolved, Vernalis will be required to review its operations and cost base including potentially delaying the start of clinical programmes. The extent of these actions will depend upon the success of any mitigating factors including, in particular, whether revenue can be generated from new collaborations. These financial statements have been prepared on a going concern basis as the directors believe that, even if the Frova ® approval is not achieved; there is a range of actions that could be taken to ensure that the business continues to operate for the foreseeable future. Accounting policies Basis of consolidation The consolidated financial statements include the financial statements of Vernalis plc (the “Company”) and all its subsidiary undertakings (together, the “Group”), made up to 31 December 2006. Inter-company 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. Share-based payments The Group makes equity-settled and cash-settled share-based payments to its employees and directors. Equity-settled share-based payments are measured at fair value at the date of grant and expensed on a straight-line basis over the vesting period of the award. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. At each balance sheet date, the Group revises its estimate of the number of options that are expected to become exercisable. It recognises the impact of the revision to original estimates, if any, in the Consolidated income statement, with a corresponding adjustment to equity. Equity settled share-based payments granted by the Company to employees of subsidiaries are recognised as an expense charged to the relevant subsidiary with an equal increase in the investment in subsidiary undertakings. Cash-settled share-based payments are accrued over the vesting period of the award based on the current expected fair value at each balance sheet date. When share options are exercised, the proceeds received net of any transaction costs, are credited to share capital (nominal value) and share premium. Vernalis plc Notes to the financial statements Annual report and accounts 2006 49 continued

1 Accounting policies and basis of preparation continued Intangible assets Intangible assets are stated at cost less provision for amortisation and impairments. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable net assets (including intangible assets) of the acquired subsidiary at the acquisition date. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill is not amortised but is tested at each balance sheet date for impairment and is carried at cost less accumulated impairment losses. Gains and losses on disposal of an entity include the carrying amount of goodwill relating to the entity or investment sold. Impairment losses on goodwill are not reversed. Internally-generated intangible assets – product research and development Development expenditure on new or substantially improved products is capitalised as an intangible asset and amortised through cost of sales over the expected useful life of the product concerned. Capitalisation commences from the point at which the technical feasibility and commercial viability of the product can be demonstrated and the Group is satisfied that it is probable that future economic benefit will result from the product once completed. This is usually at the point of regulatory filing in a major market where approval is highly probable. Capitalisation ceases when the product is ready for launch. Where assets are acquired or constructed in order to provide facilities for research and development over a number of years, they 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. Expenditure on research and development activities which does not meet the above criteria is charged to the income statement as incurred. Purchased intangibles Intangibles are recognised when they have been acquired separately for cash or other monetary assets or as part of a business combination and are amortised through cost of sales over their estimated useful lives from the time they are available for use. Impairment of assets Assets that have an indefinite useful life, or which are not yet available for use, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Employee benefits All employee benefit costs, notably holiday pay and contributions to the Group or personal defined contribution pension plans, are charged to the income statement on an accruals basis. 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. The Group does not offer any other post-retirement benefits. Investments The Group classifies its investments in the following categories: loans and receivables, held-to-maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the assets were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at every reporting date. At each balance sheet date management assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. On disposal or impairment of the investment, gains or losses recorded in equity are recycled through the income statement. Loans and receivables Loans and receivables are non-derivative financial assets or liabilities with fixed or determinable payments that are not quoted in an active market. Assets in this category are recognised at amortised cost and included in trade and other receivables, and loans in the balance sheet. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Assets in this category are held at amortised cost. Held-to-maturity investments include short-term investments with original maturities of more than 90 days. Vernalis plc Notes to the financial statements Annual report and accounts 2006 50 continued Notes to the financial statements for the year ended 31 December 2006

1 Accounting policies and basis of preparation continued Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale. Assets in this category are recognised at fair value with unrealised gains and losses arising from changes in fair value recognised in equity. Realised gains and losses are recognised in the income statement. Cash and cash equivalents Cash and cash equivalents include cash in hand, bank deposits repayable on demand and other short-term highly liquid investments with original maturities of 90 days or less. Investments in subsidiary undertakings Investments in subsidiary undertakings including loans are carried at cost less any impairment provision. Such investments are subject to review, and any impairment is charged to the income statement. Revenue recognition Revenue, which excludes value added tax, returns, rebates, discounts and other similar allowances, represents the fair value of the consideration received or receivable for the goods and services supplied. Product sales are recognised on receipt by 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 commercialisation 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 licence 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. Research and development expenditure Research and development expenditure consists of internal and external research and development expenditure, allocation of overheads and any impairment of intangible assets. Property, plant and equipment Property, plant and equipment are stated at historic cost less depreciation and impairments with the exception of freehold land which is not depreciated. Historic cost comprises the purchase price together with any incidental costs of acquisition. The Group does not capitalise borrowing costs in connection with the acquisition of property, plant and equipment. Depreciation is calculated to write off the cost, less residual value, of property plant and equipment in equal annual instalments over their estimated useful lives as follows: Freehold buildings 50 years Buildings – internal works 5 to 50 years Leasehold buildings Period of lease Plant and machinery 2 to 5 years Fixtures and fittings 3 to 10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in operating loss. Finance and operating leases Costs in respect of operating leases are charged to the income statement on a straight-line basis over the terms of the leases. Leasing agreements which transfer to the Group substantially all of 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 an 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. Inventories Inventories are carried at the lower of cost and net realisable value. Cost is calculated on a first-in first-out basis. Vernalis plc Notes to the financial statements Annual report and accounts 2006 51 continued

1 Accounting policies and basis of preparation continued Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted, or substantially enacted, by the balance sheet date. Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except to the extent that the deferred tax arises from the initial recognition of goodwill (if amortisation of goodwill is not deductible for tax purposes) or the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting profit not taxable profit and loss. Temporary differences are differences between the carrying amount of the Group’s assets and liabilities and their tax base. Deferred tax liabilities may be offset against deferred tax assets within the same taxable entity or qualifying local tax group. Any remaining deferred tax asset is recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable taxable profits, within the same jurisdiction, in the foreseeable future against which the deductible temporary difference can be utilised. Deferred tax is provided on temporary differences arising in subsidiaries, jointly controlled entities and associates, except where the timing of reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or liability settled, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Measurement of deferred tax liabilities and assets reflects the tax consequence expected to fall from the manner in which the asset or liability is recovered or settled. 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 rates of exchange ruling at the balance sheet date. Differences arising due to exchange rate fluctuations are taken to the income statement account in the period in which they arise. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from this translation of foreign operations, and of related qualifying hedges, are taken directly to the translation reserve. They are released into the income statement upon disposal. Segmental information The Group’s primary segmental reporting is by geographical location of assets, with business sector being the secondary format. This is consistent with reporting to the Board. Financial instruments The Group enters into derivative financial instruments where necessary, to hedge against future material foreign currency exposures. As at 31 December 2006, there were no derivative contracts outstanding and the Group has no financial liabilities other than finance leases, loans and trade-related payables. 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. Income and expenses arising from financial assets and financial liabilities are recognised on becoming receivable or payable respectively and are measured at fair value. Provisions Provisions for restructuring costs, onerous lease costs and returns and rebates are recognised when; the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Provisions not recognised for future operating losses. Provisions are measured at the present value of the expenditure expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligations. The increase in the provision due to the passage of time is recognised as interest expense. Exceptional items Exceptional items represent significant items of income and expense which due to their nature or the expected infrequency of the events giving rise to them, are presented separately on the face of the income statement to give a better understanding to shareholders of the elements of financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in financial performance. Exceptional items include, but are not limited to, impairments of goodwill and intangible assets, and provisions for vacant leases. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Vernalis plc Notes to the financial statements Annual report and accounts 2006 52 continued Notes to the financial statements for the year ended 31 December 2006

1 Accounting policies and basis of preparation continued Critical accounting policies and estimates The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. a) Intangible assets The Group has significant in intangible assets arising as a result of acquisitions of businesses and purchases of assets such as product development and marketing rights. Under IFRS, intangible assets that are in use are amortised over their estimated useful life and charged to cost of sales in the income statement and are only tested for impairment when there is an indication of the balance sheet carrying value not being recoverable. Intangible assets that are not yet in use are not amortised, but are tested annually for impairment. The impairment analysis is principally based upon estimated discounted future cash flows. Actual outcomes could vary significantly from such estimates of discounted future cash flows, due to the highly sensitive assumptions used, such as: Outcome of research & development activities (compound efficacy, results of clinical trials, etc.) Probability of obtaining regulatory approval Long-term sales forecast period of up to 20 years Selling price erosion rates after the end of patent protection due to generic competition Behaviour of competitors (launch of competing products, marketing initiatives etc.) The availability of sufficient funding to develop the programme in-house The determination of these underlying assumptions relating to the recoverability of intangible assets is subjective and requires the exercise of considerable judgement. Any changes in key assumptions about our business and prospects, or changes in market conditions, could result in an impairment change. b) Revenue recognition Revenue is recognised when title and risk of loss is passed to the customer and reliable estimates can be made of relevant deductions. Gross revenue on product sales is reduced by rebates, returns, discounts and similar allowances. Provisions for such deductions are made at the time of sale, based on estimates made from historical trends. Given these amounts are estimates they might not reflect the final outcome. A further factor that may affect product sales in the US is the wholesaler buying activity. Wholesalers may choose to increase or decrease orders and inventory levels ahead of an anticipated price rise, or for any other reason. The result of this is sales may be moved from one period to another. The Group constantly monitors wholesaler inventory levels and has seen no evidence of any buying patterns outside of the expected activity of business. c) Deferred revenue Under IFRS income received from upfront licence receipts is recognised over the expected life of the contract. For marketed products this is estimated by taking into account the life of patents, and length of Orphan Drug Status, as well as the expected level of generic competition. For a product still being developed this is based on the risk adjusted expected length of the contract based on its current stage in development. All of these assumptions are subjective in nature and reviewed whenever there is a change in circumstances related to a particular contract. d) Provisions The Group has two empty properties that are currently partly occupied by tenants, for periods less than the length of the Vernalis leases. The Company has estimated the expected level of occupancy for these leases based on a number of factors including current market conditions and our understanding of the intentions of our tenant. At any point in time an event may occur which may cause a change to these highly sensitive assumptions. Accounting developments a) Standards adopted early by the Group None. b) Standards, amendments and interpretations effective in 2006 but not relevant to the Group IAS 19 (Amendment), employee benefits; IAS 21(Amendment), net investment in a foreign operation; IAS 39 (Amendment), cash flow hedge accounting of forecast intragroup transactions; IAS 39 (Amendment), the fair value option; IAS 39 & IFRS 4 (Amendment), financial guarantee contracts; Vernalis plc Notes to the financial statements Annual report and accounts 2006 53 continued

1 Accounting policies and basis of preparation continued IFRS 1 (Amendment), first-time adoption of international financial reporting standards and IFRS6, (Amendment), exploration for the evaluation of mineral resources; IFRS6 (Amendment), exploration for the evaluation of mineral resources; IFRIC 4, determining whether an arrangement contains a lease; IFRIC 5, rights to interests arising from decommissioning, restoration and environmental rehabilitation funds; and IFRIC 6, liabilities arising from participating in a specific market – waste electrical and electronic equipment. c) Standards and interpretations to existing standards that are not yet effective and have not been adopted early by the Group The following interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 May 2006 or later periods but which the Group has not adopted early: IFRS 7, “financial instruments: disclosures”, and the complementary amendment to IAS 1, “presentation of financial statements – Capital disclosures”, were not adopted in 2006. IFRS 7 introduces new disclosures relating to financial instruments. This standard does not have any impact on the classification and valuation of the Group’s financial instruments. IFRIC 8, Scope of IFRS 2 (effective for annual periods beginning on or after 1 May 2006). IFRIC 8 requires consideration of transactions involving the issuance of equity instruments – where the identifiable consideration received is less than the fair value of the equity instruments issued – to establish whether or not they fall within the scope of IFRS 2. The Group will apply IFRIC 8 from 1 January 2007, but it is not expected to have any impact on the Group’s accounts. IFRIC 10, interim financial reporting and impairment (effective for annual periods beginning on or after 1 November 2006). IFRIC 10 prohibits the impairment losses recognised in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from 1 January 2007 but it is not expected to have an impact on the Group’s accounts. IFRIC 11, Group and Treasury Share Transactions, addresses how to apply IFRS 2 Share-based Payment to share-based payment arrangements involving an entity’s own equity instruments or equity instruments of another entity in the same group (eg equity instruments of its parent). The Interpretation requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity-instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained, and is effective for annual periods beginning on or after 1 March 2007. IFRS 8 Operating Segments sets out requirements for disclosure of information about an entity’s operating segments and also about the entity’s products and services, the geographical areas in which it operates, and its major customers. IFRIC 12, Service Concession Arrangements, gives guidance on the accounting by operators for public-to-private service concession arrangements (effective for annual periods beginning on or after 1 January 2008) is not relevant to the Company’s operation. d) Interpretations relating to existing standards that are not yet effective and not relevant for the Group’s operations The following interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 May 2006 or later periods but are not relevant for the Group’s operations: IFRIC 7, Applying the restatement approach under IAS 29, financial reporting in hyperinflationary economies (effective from 1 March 2006). IFRIC 7 provides guidance on how to apply the requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when the economy was not hyperinflationary in the prior period. As the Group has sterling as its functional currency, IFRIC 7 is not relevant to the Group’s operation. IFRIC 9, reassessment of embedded derivatives (effective for annual periods beginning on or after 1 June 2006). IFRIC 9 requires and entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contracts that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. IFRIC 9 is not relevant to the Group’s operations because none of the terms of the Group’s contracts have been changed. Company income statement In accordance with the provisions of section 230 of the Companies Act 1985, no separate income statement has been presented for the Company. The results for the Company are also presented under IFRS. Vernalis plc Notes to the financial statements Annual report and accounts 2006 54 continued Notes to the financial statements for the year ended 31 December 2006

2 Segmental information The Group’s primary segmental reporting is by geographical location of assets with business sector being the secondary format. Geographical segments The Group’s operations are split into two geographical areas and are based on the selling entity location. The UK is the home country of the parent.

North North UK America Total UK America Total 2006 2006 2006 2005 2005 2005 Primary reporting format – geographic £000 £000 £000 £000 £000 £000 Revenue 14,138 2,189 16,327 14,131 – 14,131 Operating loss (44,931) (5,060) (49,991) (32,656) (178) (32,834) Interest receivable and similar income 8,057 75 8,132 3,891 1 3,892 Interest payable and similar charges (3,588) (54) (3,642) (5,488) (2) (5,490) Loss on ordinary activities before taxation (40,462) (5,039) (45,501) (34,253) (179) (34,432) Tax credit on loss on ordinary activities 2,421 649 3,070 1,615 (31) 1,584 Loss for the period (38,041) (4,390) (42,431) (32,638) (210) (32,848)

Other segment items in the income statement are as follows

North North UK America Total UK America Total 2006 2006 2006 2005 2005 2005 Primary reporting format – geographic £000 £000 £000 £000 £000 £000 Depreciation (note 8) 967 351 1,318 908 13 921 Loss on disposal of property, plant and equipment 3 – 3 12 – 12 Amortisation and impairment of intangible assets (note 9) 14,543 – 14,543 3,683 – 3,683 Goodwill impairment, write offs and adjustment – 747 747 6,371 – 6,371 Charged to provision (net) 1,293 – 1,293 29 – 29 Employee share-based payments 1,090 156 1,246 1,215 3 1,218

Segmental assets and liabilities

North North UK America Total UK America Total 2006 2006 2006 2005 2005 2005 Primary reporting format – geographic £000 £000 £000 £000 £000 £000 Segmental assets 90,163 32,261 122,424 148,605 36,162 184,767 Segmental liabilities (82,206) (2,405) (84,611) (95,959) (5,948) (101,907) Capital expenditure 574 631 1,205 710 537 1,247 Purchase of intangible assets –––23,571 31,546 55,117

Business segments The Group operates one business sector, being the research, development and commercialisation of pharmaceutical products for a range of medical disorders. All costs to acquire property, plant, equipment and intangible assets as well as all related depreciation and amortisation expense borne by the Group relate to this one segment. In addition, all other non-cash expenses incurred by the Group relate to this one segment. Vernalis plc Notes to the financial statements Annual report and accounts 2006 55 continued

2 Segmental information continued Revenue analysis The revenue analysis in the table below is based on the country of registration of the fee-paying party.

2006 2005 £000 £000 United Kingdom 63 2,178 Rest of Europe 3,598 3,622 North America 12,624 8,317 Rest of the World 42 14 16,327 14,131

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

2006 2005 £000 £000 Product sales 7,739 3,602 Royalties 91 110 Collaborative 8,497 10,419 16,327 14,131

Company The Company’s business is to invest in its subsidiaries and, therefore, it operates in a single segment.

3 Exceptional items Exceptional items include, but are not limited to, impairments of goodwill and intangible assets, and provision of vacant leases.

Group 2006 2005 £000 £000 Intangibles impairment (note 9) 9,781 – Goodwill adjustment/impairment (note 9) 747 6,371 Provision for vacant leases 1,196 29 11,724 6,400 Vernalis plc Notes to the financial statements Annual report and accounts 2006 56 continued Notes to the financial statements for the year ended 31 December 2006

4 Group operating loss The following items have been included in arriving at operating loss:

Group 2006 2005 £000 £000 Operating lease rentals: – Land and buildings 1,607 1,416 – Plant, machinery and vehicles 59 50 Depreciation: – Owned property, plant and equipment 1,119 906 – Property, plant and equipment held under finance leases 199 15 Loss on disposal of property, plant and equipment 3 12 Loss on sale of available-for-sale financial asset 22 – Amortisation of intangible assets 4,762 3,683 Impairment of intangible asset 9,781 – Provision for onerous leases 1,216 29

Group 2006 2005 £000 £000 Cost of sales: Amortisation of intangible assets 4,762 3,683 Cost of inventory sold 1,533 894 Other 504 414 6,799 4,991

Services provided by the Group’s auditors and network firms:

Group 2006 2005 £000 £000 Fees payable to company’s auditors for the audit of parent company and consolidated statements 50 50 Fees payable to company’s auditors and its associates for other services 245 744 Fees payable to company’s auditors and its associates for other services Audit of accounts of the Group’s UK subsidiaries pursuant to legislation 106 116 Other assurance services pursuant to legislation 29 70 Other tax services 110 189 Service relating to completed and proposed corporate finance transactions – 369 245 744

In 2005, of the £369,000 of services in connection with the issue of investment circulars £119,000 was charged to share premium and £250,000 to cost of investment. Vernalis plc Notes to the financial statements Annual report and accounts 2006 57 continued

5 Finance credit/(charge) (net)

2006 2005 £000 £000 Interest receivable and similar income Interest on cash, cash equivalents and held-to-maturity assets 2,327 1,997 Exchange gains on cash (previously disclosed within administrative expenses) – 511 Exchange gains on other payable 347 – Exchange gains on long-term loan 3,911 – Exchange gains on other receivable – 1,320 Exchange gains on contingent deferred consideration 1,446 – Unwinding of discount on other receivable 74 531 Other interest 27 44 8,132 4,403

Interest payable and similar charges Loans repayable wholly or partly within five years 1,546 1,489 Finance leases 50 4 Exchange loss on cash 590 – Exchange loss on other receivable 701 – Exchange loss on long-term loan – 2,987 Exchange loss on other payable – 429 Exchange loss on deferred consideration – 257 Unwinding of discount on contingent deferred consideration on purchase of intangible assets 514 – Unwinding of discount on royalty buy-out from GSK 67 94 Unwinding of discount on provision 174 226 Other interest payable – 4 3,642 5,490 Net finance credit/(charge) 4,490 (1,087) Vernalis plc Notes to the financial statements Annual report and accounts 2006 58 continued Notes to the financial statements for the year ended 31 December 2006

6 Tax credit on loss on ordinary activities Analysis of current tax credit in the period

2006 2005 £000 £000 Research and development tax credits 2,421 1,865 Prior year adjustments 712 (250) Overseas corporation tax (63) (31) 3,070 1,584

The tax credit for the period is lower (2005: lower) than the standard rate of corporation tax and the differences are reconciled below. Factors affecting the tax charge for the period Loss before tax at 30 per cent (13,649) (10,330) Expenses not deductible for tax purposes 3,331 2,500 Movement on deferred tax asset not recognised 7,511 5,970 Research and development tax credit received at 24 per cent of losses compared with 30 per cent tax rate 605 466 150 per cent deduction for research and development expenditure not surrendered for cash (156) (440) Prior-year adjustments (712) 250 (3,070) (1,584)

No liability to UK corporation tax arose during the year. The Group had losses, as computed for taxation purposes, of approximately £461 million at 31 December 2006 (31 December 2005: £418 million) available to be carried forward to future periods. 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 year ended 31 December 2006 of £2,421,000 (31 December 2005: £1,615,000) represents the tax credit receivable by the Group in the UK. In addition, £712,000 represents the tax receivable by the Group in North America in respect of research and development tax incentives for the year to 31 December 2005. The Group does not anticipate such tax credits to be available in North America for the year to 31 December 2006 on the basis of legislation enacted at the balance sheet date.

7 Loss per share Basic loss per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. For diluted loss per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. Since the Group is loss-making there is no such dilutive impact.

2006 2005 Attributable loss before exceptional items (£000) 30,707 26,448 Exceptional items (£000) 11,724 6,400 Attributable loss (£000) 42,431 32,848 Weighted average number of shares in issue (000) 312,229 202,174 Loss per ordinary share before exceptional items (9.8)p (13.1)p Exceptional items (3.8)p (3.2)p Loss per share (basic and diluted) (13.6)p (16.3)p

All potential ordinary shares including options and deferred shares are anti-dilutive. Vernalis plc Notes to the financial statements Annual report and accounts 2006 59 continued

8 Property, plant and equipment

Short leasehold Plant and Fixtures buildings machinery and fittings Vehicles Total Group £000 £000 £000 £000 £000 Cost At 1 January 2006 4,167 7,670 893 137 12,867 Additions 413 222 96 474 1,205 Disposals – (144) ––(144) Exchange difference (6) (33) (19) (66) (124) At 31 December 2006 4,574 7,715 970 545 13,804 Depreciation At 1 January 2006 (3,626) (6,571) (758) (2) (10,957) Charge for the year (507) (564) (48) (199) (1,318) Disposals – 141 ––141 Exchange difference 1 7 2 9 19 At 31 December 2006 (4,132) (6,987) (804) (192) (12,115) Net book value at 31 December 2006 442 728 166 353 1,689

Cost At 1 January 2005 4,096 7,004 772 – 11,872 Additions 64 425 100 137 726 Acquisitions 9 491 21 – 521 Disposals (2) (250) ––(252) At 31 December 2005 4,167 7,670 893 137 12,867 Depreciation At 1 January 2005 (3,342) (6,209) (725) – (10,276) Charge for the year (286) (600) (33) (2) (921) Disposals 2 238 ––240 At 31 December 2005 (3,626) (6,571) (758) (2) (10,957) Net book value at 31 December 2005 541 1,099 135 135 1,910

Assets held under finance leases have the following net book value:

Vehicles 2006 2005 £000 £000 Cost 545 137 Aggregate depreciation (192) (2) Net book value 353 135

Company The Company has no property, plant and equipment at either 31 December 2006 or 31 December 2005. Vernalis plc Notes to the financial statements Annual report and accounts 2006 60 continued Notes to the financial statements for the year ended 31 December 2006

9 Intangible assets

Intangible Intangible assets assets not Goodwill in use yet in use Total Group £000 £000 £000 £000 Cost At 1 January 2006 20,431 50,400 42,425 113,256 Disposals (8,269) ––(8,269) Adjustments (1,211) ––(1,211) Exchange (248) – (3,399) (3,647) At 31 December 2006 10,703 50,400 39,026 100,129 Aggregate amortisation and impairment At 1 January 2006 15,580 8,480 – 24,060 Impairment ––9,781 9,781 Amortisation charge in the period – 4,762 – 4,762 Disposals (8,269) ––(8,269) At 31 December 2006 7,311 13,242 9,781 30,334 Net book value at 31 December 2006 3,392 37,158 29,245 69,795

Cost At 1 January 2005 17,223 37,408 600 55,231 Additions through business combinations 3,208 – 41,327 44,535 Additions separately acquired – 12,992 798 13,790 Disposals ––(300) (300) At 31 December 2005 20,431 50,400 42,425 113,256 Aggregate amortisation and impairment At 1 January 2005 9,209 4,797 – 14,006 Impairment 6,371 ––6,371 Amortisation charge in the period – 3,683 – 3,683 At 31 December 2005 15,580 8,480 – 24,060 Net book value at 31 December 2005 4,851 41,920 42,425 89,196

Opening value of intangibles Intangible assets in use at 1 January 2006 represent the capitalisation of payments conditionally due to GlaxoSmithKline (GSK) agreed in December 2000 to buy out royalties due to GSK on sales of Frova ®, and the consideration paid to Elan in respect of the re-acquisition of the North American rights to Frova ® in May 2004, and the capitalisation of payments for Apokyn ® in 2005. Goodwill at 1 January 2006 arose from the acquisitions of RiboTargets Holdings plc of £nil in 2003 (fully impaired during 2005), Cerebrus Pharmaceuticals Ltd. of £1,643,000 in 1999, Ionix Pharmaceuticals Limited of £926,000 in 2005 and Cita NeuroPharmaceuticals Inc of £2,282,000 in 2005. Impairment of intangibles In March 2006, Vernalis completed a Phase IIa study of V1003 for the management of post-operative pain. The study achieved its primary end point of pain relief over the period of eight hours from drug administration. Reckitt Benckiser has not yet identified the most appropriate indication for the future development of the nasal delivery of buprenorphine. Due to the uncertainty, and likelihood of this product being further developed by Reckitt Benckiser, the Group has fully impaired the carrying value of this asset. This results in a charge to the income statement of £9,781,000. Vernalis plc Notes to the financial statements Annual report and accounts 2006 61 continued

9 Intangible assets continued Adjustments to Cita goodwill During 2006, the Group recognised deferred tax assets on Research and Development tax credits that had previously not been recognised on the acquisition of Cita. In accordance with IAS 12, Income taxes, when deferred tax assets have not been recognised on acquisition and are subsequently recognised, both goodwill and deferred tax assets are adjusted with corresponding entries to operating expenses and taxation in the income statement. Therefore a deferred tax credit has been included within taxation in the income statement, and a charge of £747,000 has been recorded in operating expenses. Following a review of the deferred contingent consideration payable to the original Cita shareholders, an adjustment of £464,000 has been made to the value of goodwill. The adjustments relates to the timing of future contingent payments, which are discounted at 12 per cent. In accordance with IAS21, goodwill and other intangible assets that are created in relation to the acquisition of a foreign subsidiary is maintained in the functional currency of that subsidiary. During the year, the Group had an exchange loss of £248,000 on goodwill relating to the acquisition of Cita. Disposal Following the impairment of the goodwill relating to Ribotargets Holdings plc in 2005 the Group has disposed of the rights to the V140 programme in 2006. Net book value of intangible assets

£000 Useful life Assets in use Frova ® 25,682 to 2014 Apokyn ® 11,476 to 2015 Total assets in use 37,158

£000 Useful life Assets not in use V3381 14,351 Not in use V1512 13,796 Not in use Other 1,098 Not in use Total assets not in use 29,245

Closing value of goodwill The value of goodwill at 31 December 2006 is attributed to the remaining value of the business and is tested for impairment accordingly. Impairment reviews Goodwill and intangible assets that are not yet ready for use are subject to impairment review at least annually. Intangible assets in use are amortised over their expected useful lives and are reviewed when there is an indication that an impairment may have occurred. If the balance sheet carrying amount of the asset exceeds the higher of its value in use to Vernalis or its anticipated fair value less cost of sale, an impairment loss for the difference is recognised. The impairment analysis is principally based upon estimated discounted future cash flows. Actual outcomes could vary significantly from such estimates of discounted future cash flows. Especially, the development of discounted future cash flows for intangible assets under development involves highly sensitive assumptions specific to the nature of the Group’s activities such as:

G Outcome of research & development activities (compound efficacy, results of clinical trials, etc).

G Probability of obtaining regulatory approval.

G Long-term sales forecast period of up to 20 years.

G Selling price erosion rates after the end of patent protection due to generic competition.

G Behaviour of competitors (launch of competing products, marketing initiatives etc).

G The availability of sufficient funding to develop the programme in-house. Vernalis plc Notes to the financial statements Annual report and accounts 2006 62 continued Notes to the financial statements for the year ended 31 December 2006

9 Intangible assets continued Value in use calculations are generally utilised to calculate the recoverable amount. Value in use is calculated as the net present value of the projected risk-adjusted, pre-tax cash flows of the cash generating unit (being the related products) relating to the intangible asset, and applying a discount rate of the Group post-tax weighted average cost of capital of approximately 12 per cent. This approximates to applying a pre-tax discount rate to pre-tax cash flows. The cash flows projected are over the expected useful lives of the products which extend over the period of the licences or patents. The determination of these underlying assumptions relating to the recoverability of intangible assets is subjective and requires the exercise of considerable judgement. Any changes in key assumptions about our business and prospects, or changes in market conditions, could result in an impairment change. Assets that were recently acquired through business combinations, are valued using the same methods at acquisition as for their impairment testing. Therefore these assets, including V3381 and V1512 are the most vulnerable to any changes in these assumptions. Assets that have not been acquired recently through business combinations are most likely to be impaired following the Group’s discontinuance of their development programme, since they have no alternative use. None of the Group’s intangible assets at either 31 December 2006 or 31 December 2005 were internally generated. Company The Company has no intangible assets.

10 Available-for-sale financial assets

Group Company 2006 2005 2006 2005 £000 £000 £000 £000 At 1 January 601 680 – – Revaluation deficit transferred to equity (382) (79) – – Disposal (84) ––– At 31 December 135 601 – –

Available-for-sale financial assets comprise the following:

Group 2006 2005 £000 £000 Listed securities – Equity securities – Australia – 47 – Equity securities – United States 135 554 135 601

The Group’s listed investment in Australia in Bresagen Limited, a pharmaceutical company listed on the Australian stock exchange, was sold during the year realising a loss of £22,000. The Group’s listed investment in the United States is in Oscient Pharmaceuticals Corp., a pharmaceutical company listed on Nasdaq in the United States. Vernalis plc Notes to the financial statements Annual report and accounts 2006 63 continued

11 Investments

2006 2005 Shares in Loans to Shares in Loans to subsidiary subsidiary subsidiary subsidiary undertakings undertakings Total undertakings undertakings Total Company £000 £000 £000 £000 £000 £000 Fixed asset investments Cost At 1 January 116,172 456,112 572,284 73,635 408,204 481,839 Adjustment to deferred consideration (482) – (482) ––– Adjustment to acquisition costs 18 – 18 ––– Additions – 27,845 27,845 42,537 47,908 90,445 At 31 December 115,708 483,957 599,665 116,172 456,112 572,284 Provision for impairment At 1 January and 31 December (13,352) (306,773) (320,125) (13,352) (306,773) (320,125) Net book value at 31 December 102,356 177,184 279,540 102,820 149,339 252,159

During the year the Company had the following wholly-owned principal operating subsidiary undertakings.

Name of company Nature of business Country of incorporation and operations Vernalis (R&D) Limited Research and development England and Wales Vernalis Development Limited* Research and development England and Wales Vernalis Research Limited* Research and development England and Wales Vernalis Pharmaceuticals Inc. Sales and marketing United States Vernalis (Canada) Inc. Holding company Canada Ionix Pharmaceuticals Limited Research and development England and Wales Cita NeuroPharmaceuticals Inc.* Research and development Canada

* Held by a subsidiary.

All the Company’s subsidiary undertakings have been consolidated in the Group financial statements. Group The Group had no fixed asset investments at either 31 December 2006 or 31 December 2005. Vernalis plc Notes to the financial statements Annual report and accounts 2006 64 continued Notes to the financial statements for the year ended 31 December 2006

12 Inventories

2006 2005 Group £000 £000 Raw materials 818 466 Work in progress 88 – Finished goods 21 286 927 752

Company The Company has no inventories.

13 Trade and other receivables

Group Company 2006 2005 2006 2005 £000 £000 £000 £000 Trade receivables 3,049 2,292 – – Interest receivable 600 524 600 524 Research and development tax credits 5,046 3,996 – – Other receivables 643 12,969 – – Prepayments and accrued income 2,984 4,232 16 4 Current trade and other receivables 12,322 24,013 616 528

Other receivables at 31 December 2006 includes £95,000 of security deposits held by third party suppliers or collateral. Other receivables at 31 December 2005 includes £8,662,000 in relation to the fair value of the $15 million receivable from Endo. This amount was received in August 2006. During the year an exchange loss of £701,000 and an implicit interest receipt of £74,000 linked to the unwinding of the discount have been recognised in the income statement in relation to this asset.

14 Held-to-maturity financial assets These represent fixed-rate short-term deposits placed with a range of banks and building societies at fixed terms.

15 Cash and cash equivalents

Group Company 2006 2005 2006 2005 £000 £000 £000 £000 Cash and cash equivalents Cash at bank and in hand 185 1,812 58 134 Short-term bank deposits 21,284 38,431 20,680 37,848 21,469 40,243 20,738 37,982 Vernalis plc Notes to the financial statements Annual report and accounts 2006 65 continued

16 Borrowings

Group 2006 2005 £000 £000 US dollar secured loan 13,544 30,839 Obligations under finance leases 262 99 Non-current borrowings 13,806 30,938 US dollar secured loan 14,927 – Obligations under finance leases 147 33 Current borrowings 15,074 33 Total borrowings 28,880 30,971 Borrowings included above are repayable as follows: Under one year 15,074 33 Over one and under two years 6,847 – Over two and under five years 6,959 30,938 28,880 30,971

Company The Company had no borrowings. The US dollar secured loan relates to $50 million borrowed from Endo, net of the finance charges of £0.2 million, and interest payable of $6.1 million (£3.1 million) which the Group has elected to roll up into the loan at December 2005 and December 2006. It is secured against all royalty and milestone income receivable by Vernalis in respect of the licence deal with Endo. Endo has the right to offset half the royalty payments and milestones payable to Vernalis against the loan from 2007. The split between current and non-current borrowings is made using future estimates of royalty and milestone income. The weighted average interest rate is 5 per cent fixed for the term of the loan. The minimum lease payments under finance leases fall due as follows:

Group 2006 2005 £000 £000 Not later than one year 21 28 Later than one year but not more than five years – – More than five years – – Future finance charges on finance leases 21 28 Present value of finance lease liabilities 409 132

The minimum lease payments of £21,000 relate to the fleet of vehicles that are maintained for the US sales force with an initial contract term of 12 months from acquisition. The Group has capitalised the rental cost for the entire contract length, being 60 months, because if the rental is terminated before that date, any loss or gain on disposal is attributable to Vernalis. Vernalis plc Notes to the financial statements Annual report and accounts 2006 66 continued Notes to the financial statements for the year ended 31 December 2006

17 Trade and other liabilities

Group Company 2006 2005 2006 2005 £000 £000 £000 £000 Royalty buy out from GSK (a) 2,508 2,788 – – Amounts due to subsidiary undertakings (c) – – 125,758 125,758 Deferred consideration 4,056 4,624 4,056 4,624 Non-current trade and other liabilities 6,564 7,412 129,814 130,382 Trade payables 2,894 3,975 53 959 Taxation and social security payable 345 301 – – Other payables (b) 9 3,626 – – Accrued expenses 6,055 7,825 485 624 Deferred consideration 6,002 7,244 6,002 7,244 Current trade and other liabilities 15,305 22,971 6,540 8,827 Total trade and other liabilities 21,869 30,383 136,354 139,209 a) The royalty payment to GlaxoSmithKline (GSK) relates to the fair value of payments conditionally due under the agreement of December 2000 to buy out royalties due to GSK on sales of Frova ®. The Group is committed to making one further payment of $5 million, which is due 90 days after cumulative global sales exceed $300 million. During 2006, an exchange gain of £0.3 million and an implicit interest charge of £0.1 million have been recognised in the income statement. The weighted average period cannot be calculated due to the payment being conditional on future events. The directors estimate that this will not be before 2008. b) Included within other payables (and other receivables) at 31 December 2005 is £3,592,000 (CAD$7,204,000) relating to tax -assisted finance that was completed by Cita NeuroPharmaceuticals Inc. on 23 December 2004. This arrangement unwound on 6 January 2006. Also included within other payables is £7,000 (2005: £34,000) in relation to money-purchase pension contributions payable. c) Amounts due to subsidiary undertakings are unsecured, interest free and are repayable following the repayment of amounts due from subsidiary undertakings.

18 Deferred income At 31 December 2006 the Group had a total deferred income balance of £26.9 million (2005: £31.6 million) of which £5.0 million (2005: £5.1 million) was current and £21.9 million (2005: £26.5 million) was non-current. Of this total balance £24.1 million (2005: £27.3 million) relates to the initial $60 million payable from Endo in relation to the outlicence of the North American rights to Frova ®. 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 2004. These are being recognised over the expected useful lives of the respective agreements. Vernalis plc Notes to the financial statements Annual report and accounts 2006 67 continued

19 Provisions

Onerous Restructuring lease Returns provision provision and rebates Total Group £000 £000 £000 £000 At 1 January 2006 324 6,434 2,190 8,948 Charged for the year – 1,596 355 1,951 Reversed during the year ––(278) (278) Utilised during the year (324) (2,115) (1,239) (3,678) Amortisation of discount – 173 – 173 Movements on exchange ––(203) (203) At 31 December 2006 – 6,088 825 6,913

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

2006 2005 £000 £000 Current 1,373 4,169 Non-current 5,540 4,780 6,913 8,949

Restructuring provision The restructuring provision at 31 December 2005 of £324,000 arose from the acquisition of Cita NeuroPharmaceuticals Inc and was utilised in 2006. Onerous lease provision Where leasehold properties become vacant the Group provides for all costs, net of anticipated income, to the end of the lease or the anticipated date of the disposal or sublease. This provision relates to properties in Oxford and Cambridge and is expected to be utilised over the life of the related leases to 2014 and 2020 respectively. It has been discounted to fair value at the balance sheet date. In 2006 the provision was increased by £1,216,000 of which £1,196,000 has been treated as an exceptional item. This increase was in respect of a reassessment of the provision for the Cambridge property. Included in the onerous lease provision is a dilapidation provision which principally relates to costs associated with the Group’s obligation to reinstate leased buildings to their original state. The provision is expected to be utilised on vacation of the properties by 2014 and 2020 respectively and has been discounted to fair value at the balance sheet date. A further £380,000 has been charged in 2006 and capitalised to property, plant and equipment and depreciated immediately. The future minimum payments receivable from tenants occupying Group properties which are subject to an onerous lease is:

Property Property 2006 2005 £000 £000 Receipts under non-cancellable operating leases Within one year 412 – Later than one year and less than five years 1,795 – After five years – –

Returns and rebates provision On acquiring the rights from Elan the Group took on an obligation for certain product returns, estimated at £1.9 million. In addition the Group is responsible for product returns, rebates and chargebacks from the date it re -acquired the rights from Elan through to the date of the outlicence to Endo. There are no further obligations to the Company in respect of these for sales made after the Company outlicensed the rights to Frova ® to Endo. The provision is to be utilised within a four-year period. Following the acquisition of Apokyn ® in November 2005 a provision has been made in respect of product returns and rebates in relation to sales made by the Group, which should be utilised within the next year. Company The Company has no provisions. Vernalis plc Notes to the financial statements Annual report and accounts 2006 68 continued Notes to the financial statements for the year ended 31 December 2006

20 Deferred taxation (unrecognised)

2006 2005 £000 £000 Group Tax effect of timing differences Losses (138,225) (125,531) Excess of depreciation over tax allowances (8,814) (11,273) Short-term timing differences (2,924) (2,661) Potential deferred tax asset (149,963) (139,465)

There was no potential liability to deferred tax at 31 December 2006, nor at 31 December 2005. Given the uncertainty of the recoverability of the Group’s tax losses carried forward, no deferred tax asset in respect of the further available tax losses is recognised. Note 6 gives details of the tax losses available to be carried forward by the Group. Company The Company has a potential (unrecognised) deferred taxation asset of £1,052,000 at 31 December 2006 (31 December 2005: £1,116,000). It is considered highly unlikely that this potential asset will be realised in the foreseeable future.

21 Share capital

Allotted, Allotted, called up called up Authorised and fully paid Authorised and fully paid Number Number £000 £000 At 1 January 2006 Equity capital Ordinary shares of 5 pence each 450,858,071 311,463,549 22,543 15,573 Deferred shares of 95 pence each 33,375,891 33,375,891 31,707 31,707 Total share capital at 1 January 2006 484,233,962 344,839,440 54,250 47,280 Allotments – equity capital Ordinary shares of 5 pence each – 1,837,271 – 92 Total allotments for the year ended 31 December 2006 – 1,837,271 – 92 At 31 December 2006 Equity capital Ordinary shares of 5 pence each 450,858,071 313,300,820 22,543 15,665 Deferred shares of 95 pence each 33,375,891 33,375,891 31,707 31,707 Total share capital at 31 December 2006 484,233,962 346,676,711 54,250 47,372

On 2 August 2006, the Company issued 1,837,271 ordinary shares fully paid at a price of 56.29 pence per share representing the balance due of deferred consideration relating to the acquisition of Ionix Pharmaceuticals Limited in July 2005. See note 22 for details of share options over ordinary shares. Vernalis plc Notes to the financial statements Annual report and accounts 2006 69 continued

21 Share capital continued

Allotted, Allotted, called up called up Authorised and fully paid Authorised and fully paid Number Number £000 £000 At 1 January 2005 Equity capital Ordinary shares of 5 pence each 285,858,071 155,700,385 14,293 7,785 Deferred shares of 95 pence each 33,375,891 33,375,891 31,707 31,707 Total share capital at 1 January 2005 319,233,962 189,076,276 46,000 39,492 Allotments – equity capital Ordinary shares of 5 pence each 165,000,000 155,763,164 8,250 7,788 Total allotments for the year ended 31 December 2005 165,000,000 155,763,164 8,250 7,788 At 31 December 2005 Equity capital Deferred shares of 5 pence each 450,858,071 311,463,549 22,543 15,573 Deferred shares of 95 pence each 33,375,891 33,375,891 31,707 31,707 Total share capital at 31 December 2005 484,233,962 344,839,440 54,250 47,280

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. Vernalis plc Notes to the financial statements Annual report and accounts 2006 70 continued Notes to the financial statements for the year ended 31 December 2006

22 Share-based payments Potential issues of ordinary shares Certain directors of the Company and certain employees across the Group hold options to subscribe for shares in the Company at prices ranging from 58.5 pence per share to £20.30 per share under share option schemes approved by the shareholders and outlined in the remuneration report on pages 35 to 41. The number of shares subject to options at 31 December 2006, the periods in which they were granted and the periods in which they may be exercised are given below. All of the awards were granted for nil consideration.

Exercise price 2006 2005 Year of grant £ Exercise period Number Number Executive Scheme 16 December 1996 42.00 December 2000 – December 2006 – 1,202 16 December 1996 42.00 December 2001 – December 2006 – 1,202 15 December 1997 20.30 December 2000 – December 2007 3,724 3,724 15 December 1997 20.30 December 2002 – December 2007 3,078 3,078 30 September 1998 8.00 September 2001 – September 2008 6,250 6,250 30 September 1998 8.00 September 2003 – September 2008 6,250 6,250 1 July 1999 4.40 July 2002 – July 2009 12,500 12,500 1 July 1999 4.40 July 2004 – July 2009 12,500 12,500 Bonus Scheme 1 July 1999 1.00 July 2001 – July 2006 – 457 17 July 2000 1.00 July 2002 – July 2007 – 4,000 Option Deed 23 April 2003 1.00 April 2003 – April 2013 2,670,071 2,670,071 Share Option Plan 23 April 2003 0.585 April 2006 – April 2013 1,982,900 1,982,900 3 October 2003 0.835 October 2006 – October 2013 2,074,138 2,166,138 30 September 2004 0.88 September 2007 – September 2014 368,000 372,000 29 October 2004 0.835 October 2007 – October 2014 618,922 618,922 13 April 2005 0.6925 April 2008 – April 2015 3,951,395 3,975,395 21 December 2005 0.6275 December 2008 – December 2015 1,100,000 1,194,000 11 May 2006 0.7850 May 2006 – May 2016 873,000 – 18 October 2006 0.6750 October 2006 – October 2016 367,000 – SAYE Plan 29 October 2004 0.71 December 2007 – June 2008 453,719 473,469

Exercise of an option is subject to continued employment. Options were valued using the “Monte Carlo” model. The fair value per option granted and the assumptions used in the calculation for options granted since 6 January 2003 are set out respectively in the tables below. The Company’s effective date for IFRS 2, “Share-based Payments”, implementation is 1 January 2005 and the IFRS has been applied to all share options granted after 7 November 2002 and which have not vested by this effective date.

Number of shares granted Share price Fair value but not vested on on grant date (share price Fair value Award Grant date 1 January 2005 £ on grant date) £ Bonus Scheme 6 January 2003 12,500 0.85 65.8% 6,991 Option Deed 23 April 2003 2,670,071 0.59 59.2% 932,602 Share Option Plan 23 April 2003 1,982,900 0.59 53.4% 624,732 Share Option Plan 3 October 2003 2,116,138 0.835 53.3% 941,798 Share Option Plan 30 September 2004 378,000 0.88 53.5% 177,692 Share Option Plan 29 October 2004 618,922 0.835 53.2% 274,938 Share Option Plan 13 April 2005 3,990,395 0.6925 52.4% 1,447,995 Share Option Plan 21 December 2005 1,194,000 0.6275 49.5% 370,871 Share Option Plan 11 May 2006 890,000 0.78 48.2% 334,604 Share Option Plan 18 October 2006 367,000 0.67 47.7% 117,290 SAYE Plan 29 October 2004 482,543 0.835 60.9% 245,380 Vernalis plc Notes to the financial statements Annual report and accounts 2006 71 continued

22 Share-based payments continued

Expected dividend Expected Risk free Performance yield volatility rate condition Award Grant date Expected term (note (b)) (note (c)) (note (d)) (note (e)) Bonus Scheme 6 January 2003 5 years 0% 75% 4.31% None Option Deed 23 April 2003 5 years 0% 76% 4.17% Market Share Option Plan 23 April 2003 See note (a) below 0% 76% 4.17% Market Share Option Plan 3 October 2003 See note (a) below 0% 75% 4.60% Market Share Option Plan 30 September 2004 See note (a) below 0% 76% 4.78% Market Share Option Plan 29 October 2004 See note (a) below 0% 75% 4.68% Market Share Option Plan 13 April 2005 See note (a) below 0% 73% 4.65% Market Share Option Plan 21 December 2005 See note (a) below 0% 68.4% 4.25% Market Share Option Plan 11 May 2006 See note (a) below 0% 65.2% 4.83% Market Share Option Plan 18 October 2006 See note (a) below 0% 63.8% 4.82% Market SAYE Plan 29 October 2004 See note (a) below 0% 82% 4.58% Non-market

Notes to assumptions: a) i) 5 per cent of participants exercise per annum in years one to ten, providing that the options are “in the money” (irrespective of the level of gain) to allow for good leavers in the first three years and all other leavers in subsequent years. The performance test must have been satisfied. If the test has not been satisfied at the date of leaving the awards lapse. ii) 40 per cent of participants exercise after three years if a gain of 30 per cent is available. If this gain is not available these individuals refrain from exercising until such a gain can be made. iii) 25 per cent of the remainder exercise in years four, five and six and so on using a reducing balance methodology providing that a gain of 20 per cent is available. As with the initial 40 per cent of individuals, if the required gain is not possible, these individuals refrain from exercising until such a gain can be made. iv) Any remaining options are exercised at maturity providing they are “in the money”. Any awards that are “underwater” therefore lapse at maturity. The above exercise strategy is subject to the passing of the performance condition. If 100 per cent of the award fails to vest at year three then these individuals hold until year four before exercising or the awards lapse at year four. b) The dividend yield of 0 per cent in all cases reflects the absence of dividends and of a clear dividend policy statement at the relevant dates of grant. c) Expected volatility is a measure of the amount by which a share price is expected to fluctuate during a period. A standard approach to calculating volatility has been used based on a calculation of the standard deviation of the natural logarithm of share price movements. d) UK Gilt rates prevalent on the grant date and commensurate with the term of each award (six years for the share option plan and deed and three years for the SAYE). e) The share price performance indicators attached to the option deed and share option plan are market conditions dependent on the market price of the Company’s ordinary shares. Those attached to the SAYE Plan are not. Vernalis plc Notes to the financial statements Annual report and accounts 2006 72 continued Notes to the financial statements for the year ended 31 December 2006

22 Share-based payments continued A reconciliation of share option scheme movements for the years ended 31 December 2006 and 31 December 2005 is set out below:

2006 2005 Weighted Weighted average average exercise price exercise price Number £ Number £ Outstanding at 1 January 13,504,058 0.798 9,049,127 0.895 Granted 1,257,000 0.753 5,195,395 0.68 Lapsed (257,611) 1.121 (740,464) 1.14 Exercised –––– Outstanding at 31 December 14,503,447 0.788 13,504,058 0.80 Exercisable at 31 December ––51,163 8.86

The following tables summarise information about the range of exercise prices for share options outstanding at 31 December 2006 and 31 December 2005:

Weighted average Weighted average Weighted average 31 December 2006 exercise price remaining life remaining life Range of exercise prices £ Number of shares Expected years Contractual years £0.585 – £0.88 0.71 11,789,074 3.56 7.56 £1.00 1 2,670,071 2.25 6.25 £4.40 – £20.30 7.86 44,302 2.02 2.02

Weighted average Weighted average Weighted average 31 December 2005 exercise price remaining life remaining life Range of exercise prices £ Number of shares Expected years Contractual years £0.585 – £0.88 0.71 10,782,824 4.33 8.33 £1.00 1.00 2,674,528 3.25 7.25 £4.40 – £42.00 9.61 46,706 2.92 2.92

The total charge for the year relating to employee equity settled share-based payment plans was £1,245,884 (2005: £1,217,510), all of which related to the above equity-based transactions. Vernalis plc Notes to the financial statements Annual report and accounts 2006 73 continued

23 Other reserves

Merger Other Revaluation Options Translation Shares to reserve reserve reserve reserve reserve be issued Total Group £000 £000 £000 £000 £000 £000 £000 At 1 January 2005 101,985 50,776 597 1,059 – – 154,417 Revaluation of assets available for sale – – (79) – – – (79) Equity share options charge – – – 1,217 – – 1,217 Exchange loss on translation of overseas subsidiaries – – – – (31) – (31) Shares to be issued – – – – – 1,034 1,034 At 31 December 2005 101,985 50,776 518 2,276 (31) 1,034 156,558 Reclassification of share premium to other reserve – 24,400 ––––24,400 At 31 December 2005 restated 101,985 75,176 518 2,276 (31) 1,034 180,958 Revaluation of assets available for sale – – (382) – – – (382) (note 10) Equity share options charge – – – 1,246 – – 1,246 Exchange loss on translation of overseas subsidiaries – – – – (3,789) – (3,789) Shares to be issued – 942 – – – (1,034) (92) At 31 December 2006 101,985 76,118 136 3,522 (3,820) – 177,941

Merger Other Revaluation Options Translation Shares to reserve reserve reserve reserve reserve be issued Total Company £000 £000 £000 £000 £000 £000 £000

At 1 January 2005 44,471 20,026 – 1,059 – – 65,556 Revaluation of assets available for sale – – – – – – – Equity share options charge – – – 1,217 – – 1,217 Shares to be issued – – – – – 1,034 1,034 At 31 December 2005 44,471 20,026 – 2,276 – 1,034 67,807 Reclassification of share premium to other reserve – 24,400 – – – – 24,400 At 31 December 2005 restated 44,471 44,426 – 2,276 – 1,034 92,207 Revaluation of assets available for sale – – – – – – – Equity share options charge – – – 1,246 – – 1,246 Shares to be issued – 942 – – – (1,034) (92) At 31 December 2006 44,471 45,368 – 3,522 – – 93,361

The merger reserve arises as a difference on consolidation under merger accounting principles and is solely in respect of the merger of the Company and Vernalis Group plc in a prior period. The reserve represents the difference between the nominal value of shares issued by the Company in consideration for Vernalis Group plc shares and the nominal value and share premium of Vernalis Group plc shares at the date of the merger. The other reserve arises as a result of the application of merger relief taken in respect of the issue of shares on the acquisition of subsidiaries of the Group, including RiboTargets, Cerebrus Pharmaceuticals, Vanguard Medica, British Biotech Pharmaceuticals, Ionix Pharmaceuticals and Cita NeuroPharmaceuticals. The revaluation reserve represents unrealised gains and losses arising from the revaluation to fair value of available-for-sale financial assets. The options reserve arises from the valuation of outstanding employee share-based payments to their fair value. The translation reserve represents exchange differences arising from the translation of foreign operations. The shares to be issued reserve at 31 December 2005 represents the deferred consideration shares issued on 2 August 2006 in respect of the Ionix acquisition. Vernalis plc Notes to the financial statements Annual report and accounts 2006 74 continued Notes to the financial statements for the year ended 31 December 2006

24 Shareholders’ equity The share premium account is a non-distributable reserve. The deferred shares carry no voting rights and no rights to participate in the profits of the Company. On a return of capital in a winding up or dissolution (but not otherwise) the holders are entitled to a distribution in excess of assets distributed above £1,000,000,000,000. Further details of the rights of the deferred shares are given in note 21. The loss attributable to shareholders which is dealt with in the accounts of the Company was £415,000 (2005: profit of £69,000). In accordance with section 230(4) of the Companies Act 1985 there is no requirement to publish a profit and loss account for the Company.

25 Financial instruments related disclosure The Group’s financial instruments comprise available-for-sale financial assets, cash and cash equivalents, held-to-maturity financial assets, finance leases, borrowings and various receivables and payables, such as trade receivables and trade and other payables, 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 (a) interest rate risk, (b) liquidity risk, (c) foreign currency risk and (d) credit 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. The functional currency of all the Company’s subsidiary undertakings is sterling with the exception of Cita NeuroPharmaceuticals (Canadian dollar) and Vernalis Pharmaceuticals Inc (US dollar). 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 for Frova ®, product sales receipts in relation to Apokyn ®, 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 organisations in respect of ongoing trials. In addition, the Group has currency exposures to balances in currencies other than the Group’s functional currency. In particular, the Group has a loan for $50 million that is repayable in August 2009, and included within other payables is $5 million due to GSK. In addition the Group is financing the activities of its North American subsidiaries in their local currencies. 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 31 December 2006 or 31 December 2005. Credit risk The Group is exposed to a concentration of credit risk in respect of these pharmaceutical companies such that, if one or more of them is affected by financial difficulty, it could materially and adversely affect the Group’s financial results. The Group does not believe it is exposed to major concentrations of credit risk on other classes of financial instruments. The Group is exposed to credit-related losses in the event of non-performance by counter parties to financial instruments, but does not expect any counter parties to fail to meet their obligations. The Group’s maximum exposure to credit risk at 31 December 2006 was £44,967,000. Vernalis plc Notes to the financial statements Annual report and accounts 2006 75 continued

25 Financial instruments related disclosure continued Interest rate risk profile The interest rate profile of the Group’s financial assets and liabilities are:

31 December 2006 31 December 2005 Floating Fixed Total Floating Fixed Total £000 £000 £000 £000 £000 £000 Financial liabilities US dollar secured loan (i) – 28,670 28,670 – 31,112 31,112 Finance leases (ii) 409 – 409 132 – 132 409 28,670 29,079 132 31,112 31,244 Financial assets Sterling cash at bank and in hand 56 – 56 1,027 – 1,027 Euro cash at bank and in hand 1 – 1 48 – 48 US dollar cash at bank and in hand 426 – 426 131 – 131 Canadian dollar cash at bank and in hand 154 – 154 606 – 606 Sterling short-term bank deposits (iii) (iv) (v) 4,000 5,238 9,238 18,822 11,092 29,914 Euro short-term bank deposits (iii) (iv) 1,313 – 1,313 877 – 877 US dollar short-term bank deposits (iii) (iv) 10,181 – 10,181 7,639 – 7,639 Canadian dollar short-term bank deposits (iii) (iv) 367 – 367 ––– Sterling held-to-maturity financial assets (vi) – 15,718 15,718 – 27,761 27,761 US dollar held-to-maturity financial assets (vii) – 102 102 – 292 292 16,498 21,058 37,556 29,150 39,145 68,295 i) The US dollar secured loan is for a term of five years from 31 August 2004, and is secured against all royalty and milestone income receivable by Vernalis in respect of the licence deal with Endo. The weighted average interest rate is 5 per cent fixed for the term of the loan. ii) At 31 December 2006 and 31 December 2005 the finance leases were all in US dollars at variable rates of interest. The weighted average interest rate and period remaining on these liabilities at 31 December 2006 was 5.06 per cent (2005: 5.26 per cent) and three years (2005: four years). iii) Short-term bank deposits are used to maintain a positive bank balance in sterling, US dollar and euro. iv) The floating-rate short-term bank deposits are invested in a money market managed fund with a weighted average maturity of less than 90 days by reference to seven-day LIBID and three-month LIBID days and are repayable within 48 hours. v) The fixed-rate short-term bank deposits are placed with a range of banks and building societies at fixed terms with a weighted average maturity of 33 days and a weighted average fixed rate of 5.21 per cent at 31 December 2006. vi) The fixed-rate sterling held-to-maturity financial assets are placed with a range of banks and building societies at fixed terms with a weighted average maturity of 289 days and a weighted average fixed rate of 4.78 per cent at 31 December 2006. vii) The fixed-rate US dollar held-to-maturity financial assets are placed with Bank of America at fixed terms with a weighted average maturity of 365 days and a weighted average fixed rate of 4.41 per cent at 31 December 2006. The following financial assets and liabilities are all non-interest bearing and thus not exposed to interest rate risk: available-for-sale financial assets and various receivables and payables, such as trade and other receivables and trade and other payables that arise directly from operations. Borrowing facilities The Group has no significant undrawn committed borrowing facilities at 31 December, 2006. Foreign currency exposure At 31 December 2006 the Group’s operating companies had net monetary liabilities of £18.0 million (31 December 2005, net monetary liabilities: £23.1 million) denominated in US dollars, net monetary assets of £1.3 million (31 December 2005: £0.9 million) denominated in euros and net monetary assets of £0.5 million (31 December 2005: £0.6 million) denominated in Canadian dollars. Vernalis plc Notes to the financial statements Annual report and accounts 2006 76 continued Notes to the financial statements for the year ended 31 December 2006

25 Financial instruments related disclosure continued Fair value of derivative financial instruments Derivative financial instruments are recognised at fair value. The gain or loss on re -measurement to fair value is recognised immediately in the income statement. Fair value of non-derivative financial instruments Where market values are not available, fair values of financial assets and financial liabilities have been calculated by discounting expected future cash flows at prevailing interest rates and by applying year-end exchange rates. The carrying amounts of short-term borrowings approximate to book value.

26 Employees and directors The average number of persons, including executive directors, employed by the Group during the period was as follows:

2006 2005 £000 £000 Research, development and operations 124 107 Sales and marketing 45 4 Administration 39 35 208 146

At 31 December 2006, the Group employed a total of 210 permanent staff (31 December 2005: 192), 63 being in North America (31 December 2005: 31). Staff costs in respect of these employees were:

2006 2005 £000 £000 Wages and salaries 13,807 10,193 Social security costs 1,237 1,111 Pension costs 920 767 Share-based payments 1,332 1,218 17,296 13,289

In respect of directors’ remuneration, the Company has taken advantage of the permission in paragraph 1(6) of Schedule 6 to the Companies Act 1985 to omit aggregate information that is capable of being ascertained from the detailed disclosures in the report of the remuneration committee which form part of these financial statements. Pension costs are all in respect of defined contribution schemes. Key management compensation:

2006 2005 £000 £000 Salaries and short-term employee benefits 2,002 2,550 Post-employment benefits 186 177 Share-based payments 589 641 2,777 3,368

The key management figures given above include directors. Vernalis plc Notes to the financial statements Annual report and accounts 2006 77 continued

27 Operating lease commitments

Vehicles, plant Vehicles, plant Property and equipment Property and equipment 2006 2006 2005 2005 Group £000 £000 £000 £000 Commitments under non-cancellable operating leases: Within one year 2,486 51 2,461 50 Later than one year and less than five years 9,545 94 9,598 90 After five years 13,502 – 15,742 –

The Group lease various properties, vehicles and equipment under non-cancellable operating lease agreements. The leases have various terms, escalation clauses and renewal rights. The Group has an onerous lease provision for its properties in Oxfordshire and Cambridge (see note 19). Company The Company had no operating lease commitments at either 31 December 2006 or 31 December 2005.

28 Contingent liabilities and capital and other financial commitments Group The Group has commitments of up to £7.4 million payable in cash, £5.0 million payable in shares and £6.0 million payable in either shares or cash at 31 December 2006 (31 December 2005: £8.4 million in cash, £5.0 million in shares, £6.8 million in either shares or cash) which are contingent upon successful product development, registration and approval. Company The Company has no financial commitments at 31 December 2006 (31 December 2005: nil). The Company has provided Endo Pharmaceuticals Inc. with a parent company guarantee on the US$50 million loan and rolled up interest to Vernalis Development Limited (see note 16). Capital commitments were as follows:

31 December 31 December 2006 2005 Group £000 £000 Contracts placed for future capital expenditure not provided in the financial statements 137 232

Company The Company has no fixed assets or capital commitments at either 31 December 2006 or 31 December 2005.

29 Related party transactions Group The Group had no related party transactions. Company The Company has issued share options to employees of subsidiary undertakings and in accordance with IFRS2 has made a charge of £1,246,000 (2005: £1,218,000). The Company has been charged for corporate services provided by subsidiary undertakings £516,000 (2005: £1,272,000). The Company provides financing to its operating subsidiary undertakings. Details of inter-company loans can be found in notes 11 and 17. Key management compensation is disclosed in note 26. At 31 December 2006 an amount of £9,705 was due to the Company from Dr Peter Fellner in respect of his personal contribution to certain travel costs. This was repaid in full in January 2007.

30 Post-balance-sheet events On 16 March Vernalis announced the FDA had requested a three-month extension of the PDUFA date for Frova ® sNDA. Vernalis plc Annual report and accounts 2006 78 Shareholder information

Analysis of ordinary shareholdings at 31 December 2006 Number of shareholders: 19,258

Percentage Percentage Number of of ordinary Number of of total ordinary issued share shareholders shareholders shares capital Shareholding range 1 – 1,000 17,680 91.8060 3,062,734 0.9776 1,001 – 5,000 1,102 5.7223 2,249,674 0.7181 5,001 – 50,000 309 1.6045 4,453,198 1.4214 50,001 – 500,000 104 0.5400 15,546,511 4.9622 500,001 – 1,000,000 21 0.1090 15,895,170 5.0735 1,000,000 and over 42 0.2181 272,093,533 86.8474 Total 19,258 313,300,820

Registrar Administrative enquiries regarding shareholdings in Vernalis on such matters as a change of address or lost share certificates should be made to Capita Registrars. American Depository Receipt (ADR) holders should contact The Bank of New York. Correspondence should clearly state the name and address of the shareholder and refer to Vernalis. Capita share dealing services A quick and easy share dealing service is available to either sell or buy more shares. An on-line and telephone dealing facility is available providing shareholders with an easy to access and simple to use service. The table below provides you with details of the associated charges:

% of Minimum Maximum Compliance Channel trade value charge charge charge* Telephone 1.5% £22.50 £100.00 £2.50 Internet 1% £17.50 £50.00 £2.50

*The additional charge of £2.50 added to each transaction is to cover the increasing cost of complying with UK and EU regulation.

All transactions incur a compliance charge of £2.50. There is no need to pre-register and there are no complicated forms to fill in. The on-line and telephone dealing service allows you to trade “real time” at a known price which will be given to you at the time you give your instruction. To deal on-line or by telephone all you need is your surname, shareholder reference number, full postcode and your date of birth. Your shareholder reference number can be found on your latest statement or certificate where it will appear as either a “folio number” or “investor code”. Please have the appropriate documents to hand when you log on or call, as this information will be needed before you can buy or sell shares. For further information on this service, or to buy and sell shares, please contact: www.capitadeal.com (online dealing) 0870 458 4577 (telephone dealing) Amalgamation of shareholdings If a shareholder receives more than one copy of the report and accounts, it may indicate multiple accounts in the shareholder’s name are appearing on the share register. Shareholders can write to Capita Registrars, or ADR holders should contact The Bank of New York, at the addresses on the inside back cover stating the accounts concerned and giving instructions on how they should be amalgamated. Financial calendar Annual General Meeting: Wednesday 23 May 2007 Interim results 2007: September 2007 Preliminary results 2007: February 2008 Vernalis plc Shareholder information Annual report and accounts 2006 79 continued

Share price information Vernalis shares are listed on the London Stock Exchange under the symbol VER. The latest share price information is available on the Cityline Service operated by the Financial Times: tel +44 (0)906 8432619 (calls from within the UK are charged at 60 pence per minute). Annual General Meeting The Company’s 2006 Annual General Meeting of shareholders will take place at 11am on Wednesday 23 May 2007 at Barber -Surgeons’ Hall, Monkwell Square, London EC2Y 5BL. ADR holders may instruct The Bank of New York as to how the ordinary shares represented by their ADRs should be voted by completing and returning the voting card provided by The Bank of New York in accordance with the instructions given. Information for US investors The Company’s shares, in the form of American Depository Shares (ADRs) and as evidenced by ADRs, are listed in the USA on the Nasdaq National Market System. The ADRs are issued by The Bank of New York. Each ADR is equivalent to two ordinary shares and trades under the symbol VNLS. The Company prepares an annual report on Form 20-F which is filed with the Securities and Exchange Commission. Vernalis plc Annual report and accounts 2006 80 Addresses and advisers

Vernalis plc ADR depositary bank Registered Office The Bank of New York Oakdene Court Investor Relations 613 Reading Road PO Box 11258 Winnersh Church Street Station Berkshire RG41 5UA New York, NY 10286–1258 Tel +44 (0)118 977 3133 Tel +1 610 312 5315 Fax +44 (0)118 989 9300 (or toll-free on 1 888 BNY ADRS for US callers) Email [email protected] Registered number 2304992. www.adrbny.com Domiciled in the United Kingdom. www.stock.bankofny.com Incorporated in England and Wales. Financial advisers and stockbrokers Information about the Company may be found Piper Jaffray Limited on the internet at www.vernalis.com Phoenix House Registrar 18 King William Street Capita Registrars London EC4N 7US Northern House Tel +44 (0)20 7743 8700 Woodsome Park Fax +44 (0)20 7743 8735 Fenay Bridge Huddersfield Solicitors West Yorkshire HD8 0LA Allen & Overy LLP One Bishops Square Tel +44 (0)870 162 3131 London E1 6AO Tel (overseas) +44 20 8639 3131 Fax +44 (0)1484 600 911 Tel: +44 (0)203 088 0000 Email: [email protected] Fax: +44 (0)203 088 0088 Website: www.capitaregistrars.com Public relations Auditors Brunswick Group PricewaterhouseCoopers LLP 16 Lincoln’s Inn Fields 1 Embankment Place London WC2A 3ED London WC2N 6RH Tel +44 (0)20 7404 5959 Tel +44 (0)20 7583 5000 Fax +44 (0)20 7822 4652 www.pwc.com Vernalis plc Annual report and accounts 2006

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