V e r n a 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.