There were 1,653 press releases posted in the last 24 hours and 412,820 in the last 365 days.

Verona Pharma plc ("Verona Pharma" or the "Company") Reports Operational Update and Financial Results for Full Year Ended December 31, 2017

LONDON, Feb. 27, 2018 (GLOBE NEWSWIRE) -- Verona Pharma plc (AIM:VRP) (Nasdaq:VRNA) (Verona Pharma), a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapies for respiratory diseases, announces its audited results for the full year ended December 31, 2017.

OPERATIONAL AND DEVELOPMENT HIGHLIGHTS

  • Initiated four clinical studies, two of which have been successfully completed ahead of schedule:
      •   Reported in September 2017 positive top-line data from a Phase 2a clinical trial in COPD with RPL554 when dosed in addition to tiotropium (Spiriva®), compared to placebo:
           •   Demonstrated statistical significance across all primary and secondary efficacy outcome measures, as well as a clear dose response;
           •   Achieved significant and clinically meaningful additional improvement in peak lung function when added to tiotropium, a widely used drug to treat COPD;
           •   Produced a marked reduction in Functional Residual Capacity and in Residual Volume (both measures of trapped air in the lung) as compared to tiotropium alone;
           •   Achieved faster onset-of-action when added to tiotropium; and
           •   Confirmed that both study doses of RPL554 were well tolerated as add-on treatments to tiotropium; adverse reactions were consistent with previous studies with RPL554 and tiotropium. No cardiovascular-related or gastrointestinal related adverse reactions were reported;

       •   Positive top-line data from U.S. pharmacokinetic (“PK”) trial demonstrated that inhalation of nebulized RPL554 provides optimal delivery of a clinical dose to the lungs of patients:
           •   Completed IND-opening study in US;
           •   Confirmed inhaled RPL554 is an appropriate route of administration for patients with chronic COPD and other respiratory disorders;
           •   Demonstrated absorption occurs primarily in the lungs following inhaled administration, consistent with inhalation being the optimal form of delivery of medications for the treatment of COPD and asthma; and
           •   Low oral bioavailability of swallowed medication and low blood levels of RPL554 after inhalation, suggest limited contribution to systemic effects by inhaled RPL554;

       •   Provided update related to ongoing 4-week, Phase 2b dose-ranging clinical trial in Europe in approximately 400 patients to investigate the efficacy, safety, and dose-response of nebulized RPL554 for the maintenance treatment of COPD:
           •   Announced that study enrollment progressed ahead of expectations and completed patient enrollment, as announced on February 13, 2018 (after the year end);
           •   Expect to report top-line data early in the second quarter of 2018, earlier than previous guidance of mid-2018 and original guidance of second-half of 2018;

       •   Provided update related to ongoing Phase 2a clinical study to evaluate the PK and pharmacodynamic (“PD”) profile and tolerability of RPL554 in up to 10 CF patients as well as examine the effect on lung function:
           •   Expect to report top-line data in late first quarter of 2018, earlier than previous guidance of the first half of 2018;

  • Initiated development of RPL554 as dry powder inhaler (“DPI”) and pressurized metered dose inhaler (“pMDI”) formulations for maintenance treatment of COPD;

  • Strengthened the management team through the addition of Richard Hennings as Commercial Director and Dr Desiree Luthman as VP Regulatory Affairs; and

  • Entered into a global strategic services agreement with IQVIA (formerly known as QuintilesIMS), in which IQVIA agreed to serve as sole provider of core clinical trial services for Verona Pharma's RPL554 clinical development programs.

FULL YEAR FINANCIAL HIGHLIGHTS

  • Successfully raised £70 million ($90 million) gross, through a global offering comprising an initial public offering (“IPO”) on the Nasdaq Global Market (“Nasdaq”), and a concurrent European private placement, together with a shareholder private placement;

  • Verona Pharma American Depositary Shares (“ADSs”) now listed on Nasdaq under the symbol VRNA; each ADS represents 8 Verona Pharma ordinary shares;

  • Reported operating loss for the year ended December 31, 2017 of £29.8 million (full year 2016: £7.0 million) and reported loss after tax of £20.5 million (full year 2016: loss after tax of £5.0 million), reflecting the preparation and initiation of clinical trials and pre-clinical activities;

  • Reported loss per share of 23.4 pence for the year ended December 31, 2017 (full year 2016: loss per share 15.0 pence);

  • Net cash used in operating activities for the year ended December 31, 2017 of £20.7 million (full year 2016: £5.6 million);

  • Cash, cash equivalents and short-term investments at December 31, 2017 amounted to £80.3 million (December 31, 2016: £39.8 million);

POST PERIOD

  • Plan to conduct a further Phase 2a clinical trial in Europe to evaluate RPL554 when dosed in addition to LAMA/LABA therapy, compared to placebo:
       •   Anticipate commencing in the second half of 2018, with top-line data expected in 2019.

Jan-Anders Karlsson, PhD, CEO of Verona Pharma, commented: “2017 brought another very successful year with further highly encouraging clinical data for RPL554 together with additional strengthening of our cash resources through our Nasdaq IPO.  We look forward to reporting top-line data from the CF and COPD trials in the coming weeks. In the second half of 2018, we plan to commence a Phase 2a clinical trial in Europe to evaluate RPL554 when dosed in addition to LAMA/LABA therapy.”

For further information, please contact:

Verona Pharma plc             Tel: +44 (0)20 3283 4200
Jan-Anders Karlsson, Chief Executive Officer             info@veronapharma.com
               
Stifel Nicolaus Europe Limited (Nominated Adviser and UK Broker)             Tel: +44 (0) 20 7710 7600
Stewart Wallace / Jonathan Senior / Ben Maddison             SNELVeronaPharma@stifel.com 
               
FTI Consulting (UK Media and Investor enquiries)             Tel: +44 (0)20 3727 1000
Simon Conway / Natalie Garland-Collins             veronapharma@fticonsulting.com
               
ICR, Inc. (US Media and Investor enquiries)              
James Heins             Tel: +1 203-682-8251
              James.Heins@icrinc.com
Stephanie Carrington             Tel. +1 646-277-1282
              Stephanie.Carrington@icrinc.com
               

An electronic copy of the annual report and accounts will be made available today on the Company's website (http://www.veronapharma.com). A copy of the Form 20-F will be filed with the SEC as soon as possible. This press release does not constitute an offer to sell or the solicitation of an offer to buy securities, and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction.

About Verona Pharma plc

Verona Pharma is a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapies for the treatment of respiratory diseases with significant unmet medical needs. Verona Pharma’s product candidate, RPL554, is a first-in-class, inhaled, dual inhibitor of the enzymes phosphodiesterase 3 and 4 that acts as both a bronchodilator and an anti-inflammatory agent in a single compound. In clinical trials, treatment with RPL554 has been observed to result in statistically significant improvements in lung function as compared to placebo, and has shown clinically meaningful and statistically significant improvements in lung function when administered in addition to frequently used short- and long-acting bronchodilators as compared to such bronchodilators administered as a single agent. Verona Pharma is developing RPL554 for the treatment of chronic obstructive pulmonary disease (COPD), cystic fibrosis (CF), and potentially asthma.

Forward-Looking Statements

This press release contains forward-looking statements. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements, including, but not limited to, statements regarding the design of the Phase 2b clinical trial of RPL554, the importance of the Phase 2b clinical trial to our development plans for RPL554, the potential of RPL554 as a promising first-in-class treatment option for COPD, and the value of the data and insights that may be gathered from the Phase 2b clinical trial.

These forward-looking statements are based on management's current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from our expectations expressed or implied by the forward-looking statements, including, but not limited to, the following: our limited operating history; our need for additional funding to complete development and commercialization of RPL554, which may not be available and which may force us to delay, reduce or eliminate our development or commercialization efforts; the reliance of our business on the success of RPL554, our only product candidate under development; economic, political, regulatory and other risks involved with international operations; the lengthy and expensive process of clinical drug development, which has an uncertain outcome; serious adverse, undesirable or unacceptable side effects associated with RPL554, which could adversely affect our ability to develop or commercialize RPL554; potential delays in enrolling patients, which could adversely affect our research and development efforts; we may not be successful in developing RPL554 for multiple indications; our ability to obtain approval for and commercialize RPL554 in multiple major pharmaceutical markets; misconduct or other improper activities by our employees, consultants, principal investigators, and third-party service providers; delays in analyzing our top-line data; material differences between our top-line data and final data; our reliance on third parties, including clinical investigators, manufacturers and suppliers, and the risks related to these parties’ ability to successfully develop and commercialize RPL554; and lawsuits related to patents covering RPL554 and the potential for our patents to be found invalid or unenforceable. These and other important factors under the caption “Risk Factors” in our final prospectus filed with the Securities and Exchange Commission (“SEC”) on April 28, 2017 relating to our Registration Statement on Form F-1, and our other reports filed with the SEC, could cause actual results to differ materially from those indicated by the forward-looking statements made in this press release. Any such forward-looking statements represent management's estimates as of the date of this press release. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this press release.

CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S JOINT STATEMENT

OVERVIEW

We are a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapeutics for the treatment of respiratory diseases with significant unmet medical needs. Our product candidate, RPL554, is a first-in-class, inhaled, dual inhibitor of the enzymes phosphodiesterase 3 and 4, or PDE3 and PDE4, that acts as both a bronchodilator and an anti-inflammatory agent in a single compound. We are not aware of any therapy in a single compound in clinical development or approved by the U.S. Food and Drug Administration, or FDA, or the European Medicines Agency, or EMA, for the treatment of respiratory diseases that acts as both a bronchodilator and anti-inflammatory agent. We believe RPL554 has the potential to be the first novel class of bronchodilator in over 40 years. We have clinically completed twelve Phase 1 and 2 clinical trials for RPL554 with over 700 subjects enrolled; ten of these studies have been reported, one study is expected to report late in the first quarter of 2018 and one study is expected to report early in the second quarter of 2018. In our clinical trials, treatment with RPL554 has been observed to result in statistically significant improvements in lung function as compared to placebo. Statistically significant means that there is a low statistical probability, typically less than 5%, that the observed results occurred by chance alone. Our clinical trials also have shown clinically meaningful and statistically significant improvements in lung function when RPL554 is added to commonly used short- and long-acting bronchodilators as compared to either bronchodilator administered as a single agent. RPL554 also has shown anti-inflammatory effects and been well tolerated in our clinical trials, and has not been observed to result in the gastrointestinal or other side effects commonly associated with roflumilast, the only PDE4 inhibitor currently on the market for the treatment of chronic obstructive pulmonary disease, or COPD. We are developing RPL554 for the treatment of patients with COPD and for the treatment of patients with cystic fibrosis, or CF.

We believe there is an urgent and unmet medical need for new and more effective treatments for COPD to reduce the number and burden of symptoms, reduce acute periods of worsening symptoms, or exacerbations, and establish a consistent and durable response to treatment. In addition, in CF, a fatal inherited disease, we believe the bronchodilatory and anti-inflammatory effects of RPL554 may be beneficial. We believe RPL554, if approved, has the potential to become an important and novel treatment and standard of care for COPD and CF patients. We may also explore, alone or with a collaborator, the development of RPL554 to treat asthma and other respiratory diseases.

According to the World Health Organization (WHO), over one billion people suffer from chronic respiratory diseases. Among the most common of these afflictions is COPD, which is a progressive respiratory disease for which there is no cure. COPD damages the airways and the lungs and leads to shortness of breath, impacting a person's ability to perform daily activities. Chronic inflammation plays a central role in the pathology of the disease, and is particularly prominent in the airways of COPD patients. COPD includes chronic bronchitis, which refers to the inflammation of the lung and airways that results in coughing and sputum production, and emphysema, which refers to a destruction of distal lung tissue, or air sacs. In some cases, patients with COPD experience exacerbations, which are estimated to cause approximately 1.5 million emergency department visits, 687,000 hospitalizations and 129,000 deaths per year in the United States alone. According to the WHO, COPD is expected to become the third leading cause of death globally by 2030, with 210 million people worldwide suffering from the disease. It is estimated that there are 24 million people with COPD in the United States, only half of whom have been diagnosed. Of those diagnosed with COPD in the United States, more than 2 million suffer from severe or very severe forms of the disease. Total annual medical costs relating to COPD in the United States were estimated to be $32 billion in 2010 and are projected to rise to $49 billion in 2020. Whereas the number of patients diagnosed with COPD in the US continues to increase annually, the growth in numbers in more developing countries, like China, is significantly higher.  The prevalence of COPD in China is expected to be about 8% of patients over 40 years of age and is expected to increase in coming years. Global sales of drugs currently indicated for COPD in major markets were approximately $15 billion in 2015 and are expected to grow to $20 billion by 2025.

COPD patients are commonly treated with bronchodilators, which seek to relieve airway constriction and make it easier to breathe, and inhaled corticosteroids, which seek to reduce lung inflammation. For patients with more severe disease who experience recurrent exacerbations, and for whom inhaled corticosteroids are not effective, an oral formulation of a PDE4 inhibitor, which is an anti-inflammatory agent, may also be used as treatment. Despite the wide availability of these therapies, many COPD patients continue to suffer exacerbations and have continued respiratory symptoms, which limit their daily activities. Furthermore, current therapies have not demonstrated an ability to change the progressive decline in lung function or reduce the mortality associated with COPD. We believe there is an urgent and unmet medical need for new and more effective treatments for COPD to reduce the number and burden of symptoms, reduce exacerbations and establish a consistent and durable treatment response.

CF is the most common fatal inherited disease in the United States and Europe. CF causes impaired lung function and is commonly associated with repeat and persistent lung infections due to the inability to clear thickened phlegm, or mucus, from the lung. This condition often results in frequent exacerbations and hospitalizations. There is no cure for CF and although current therapies are leading to longer lifespans the median age of death for CF patients is still only around 40 years. CF is considered a rare, or orphan, disease by both the FDA and the EMA. According to the Cystic Fibrosis Foundation, more than 30,000 people in the United States and more than 70,000 people worldwide are living with CF and approximately 1,000 new cases of CF are diagnosed each year. The FDA and the EMA provide incentives for sponsors to develop products for orphan diseases, and we plan to seek orphan drug designation for RPL554 from both regulators in treating CF. CF patients require lifelong treatment with multiple daily medications, frequent hospitalizations and, ultimately, lung transplants in some end-stage patients. The quality of life for CF patients is compromised as a result of spending significant time on self-care every day and frequent outpatient doctor visits and hospitalizations. CF patients take an average of seven medications daily. In the 12-month period ended June 30, 2016, global sales of drugs currently indicated for CF totaled $4.1 billion. The global market for CF drugs is expected to increase to $7.0 billion by 2020.

RPL554 is a first-in-class, inhaled, dual inhibitor of PDE3 and PDE4. Phosphodiesterases, or PDEs, are well known and validated therapeutic targets, and many PDE inhibitors, with different specificities, are currently available in the market for other indications. PDE3 is present in airways and the lung, and inhibition of this enzyme is primarily responsible for the bronchodilatory action of RPL554. PDE4 is found in inflammatory and epithelial cells, and inhibition of this enzyme contributes to RPL554's anti-inflammatory activity. PDEs metabolize the critical signaling molecules, cyclic adenosine monophosphate, or cAMP, and cyclic guanosine monophosphate, or cGMP. By inhibiting PDE3 and PDE4, RPL554 increases the levels of cAMP and cGMP, resulting in bronchodilator and anti-inflammatory effects. RPL554 also stimulates the cystic fibrosis transmembrane conductance regulator, or CFTR, which is an ion channel in the epithelial cells lining the airways. Mutations in the CFTR protein result in poorly or non-functioning ion channels, which cause CF and are potentially important in COPD. CFTR stimulation leads to improved electrolyte balance in the lung and thinning of the mucus, which facilitates mucociliary clearance and leads to improved lung function and potentially a reduction in lung infections. Dual inhibition of PDE3 and PDE4 has been observed to be more effective than inhibition of either PDE alone at relaxing airway smooth muscle cells and suppressing the activation and functions of pro-inflammatory cells residing in the lung, both of which are commonly understood to play a significant role in COPD and CF.

CLINICAL DEVELOPMENT IN 2017

COPD - nebulized formulation

We are developing RPL554 in a nebulized formulation for the maintenance treatment of COPD patients. We also are developing RPL554 in a nebulized formulation as an add-on therapy to short acting bronchodilators and other commonly used therapies for the treatment of hospitalized patients with acute exacerbations of COPD.

To evaluate RPL554 in a nebulized formulation for COPD, we commenced four clinical trials in 2017, with two completed during the year and two ongoing. Our completed studies included our IND-opening study in the US.

In September 2017, we reported positive data from a Phase 2a clinical trial evaluating RPL554 compared to placebo in approximately 30 patients with COPD as an add-on therapy to tiotropium, a commonly used long acting bronchodilator:

  • RPL554 demonstrated a significant and clinically meaningful additional improvement in peak lung function when added to tiotropium, a widely used drug to treat COPD;

  • RPL554 achieved a faster onset-of-action when added to tiotropium vs tiotropium alone;

  • RPL554 opened peripheral airways as measured by improvements in airway resistance and compliance, suggesting that RPL554 treatment may reduce dyspnea (shortness of breath), a major debilitating symptom of COPD; and

  • RPL554 demonstrated statistical significance across all primary and secondary efficacy outcome measures, as well as a clear dose response at 6 mg dose compared to 1.5 mg dose.

Also in September 2017, we reported positive data from a Phase 1 single-dose pharmacokinetic, or PK, trial in 12 healthy volunteers. A PK trial involves the study of the process of bodily absorption, distribution, metabolism and excretion of a drug. Our IND-opening study, conducted in the United States, confirmed that:

  • RPL554 absorption occurs primarily via the lungs following inhaled administration, consistent with optimal inhaled delivery of medications for the treatment of COPD and asthma; and

  • Low oral bioavailability and blood levels following inhalation of RPL554 suggest that swallowed medication contributes little to systemic effects of RPL554.

On February 13, 2018, we provided an update on enrollment in our four-week Phase 2b dose ranging clinical trial in approximately 400 patients, for which dosing is now completed, with data now anticipated early in the second quarter of 2018, which is earlier than previous guidance of mid-2018.

COPD - pMDI and DPI formulations

In addition to our nebulized formulation of RPL554, we are developing RPL554 in both pressurized metered dose inhaler, or pMDI, and dry powder inhaler, or DPI, formulations for the maintenance treatment of COPD. We plan to select a pMDI and a DPI formulation as part of an expansion to the RPL554 clinical development program to the treatment of patients with moderate to severe chronic obstructive pulmonary disease (COPD).  It is estimated that, in the United States, approximately 4.5 million patients with moderate to severe COPD use inhalers for maintenance therapy.

Delivery of orally inhaled drugs by pMDI or DPI is a mainstay of maintenance treatment for patients with moderate to severe COPD. Successful development of a pMDI or DPI formulation of RPL554 for moderate disease would greatly expand the addressable market for the drug and represents a multi-billion dollar potential opportunity. We believe that over 90% of patients with diagnosed COPD use inhalers, such as a pMDI or DPI, rather than a nebulizer, to administer treatment.

We plan to commence pre‑clinical studies for RPL554 in these formulations in 2018, followed by the first clinical trials in healthy subjects or patients with COPD.

We may also explore the development of RPL554 in pMDI and/or DPI formulations for the treatment of asthma and other respiratory diseases.

Cystic Fibrosis

In April 2017, we announced the commencement of a Phase 2a single dose PK and pharmacodynamics, or PD, trial evaluating RPL554 in approximately ten CF patients. A PD trial involves the study of the biochemical and pharmacological effects of a drug and its mechanism of action, including the correlation of the drug’s actions and effects with its mechanism of action.

On February 13, 2018, we provided an update on enrollment in this Phase 2a PK and PD trial, with data now anticipated in late first quarter of 2018, which is earlier than previous guidance of first half of 2018.

PREVIOUS STUDIES WITH RPL554

In our clinical trials, RPL554 has shown rapid onset and durable bronchodilation in healthy subjects and patients with COPD or asthma when inhaled from a nebulizer. In addition, RPL554 has been observed to be complementary and additive when administered as an add-on therapy to other currently marketed bronchodilators. In 2017 we announced the results of a Phase 2a clinical trial of RPL554 in 30 patients with COPD. Our primary objective in this clinical trial was to evaluate the improvement in lung function, as measured by the maximal volume of air a person can forcefully exhale in one minute, FEV1, and the duration of action of RPL554. We evaluated RPL554 administered as an add-on therapy to a commonly used bronchodilator tiotropium, marketed as Spiriva. We observed clinically meaningful and statistically significant improvement in lung function, as measured by FEV1, when RPL554 was administered as an add-on therapy to a standard dose of tiotropium as compared to a standard dose of tiotropium alone. In this clinical trial, we observed the effect size, or peak improvement was 127 ml and 104 ml for 1.5mg and 6mg doses respectively over tiotropium alone. P-value is a conventional statistical method for measuring the statistical significance of clinical results. A p-value of 0.05 or less represents statistical significance, meaning that there is a less than 1-in-20 likelihood that the observed results occurred by chance. In addition, RPL554 administered as an add-on therapy to tiotropium resulted in a statistically significant reduction in time of onset of bronchodilation as compared to tiotropium alone. The data from this study was highly consistent with the results of a previous Phase 2a clinical trial we announced in 2016 of RPL554 in 36 patients with COPD. Our primary objective in that clinical trial was to evaluate the improvement in lung function, as measured by the maximal volume of air a person can forcefully exhale in one minute, FEV1, and the duration of action of RPL554. We evaluated RPL554 administered as a single agent as compared to placebo and two commonly used bronchodilators, albuterol, also known as salbutamol and marketed as Ventolin, and ipratropium, marketed as Atrovent. We also evaluated RPL554 administered as an add-on therapy to either albuterol or ipratropium, in each case as compared to albuterol or ipratropium alone. We observed that RPL554 administered as a single agent produced statistically significant improvements in lung function, as measured by FEV1, as compared to placebo, with a p-value of less than 0.001. P-value is a conventional statistical method for measuring the statistical significance of clinical results. We also observed clinically meaningful and statistically significant improvement in lung function, as measured by FEV1, when RPL554 was administered as an add-on therapy to standard doses of albuterol and ipratropium as compared to standard doses of either bronchodilator alone. In this clinical trial, we observed the effect size, or peak improvement minus placebo improvement, was 51% higher for the add-on-therapy of RPL554 with albuterol as compared to albuterol alone, and 66% higher for the add-on-therapy of RPL554 with ipratropium as compared to ipratropium alone. In addition, RPL554 administered as an add-on therapy to either albuterol or ipratropium resulted in a statistically significant reduction in time of onset of bronchodilation as compared to albuterol or ipratropium alone.

CORPORATE

RPL554 is protected by granted and pending patents. We believe that medicinal products containing RPL554 are protected by our IP beyond 2035. We have worldwide commercialization rights for RPL554.

We raised £70m in gross proceeds from investors from our April 2017 global offering comprising an initial public offering (“IPO”) on the NASDAQ Global Market (“Nasdaq”), and a concurrent European private placement, together with a shareholder private placement.

Members of our management team, which we have strengthened and expanded during the year, and our board of directors have extensive experience in large pharmaceutical and biotechnology companies, particularly in respiratory product development from drug discovery through commercialization and have played important roles in the development and commercialization of several approved respiratory treatments, including Symbicort, Daliresp/Daxas, Spiriva and Flutiform.

FINANCIALS

The operating loss for the year ended December 31, 2017 was £29.8 million (2016: £7.0 million) and the loss after tax for the year ended December 31, 2017 was £20.5 million (2016: £5.0 million).

Research and Development Costs

Research and development costs were £23.7 million for the year ended December 31, 2017, as compared to £4.5 million for the year ended December 31, 2016, an increase of £19.2 million. The increase was attributable to a £12.3 million increase in clinical trial expenses related to the initiation of four, and completion of two, Phase 2 clinical trials of RPL554.  In addition, we increased spending on contract manufacturing and other formulation work by £2.7 million and toxicology and other pre-clinical development by £1.2m.  Our salary costs increased by £0.3m and our share-based payment charge rose by £1.2 million as we expanded our team and initiated a new long term incentive plan to drive development of RPL 554.  Furthermore, our spend on third party consultants increased by £0.8 million and patent and other costs by £0.3 million.

General and Administrative Costs

General and administrative costs were £6.0 million for the year ended December 31, 2017, as compared to £2.5 million for the year ended December 31, 2016, an increase of £3.5 million. The increase was attributable to £0.8 million increase in our salary costs and a £1.1 million increase in our share-based payment charge as we built the team to support the activities of the Group.  There was an increase of £1.3 million of costs in preparation for and relating to the Global Offering, as well as ongoing compliance and other costs due to listing our ADSs on the NASDAQ stock market.  We also incurred costs of £0.4 million developing our commercial strategy for RPL 554.

Finance Income and Expense

Finance income was £7.0 million for the year ended December 31, 2017 and £1.8 million for the year ended December 31, 2016. The increase in finance income was primarily due to a decrease in the fair value of the warrant liability of £6.6 million caused by changes in the underlying assumptions for measuring the liability of the warrants issued in the July 2016 Placement, including the price and volatility of our ordinary shares and the unwinding of the expected life of the warrants.

Finance expense was £2.5 million for the year ended December 31, 2017 as compared to £0.8 million for the year ended December 31, 2016. The increase was primarily due to the foreign exchange loss on translation of foreign currency denominated cash and cash equivalents and short term investments.

Taxation

Taxation for the year ended December 31, 2017 amounted to a credit of £4.7 million as compared to a credit of £1.0 million for the year ended December 31, 2016, an increase in the credit amount of £3.7 million. The credits are obtained at a rate of 14.5% of 230% of our qualifying research and development expenditure, and the increase in the credit amount was primarily attributable to our increased expenditure on research and development.

Cash Flows

The decrease in net cash used in operating activities to £20.7 million for the year ended December 31, 2017 from £5.6 million for the year ended December 31, 2016 was primarily due to an increase in loss before taxation driven by higher research and development costs.

The increase in net cash used in investing activities to £49.5 million for the year ended December 31, 2017 from £41 thousand for the year ended December 31, 2016 was due to placing funds raised in the Global Offering on term deposits with maturities of more than three months at inception.

The net cash of £63.2 million received from financing activities to for the year ended December 31, 2017 was the cash raised from the Global Offering. The £41.2 million received for the year ended December 31, 2016 was the cash received from the sale of our equity securities and warrants in connection with the July 2016 Placement.

Cash, cash equivalents and short-term investments

Net cash, cash equivalents and short-term investments at December 31, 2017 increased to £80.3 million from £39.8 million at December 31, 2016 primarily due to the global offering offset by cash spent on research and development activities.

Net assets

Net assets increased to £79.9 million at the year ended December 31, 2017 from £34.5 million at the year ended December 31, 2016. This increase was primarily due to the net cash of £63.2 million raised from the issue of shares, offset by the increased expenditure from research and development costs.

OUTLOOK AND STRATEGY

We intend to become a leading biopharmaceutical company focused on the treatment of respiratory diseases with significant unmet medical needs. The key elements of our strategy to achieve this goal include:

  • Rapidly advance the development of nebulized RPL554 for the maintenance treatment of COPD in moderate and severe patients.

  • For the maintenance treatment of severe COPD patients, we are progressing the development of RPL554 in a nebulized formulation. We are currently conducting a four-week Phase 2b dose ranging clinical trial in approximately 400 patients; data from this study is now expected early in the second quarter of 2018.

  • Following completion of this ongoing 4-week Phase 2b clinical trial, we will evaluate and possibly adjust the overall and near-term development plans for RPL554. Depending on the data from all clinical trials conducted with RPL554 to date, future interactions with regulatory authorities and our commercial assessment of different development options for RPL554, we will consider any opportunity to focus and accelerate our development plans for RPL554, including proceeding more rapidly towards Phase 3 clinical trials, particularly with nebulized RPL554 for the maintenance treatment of COPD.

  • For the maintenance treatment of severe COPD patients, we also plan to conduct a further Phase 2a clinical trial in Europe to evaluate RPL554 when dosed in addition to LAMA/LABA therapy, compared to placebo. We expect to commence this study late in the second half of 2018, with top-line data expected in 2019.

  • RPL554 for nebulized administration is currently presented in a glass vial with a flip, tear-up cap. This format is adequate for clinical trials but patient acceptance in a commercial setting is expected to be improved by a switch to presenting the suspension formulation of RPL554 in plastic ampules. We will investigate the feasibility to manufacture and supply RPL554 nebulized suspension formulation in plastic ampules. In addition to patient acceptance, switching to plastic ampules may also be more cost-effective for manufacturing in larger volumes. A decision on presentation form will be made before the start of Phase 3 clinical trials; during this evaluation process we will also review and optimize the nebulized suspension formulation as part of a quality by design program.

  • For the treatment of COPD patients who may prefer the more convenient administration of an inhaler device, we are developing RPL554 in inhaler formulations. We plan to commence pre‑clinical studies for RPL554 in these formulations in 2018, followed by the first clinical trials in healthy subjects or patients with COPD.

  • Proceeding more rapidly towards Phase 3 clinical trials with nebulized RPL554 for the maintenance treatment of COPD may require us to focus our financial and other resources on maintenance treatment of COPD with nebulized and inhaled formulations of RPL554 in the short term, which may alter our timing to commence further trials using RPL554 in other indications.

  • Advance the development of nebulized RPL554 for the treatment of acute exacerbations of COPD.  We are developing RPL554 as an add-on therapy to short acting bronchodilators and other commonly used therapies for the treatment of hospitalized patients with acute exacerbations of COPD. The timing for future studies in this indication may be dependent on any decision to move more rapidly towards Phase 3 clinical trials with nebulized RPL554 for the maintenance treatment of COPD.

  • Develop RPL554 for the treatment of CF. The timing for future studies in this indication may be dependent on any decision to move more rapidly towards Phase 3 clinical trials with nebulized RPL554 for the maintenance treatment of COPD.

  • Pursue development of RPL554 in other forms of respiratory disease.  We believe that RPL554’s properties as an inhaled, dual inhibitor of PDE3 and PDE4 give it broad potential applicability in the treatment of other respiratory diseases. We may explore development of RPL554 to treat other forms of respiratory disease following development of RPL554 for the treatment of COPD and CF.

  • Seek strategic collaborative relationships.  We may seek strategic collaborations with market leading biopharmaceutical companies to develop and commercialize RPL554. We believe these collaborations could provide significant funding to advance the development of RPL554 while allowing us to benefit from the development or commercialization expertise of our collaborators.

  • Acquire or in-license product candidates for the treatment of respiratory diseases.  We plan to leverage our respiratory disease expertise to identify and in-license or acquire additional clinical stage product candidates that we believe have the potential to become novel treatments for respiratory diseases with significant unmet medical needs.

We would like to thank the staff and Board members for all their contributions and shareholders for their continued support during a successful year.

Dr. David Ebsworth                   Dr. Jan-Anders Karlsson
Chairman                   Chief Executive Officer
February 27, 2018                   February 27, 2018
                     

 

           
VERONA PHARMA PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2017
           
           
  Notes   Year ended
December
31, 2016
  Year ended
December
31, 2017
      £'000s   £'000s
Research and development costs     (4,522 )   (23,717 )
General and administrative costs     (2,498 )   (6,039 )
Operating loss 7   (7,020 )   (29,756 )
Finance income 9   1,841     7,018  
Finance expense 9   (794 )   (2,465 )
Loss before taxation     (5,973 )   (25,203 )
Taxation — credit 10   954     4,706  
Loss for the year     (5,019 )   (20,497 )
Other comprehensive income / (loss):          
Items that might be subsequently reclassified to profit or loss          
Exchange differences on translating foreign operations     43     (29 )
Total comprehensive loss attributable to owners of the Company     (4,976 )   (20,526 )
Loss per ordinary share — basic and diluted (pence) 5   (15.0 )   (23.4 )
               

The accompanying notes form an integral part of these consolidated financial statements.

           
           
VERONA PHARMA PLC
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2017
 
           
  Notes   As of
December
31, 2016
  As of
December
31, 2017
      £'000s   £'000s
ASSETS          
Non-current assets:          
Goodwill 11   441     441  
Intangible assets 12   1,877     1,969  
Property, plant and equipment 13   14     16  
Total non-current assets     2,332     2,426  
           
Current assets:          
Prepayments and other receivables 14   2,959     1,810  
Current tax receivable     1,067     5,006  
Short term investments       48,819  
Cash and cash equivalents     39,785     31,443  
Total current assets     43,811     87,078  
Total assets     46,143     89,504  
           
EQUITY AND LIABILITIES          
Capital and reserves attributable to equity holders:          
Share capital 16   2,568     5,251  
Share premium     58,526     118,862  
Share-based payment reserve     2,103     5,022  
Accumulated loss     (28,728 )   (49,254 )
Total equity     34,469     79,881  
           
Current liabilities:          
Derivative financial instrument 20   7,923     1,273  
Trade and other payables 18   2,823     7,154  
Tax payable—U.S. Operations     126     169  
Total current liabilities     10,872     8,596  
           
Non-current liabilities:          
Assumed contingent obligation 19   802     875  
Deferred income         152  
Total non-current liabilities     802     1,027  
Total equity and liabilities     46,143     89,504  
               

The financial statements were approved by the Company's board of directors on February 27, 2018 and signed on its behalf by Dr. Jan-Anders Karlsson, Chief Executive Officer of the Company. The accompanying notes form an integral part of these consolidated financial statements.

Dr. Jan-Anders Karlsson
Chief Executive Officer of the Company. Company number: 05375156

           
           
VERONA PHARMA PLC
COMPANY STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2017
           
           
  Notes   As of
December 31,
2016
  As of
December 31,
2017
      £'000s   £'000s
ASSETS          
Non-current assets:          
Goodwill 11   441     441  
Intangible assets 12   1,877     1,969  
Property, plant and equipment 13   14     16  
Investments 15   243     877  
Total non-current assets     2,575     3,303  
           
Current assets:          
Prepayments and other receivables 14   2,953     1,970  
Current tax receivable     1,067     5,006  
Short term investments 3       48,819  
Cash and cash equivalents     39,734     31,313  
Total current assets     43,754     87,108  
Total assets     46,329     90,411  
           
EQUITY AND LIABILITIES          
Capital and reserves attributable to equity holders:          
Share capital 16   2,568     5,251  
Share premium     58,526     118,862  
Share-based payment reserve     2,103     5,022  
Accumulated loss     (28,743 )   (49,084 )
Total equity     34,454     80,051  
           
Current liabilities:          
Derivative financial instrument 20   7,923     1,273  
Trade and other payables 18   3,150     8,060  
Total current liabilities     11,073     9,333  
           
Non-current liabilities:          
Assumed contingent obligation 19   802     875  
Deferred income         152  
Total non-current liabilities     802     1,027  
Total equity and liabilities     46,329     90,411  

The Parent Company has taken advantage of the exemption permitted by Section 408 of the Companies Act 2006 not to present an income statement for the year. The Parent Company's loss for the year was £20.3m (2016: loss of £5.0m), which has been included in the Group’s income statement.

The financial statements on were approved by the Company's board of directors on February 27, 2018 and signed on its behalf by Dr. Jan-Anders Karlsson, Chief Executive Officer of the Company.

Dr. Jan-Anders Karlsson
Chief Executive Officer of the Company.
Company number: 05375156

       
       
VERONA PHARMA PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2017
       
       
  Year ended
December
31, 2016
  Year ended
December
31, 2017
  £'000s   £'000s
Cash used in operating activities:      
Loss before taxation (5,973 )   (25,203 )
Finance income (1,841 )   (7,018 )
Finance expense 794     2,465  
Share-based payment charge 577     2,919  
Increase in prepayments and other receivables (1,809 )   (161 )
Increase in trade and other payables 1,068     5,363  
Depreciation of property, plant and equipment 10     7  
Loss on disposal of property, plant and equipment 3      
Amortization of intangible assets 52     116  
Cash used in operating activities (7,119 )   (21,512 )
Cash inflow from taxation 1,533     816  
Net cash used in operating activities (5,586 )   (20,696 )
Cash flow from investing activities:      
Interest received 87     128  
Purchase of plant and equipment (13 )   (9 )
Payment for patents and computer software (115 )   (208 )
Transfer to short term investments     (54,465 )
Maturity of short term investments     5,085  
Net cash used in investing activities (41 )   (49,469 )
Cash flow from financing activities:      
Gross proceeds from issue of shares and warrants 44,750      
Gross proceeds from the April 2017 Global Offering     70,032  
Transaction costs on issue of shares and warrants (2,910 )    
Transaction costs on April 2017 Global Offering (636 )   (6,786 )
Net cash generated from financing activities 41,204     63,246  
Net increase / (decrease) in cash and cash equivalents 35,577     (6,919 )
Cash and cash equivalents at the beginning of the year 3,524     39,785  
Effect of exchange rates on cash and cash equivalents 684     (1,423 )
Cash and cash equivalents at the end of the period 39,785     31,443  
           

The accompanying notes form an integral part of these consolidated financial statements.

       
       
VERONA PHARMA PLC
COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2017
       
       
  Year ended
December 31,
2016
  Year ended
December 31,
2017
  £'000s   £'000s
Cash used in operating activities:      
Loss before taxation (6,048 )   (25,357 )
Finance income (1,841 )   (7,018 )
Finance expense 794     2,465  
Share-based payment charge 414     2,285  
Increase in prepayments and other receivables (1,803 )   (327 )
Increase in trade and other payables 1,231     5,953  
Depreciation of property, plant and equipment 10     7  
Loss on disposal of property, plant and equipment 3      
Amortization of intangible assets 52     116  
Cash used in operating activities (7,188 )   (21,876 )
Cash inflow from taxation 1,551     1,078  
Net cash used in operating activities (5,637 )   (20,798 )
Cash flow from investing activities:      
Interest received 87     151  
Purchase of plant and equipment (13 )   (9 )
Payment for patents and computer software (115 )   (208 )
Transfer to short term investments     (54,465 )
Maturity of short term investments     5,085  
Net cash used in investing activities (41 )   (49,446 )
Cash flow from financing activities:      
Gross proceeds from issue of shares and warrants 44,750      
Gross proceeds from the April 2017 Global Offering     70,032  
Transaction costs on issue of shares and warrants (2,910 )    
Transaction costs on April 2017 Global Offering (636 )   (6,786 )
Net cash generated from financing activities 41,204     63,246  
Net increase / (decrease) in cash and cash equivalents 35,526     (6,998 )
Cash and cash equivalents at the beginning of the year 3,523     39,734  
Effect of exchange rates on cash and cash equivalents 685     (1,423 )
Cash and cash equivalents at the end of the period 39,734     31,313  

The accompanying notes form an integral part of these consolidated financial statements.


                   
                   
VERONA PHARMA PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2017
                   
                   
  Share
Capital
  Share
Premium
  Share-based
Expenses
  Total
Accumulated
Losses
  Total
Equity
  £'000s   £'000s   £'000s   £'000s   £'000s
Balance at January 1, 2016 1,010     26,650     1,526     (23,752 )   5,434  
Loss for the year             (5,019 )   (5,019 )
Other comprehensive income for the year:                  
Exchange differences on translating foreign operations             43     43  
Total comprehensive loss for the period             (4,976 )   (4,976 )
New share capital issued 1,556     34,151             35,707  
Transaction costs on share capital issued     (2,325 )           (2,325 )
Share options exercised during the period 2     50             52  
Share-based payments         577         577  
                             
Balance at December 31, 2016 2,568     58,526     2,103     (28,728 )   34,469  
Balance at January 1, 2017 2,568     58,526     2,103     (28,728 )   34,469  
Loss for the year             (20,497 )   (20,497 )
Other comprehensive loss for the year:                  
Exchange differences on translating foreign operations             (29 )   (29 )
Total comprehensive loss for the period             (20,526 )   (20,526 )
New share capital issued 2,677     67,648             70,325  
Transaction costs on share capital issued     (7,453 )           (7,453 )
Share options exercised during the period 6     141             147  
Share-based payments         2,919         2,919  
Balance at December 31, 2017 5,251     118,862     5,022     (49,254 )   79,881  

The currency translation reserve for 2016 and 2017 is not considered material and as such is not presented in a separate reserve but is included in the total accumulated losses reserve.

The accompanying notes form an integral part of these consolidated financial statements.

                   
                   
VERONA PHARMA PLC
COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2017
                   
                   
  Share
Capital
  Share
Premium
  Share-based
Expenses
  Total
Accumulated
Losses
  Total
Equity
  £'000s   £'000s   £'000s   £'000s   £'000s
Balance at January 1, 2016 1,010       26,650       1,526       (23,779 )     5,407  
Loss for the year             (4,964 )   (4,964 )
Other comprehensive income for the year:                  
Total comprehensive loss for the period                 (4,964 )   (4,964 )
New share capital issued 1,556     34,151                 35,707  
Transaction costs on share capital issued     (2,325 )               (2,325 )
Share options exercised during the period 2     50                 52  
Share-based payments recognized as an expense           414           414  
Share-based payments recognized as an investment         163         163  
                                 
Balance at December 31, 2016 2,568     58,526       2,103       (28,743 )   34,454  
Balance at January 1, 2017 2,568     58,526       2,103       (28,743 )   34,454  
Loss for the year             (20,341 )   (20,341 )
Other comprehensive income for the year:                  
Total comprehensive loss for the period             (20,341 )   (20,341 )
New share capital issued 2,677     67,648             70,325  
Transaction costs on share capital issued     (7,453 )           (7,453 )
Share options exercised during the period 6     141             147  
Share-based payments recognized as an expense         2,285         2,285  
Share-based payments recognized as an investment         634         634  
Balance at December 31, 2017 5,251     118,862     5,022     (49,084 )   80,051  

The accompanying notes form an integral part of these consolidated financial statements.


VERONA PHARMA PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2017

1. General information

Verona Pharma plc (the "Company") and its subsidiaries (together, the "Group") are a clinical-stage biopharmaceutical group focused on developing and commercializing innovative therapeutics for the treatment of respiratory diseases with significant unmet medical needs.

The Company is a public limited company, which is dual listed on the Alternative Investment Market of the London Stock Exchange and on April 27, 2017, American Depositary Shares began trading on NASDAQ Global Market. The company is incorporated and domiciled in the United Kingdom. The address of the registered office is 1 Central Square, Cardiff, CF10 1FS, United Kingdom.

The Company has two subsidiaries, Verona Pharma, Inc. and Rhinopharma Limited ("Rhinopharma"), both of which are wholly owned.

On February 10, 2017 the Company effected a 50-for-1 consolidation of its shares. All references to ordinary shares, options and warrants, as well as share, per share and related information in these consolidated financial statements have been adjusted to reflect the consolidation as if it had occurred at the beginning of the earliest period presented.

On April 26, 2017, the Company announced the closing of its global offering of an aggregate of 47,399,001 new ordinary shares, consisting of the initial public offering in the United States of 5,768,000 American Depositary Shares (“ADSs”) at a price of $13.50 per ADS and the private placement in Europe of 1,255,001 ordinary shares at a price of £1.32 per ordinary share, for gross proceeds of $80 million (the “Global Offering”). Each ADS offered represents eight ordinary shares of the Company. The ordinary shares offered were allotted and issued in a concurrent private placement in Europe and other countries outside of the United States and Canada.

In addition, the Chairman of Verona Pharma’s board of directors, Dr David Ebsworth, and an existing shareholder agreed to subscribe for 254,099 new ordinary shares at a price of £1.32 per ordinary share in a shareholder private placement separate from the Global Offering (the “Shareholder Private Placement”), contingent on and concurrent with the Global Offering and generating additional gross proceeds of £0.3 million.

On May 15 and May 23, 2017, pursuant to the Global Offering, the underwriters purchased an additional 733,738 ADSs, representing 5,869,904 ordinary shares, at a price of $13.50 per ADS, for additional gross proceeds of $9.9 million bringing the total gross proceeds in the Global Offering to $89.9 million (£70.0 million). Including the Shareholder Private Placement, the total gross proceeds of the capital raising amounted to $90.3 million (£70.3 million).

The ADSs began trading on the NASDAQ Global Market under the ticker symbol “VRNA” on April 27, 2017. Verona Pharma’s ordinary shares continue to trade on the AIM market of the London Stock Exchange (“AIM”) under the symbol “VRP”.

2. Accounting policies

A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.

2.1 Basis of preparation

The consolidated financial statements of the Group and the financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRSs") as issued by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, with the exception of derivative financial instruments which have been measured at fair value.

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 and Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4.

Going concern

During the year ended December 31, 2017, the Group had a loss of £20.5 million (2016: £5.0 million). As of December 31, 2017, the Group had net assets of £79.9 million (2016: £34.5 million) of which £80.3 million (2016: £39.8 million) was cash and cash equivalents and short term investments.

The operation of the Group is currently being financed from funds that the Company raised from share placings. On May 2nd, 2017, the company raised $89.9 million (£70 million) from the initial public offering in the United States. On July 29, 2016, the Company raised gross proceeds of £44.7 million from a placing, subscription and open offer (the "July 2016 Placement"). These funds are expected to be used primarily to support the development of RPL554 in chronic obstructive pulmonary disease ("COPD"), other chronic respiratory diseases as well as corporate and general administrative expenditures.

The Directors believe that the Group has sufficient funds to complete the current clinical trials, to cover corporate and general administration costs and for it to comply with all commitments for at least 12 months from the end of the reporting period and, accordingly, are satisfied that the going concern basis remains appropriate for the preparation of these consolidated financial statements.

Business combination

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. Goodwill arising on acquisitions is capitalized and is subject to an impairment review, both annually and when there are indications that the carrying value may not be recoverable.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred and included in administrative expenses.

Basis of consolidation

These consolidated financial statements include the accounts of Verona Pharma plc and its wholly owned subsidiaries Verona Pharma, Inc. and Rhinopharma. The acquisition method of accounting was used to account for the acquisition of Rhinopharma.

Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated.

Verona Pharma Inc. and Rhinopharma adopt the same accounting policies as the Company.

2.2 Foreign currency translation

Items included in the Group's consolidated financial statements are measured using the currency of the primary economic environment in which the Entity operates ("the functional currency"). The consolidated financial statements are presented in pounds sterling ("£"), which is the functional and presentational currency of the Company and the presentational currency of the Group.

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the Consolidated Statement of Comprehensive Income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the original transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The assets and liabilities of foreign operations are translated into pounds sterling at the rate of exchange ruling at the balance sheet date. Income and expenses are translated at weighted average exchange rates for the period. The exchange differences arising on translation for consolidation are recognized in Other Comprehensive Income.

2.3 Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

2.4 Deferred taxation

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and expected to apply when the related deferred tax is realized or the deferred liability is settled.

Deferred tax assets are recognized to the extent that it is probable that the future taxable profit will be available against which the temporary differences can be utilized.

2.5 Research and development costs

Capitalization of expenditure on product development commences from the point at which technical feasibility and commercial viability of the product can be demonstrated and the Group is satisfied that it is probable that future economic benefits will result from the product once completed. No such costs have been capitalized to date, given the early stage of the Group's product candidate development.

Expenditure on research and development activities that do not meet the above criteria is charged to the Consolidated Statement of Comprehensive Income as incurred.

2.6 Property, plant and equipment

Property, plant and equipment are stated at cost, net of depreciation and any provision for impairment. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is calculated so as to write off the cost less their estimated residual values, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal annual periods used for this purpose are:

Computer hardware               3 years
Office equipment               5 years
                 

2.7 Intangible assets and goodwill

(a)   Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the fair value of the identifiable net assets acquired.

(b)   Patents

Patent costs associated with the preparation, filing, and obtaining of patents are capitalized and amortized on a straight-line basis over the estimated useful lives of the patents of ten years.

(c)   Computer software

Amortization is calculated so as to write off the cost less estimated residual values, on a straight-line basis over the expected useful economic life of two years.

(d)   In-process research & development ("IPR&D")

IP R&D assets acquired through business combinations which, at the time of acquisition, have not reached technical feasibility are recognized at fair value. The amounts are capitalized and are not amortized but are subject to impairment testing until completion, abandonment of the projects or when the research findings are commercialized through a revenue generating project. The Group determines whether intangible assets (including goodwill) are impaired on an annual basis and this requires the estimation of the higher of fair value less costs of disposal and value in use. Upon successful completion or commercialization of the relevant project, IP R&D will be reclassified to developed technology. The Group will make a determination as to the then useful life of the developed technology, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. In case of abandonment the asset will be impaired.

2.8 Impairment of intangible assets, goodwill and non-financial assets

Goodwill and intangible assets that have an indefinite useful life and intangible assets not ready to use are not subject to amortization. These assets are tested annually for impairment or more frequently if impairment indicators exist. Non-financial assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized 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 costs of disposal) 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, which are largely independent of the cash flows from other assets or group of assets (cash generating units "CGUs").

Goodwill is allocated to CGUs for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. The units or group of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments.

The Group is a single cash generating unit. Goodwill that arose on the acquisition of Rhinopharma has been thus allocated to this single CGU. IP R&D is tested for impairment at this level as well, since it is the lowest level at which independent cash flows can be identified.

Non-financial assets, other than goodwill, that have been previously impaired are reviewed for possible reversal of the impairment at each subsequent reporting date.

2.9 Employee Benefits

(a)   Pension

The Group operates a defined contribution pension scheme for UK employees. Contributions payable for the year are charged to the Consolidated Statement of Comprehensive Income. The contributions are recognized as employee benefit expense when they are due. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the Consolidated Statement of Financial Position. The Group has no further payment obligation once the contributions have been paid.

(b)   Bonus plans

The Company recognizes a liability and an expense for bonus plans if contractually obligated or if there is a past practice that has created a constructive obligation.

2.10 Share-based payments

The Group operates a number of equity-settled, share-based compensation schemes. The fair value of share-based payments under such schemes is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest.

Where equity settled transactions are entered into with third party service providers, fair value is determined by reference to the value of the services provided in lieu of payment. The expense is measured based on the services received at the date of receipt of those services and is charged to the Consolidated Statement of Comprehensive Income over the period for which the services are received and a corresponding credit is made to reserves. For other equity-settled transactions fair value is determined using the Black-Scholes model and requires several assumptions and estimates as disclosed in note 17.

2.11 Provisions

Provisions are recognized 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 can be reliably estimated. Provisions are measured at the present value of the expenditures 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 obligation.

2.12 Assumed contingent obligation related to the business combinations

On September 19, 2006, the Group acquired Rhinopharma for a total consideration of £1.52 million payable in ordinary shares. In addition, the Group assumed certain contingent obligations owed by Rhinopharma to Vernalis under an assignment and license agreement (the "assumed contingent consideration") following the sale of IP by Vernalis to Rhinopharma. Pursuant to the agreement Vernalis (i) assigned to the Company all of its rights to certain patents and patent applications relating to RPL554 and related compounds (the "Vernalis Patents") and (ii) granted to the Company an exclusive, worldwide, royalty-bearing license under certain Vernalis know-how to develop, manufacture and commercialize products (the "Licensed Products") developed using Vernalis Patents, Vernalis know-how and the physical stock of certain compounds.

The assumed contingent obligation comprises (a) a milestone payment on obtaining the first approval of any regulatory authority for the commercialization of a Licensed Product; (b) low to mid single digit royalties based on the future sales performance of all Licensed Products; and (c) a portion equal to a mid twenty percent of any consideration received from any sub-licensees for the Vernalis Patents and for Vernalis know-how. On the date of acquisition, the fair value of the assumed contingent obligation was estimated as the expected value of the milestone payment, royalty payments and sub-license payments, based on an assessment of the probability of success using standard market probabilities for respiratory drug development. The risk-weighted value of the assumed contingent arrangement was then discounted back to its net present value applying an effective interest rate of 12%. The initial fair value of the assumed contingent obligation as of December 31, 2006 was deemed to be insignificant at the date of the acquisition, so it was not recorded.

The amount of royalties payable under the agreement is based on the future sales performance of certain products, and so the total amount payable is unlimited. The level of sales that may be achieved under the agreement is difficult to predict and subject to estimate, which is inherently uncertain. The value of this assumed contingent obligation is measured at amortized cost using the effective interest rate method, and is re-measured for changes in estimated cash flows, when the probability of success changes. The assumed contingent obligation is accounted for as a liability, and any adjustments made to the value of the liability will be recognized in the Consolidated Statement of Comprehensive Income for the period.

2.13 Government and other grants

The Group may receive government, regional or charitable grants to support its research efforts in defined projects where these grants provide for reimbursement of approved costs incurred as defined in the respective grants. Income in respect of such grants would include contributions towards the costs of research and development. Income would be recognized when costs under each grant are incurred in accordance with the terms and conditions of the grant and the collectability of the receivable is reasonably assured. Government, regional and charitable grants relating to costs would be deferred and recognized in the Consolidated Statement of Comprehensive Income over the period necessary to match them with the costs they are intended to compensate. When the cash in relation to recognized government, regional or charitable grants is not yet received the amount is included as a receivable on the Consolidated Statement of Financial Position.

Where the grant income is directly related to the specific items of expenditure incurred, the income would be netted against such expenditure. Where the grant income is not a specific reimbursement of expenditure incurred, the Group would include such income under "Other income" in the Consolidated Statement of Comprehensive Income. Grants or investment credits may be repayable if the Group successfully commercializes a relevant program that was funded in whole or in part by the grant or investment credit within a particular timeframe. Prior to successful commercialization, the Group would not make any provision for repayment.

2.14 Financial instruments — initial recognition and subsequent measurement

The Company classifies a financial instrument, or its component parts, as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.

The Company evaluates the terms of the financial instrument to determine whether it contains an asset, a liability or an equity component. Such components shall be classified separately as financial assets, financial liabilities or equity instruments.

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

(a)   Financial assets, initial recognition and measurement and subsequent measurement

All financial assets not recorded at fair value through profit or loss, such as receivables and deposits, are recognized initially at fair value plus transaction costs. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement.

The measurement of financial assets depends on their classification.  Financial assets such as receivables and deposits are subsequently measured at amortized cost. The Company does not hold any financial assets at fair value through profit or loss or available for sale financial assets.

(b)   Financial liabilities, initial recognition and measurement and subsequent measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, or payables, as appropriate. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The measurement of financial assets and financial liabilities depends on their classification. Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. These are subsequently measured at fair value with any gains or losses recognized in profit or loss. All other financial liabilities are measured at amortized cost using the effective interest method.

The Company's financial liabilities include trade and other payables and derivative financial instruments.

(c)   Derivative financial instruments

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at fair value at the end of each reporting date. The Company holds only one type of derivative financial instrument, the warrants, as explained in Note 2.15.

The full fair value of the derivative is classified as a non-current liability when the warrants are exercisable in more than 12 months and as a current liability when the warrants are exercisable in less than 12 months.

Changes in fair value of a derivative financial liability when related to a financing arrangement are recognized in the Consolidated Statement of Comprehensive Income within Finance income or Finance expense. Fair value gains or losses on derivatives used for non-financing arrangements are recognized in other operating income or expense.

2.15 Warrants

Warrants issued by the Company to investors as part of a share subscription are compound financial instruments where the warrant meets the definition of a financial liability.

The financial liability component is initially measured at fair value in the Consolidated Statement of Financial Position. Equity is measured at the residual between the subscription price for the entire instrument and the liability component. The financial liability component is remeasured depending on its classification. Equity is not remeasured.

2.16 Short Term Investments

Short term investments include fixed term deposits held at banks with original maturities of more than three months but less than a year. They are classified as loans and receivables and are measured at amortized cost using the effective interest method.

2.17 Transaction costs

Qualifying transaction costs might be incurred in anticipation of an issuance of equity instruments and may cross reporting periods. The entity defers these costs on the balance sheet until the equity instrument is recognized. Deferred costs are subsequently reclassified as a deduction from equity when the equity instruments are recognized, as the costs are directly attributable to the equity transaction. If the equity instruments are not subsequently issued, the transaction costs are expensed. Any costs not directly attributable to the equity transaction are expensed.

Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. Where the liability component is held at fair value through profit or loss, the transaction costs are expensed to the Consolidated Statement of Comprehensive Income. For liabilities held at amortized cost, transaction costs are deducted from the liability and subsequently amortized. The amount of transaction costs accounted for as a deduction from equity in the period is disclosed separately in accordance with IAS 1.

2.18 Investments in subsidiaries

Investments in subsidiaries are shown at cost less any provision for impairment.

2.19 New standards, amendments and interpretations adopted by the Group

The following amendments have been adopted by the Group for the first time for the financial year beginning on or after 1 January, 2017. It did not materially impact the Group’s results:

  • Annual Improvements to IFRS Standards 2014-2016 Cycle,

  • Disclosure initiative - amendments to IAS 7, and

  • Recognition of Deferred Tax Assets for Unrealized Losses - Amendments to IAS 12.

The amendments to IAS 7 require disclosure of changes in liabilities arising from financing activities, see note 3.3.

2.20 New standards, amendments and interpretations issued but not effective for the financial year beginning January 1, 2017 and not early adopted

A number of new standards and amendments to standards and interpretations have been issued but are not yet effective for annual periods beginning after January 1, 2017 (noted below), and have not been adopted in preparing these consolidated financial statements.

  • IFRS 9 "Financial instruments" (effective for annual periods beginning on or after January 1, 2018)

  • IFRS 15 "Revenue from contracts with customers" (effective for annual periods beginning on or after January 1, 2018)

  • IFRS 16 "Leases" (effective for annual periods beginning on or after January 1, 2019)

IFRS 9 will have no material impact on the accounting or measurement of any of the financial instruments the group or company currently holds.

IFRS 15 will have no impact on the financial statements of the Group or company as they are not currently revenue generating.

IFRS 16 is effective for accounting periods beginning on or after 1 January 2019 and will replace IAS 17 'leases'. It will eliminate the classification of leases as either operating leases or finance leases and, instead, introduce a single lessee accounting model. The adoption of IFRS 16 will result in the Group and Company recognizing lease liabilities and corresponding 'right to use' assets for agreements that are currently classified as operating leases. See note 21 for further details on operating leases held.

3. Financial Instruments

3.1 Financial Risk Factors

The Company's activities have exposed it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk, and liquidity risk. The Company's overall risk management program is focused on preservation of capital and the unpredictability of financial markets and has sought to minimize potential adverse effects on the Company's financial performance and position.

(a)   Currency risk

Foreign currency risk reflects the risk that the Group's net assets will be negatively impacted due to fluctuations in exchange rates. The Group has not entered into foreign exchange contracts to hedge against gains or losses from foreign exchange fluctuations.

The summary quantitative date about the Group's exposure to currency risk is as follows. Figures are the sterling values of balances in each currency:

             
    Year Ended December
31, 2016
      Year Ended December
31, 2017
    USD   EUR       USD   EUR
    £'000s   £'000s       £'000s   £'000s
Cash and cash equivalents   10,631     242         16,806     301  
Short term Investments               19,718      
Trade and other payables   305     180         276     403  

Sensitivity Analysis

A reasonably possible strengthening (weakening) of the Euro, US dollar, or Sterling against all other currencies at 31 December would have affected the measurement of the financial instruments denominated in a foreign currency and affected equity and profit and loss by the amounts shown below. This analysis assumes that all other variables remain constant.

   
   
  Profit or loss and equity
  Strengthening   Weakening
December 31, 2017 £'000s   £'000s
EUR (5% movement) 35     (35 )
USD (5% Movement) 1,840     (1,840 )
December 31, 2016 £'000s   £'000s
EUR (5% movement) 21     (21 )
USD (5% Movement) 547     (547 )

Foreign currency denominated trade payables are short term in nature (generally 30 to 45 days). The Group has a U.S. operation, the net assets of which are exposed to foreign currency translation risk.

(b)   Credit risk

Credit risk reflects the risk that the Group may be unable to recover contractual receivables. As the Group is still in the development stage no policies are currently required to mitigate this risk.

For banks and financial institutions, only independently rated parties with a minimum rating of "B+" are accepted. The Directors recognize that this is an area in which they may need to develop specific policies should the Group become exposed to further financial risks as the business develops.

As of December 31, 2017, and December 31, 2016, cash and cash equivalents and short term investments were placed at the following banks: 

                   
Cash and Cash Equivalents Year ended
December
31, 2016
 
  Credit
rating
  Year ended
December
31, 2017
 
  Credit
rating
  £'000       £'000    
Banks              
Royal Bank of Scotland 11,287     A3   16,623     A2
Lloyds Bank 28,447     A1   13,448     Aa3
Standard Chartered       1,242     A1
Wells Fargo 51     Aa1   130     Aa1
Total 39,785         31,443      
                   
   
   
Short Term Investments Year ended
December
31, 2016
  Credit   Year ended
December
31, 2017
  Credit
rating rating
  £'000       £'000    
Banks              
Royal Bank of Scotland       15,316     A2
Lloyds Bank       11,036     Aa3
Standard Chartered       22,467     A1
Wells Fargo           Aa1
Total         48,819      
 

(c)   Management of capital

The Group considers capital to be its equity reserves. At the current stage of the Group's life cycle, the Group's objective in managing its capital is to ensure funds raised meet the research and operating requirements until the next development stage of the Group's suite of projects.

The Group ensures it is meeting its objectives by reviewing its Key Performance Indicators ("KPIs") to ensure the research activities are progressing in line with expectations, costs are controlled and unused funds are placed on deposit to conserve resources and increase returns on surplus cash held.

(d)   Interest rate risk

As of December 31, 2017, the Group had cash deposits of £31.4 million (2016: £39.8 million) and short term investments of £48.8 million (2016: nil). The rates of interest received during 2017 ranged between 0.0% and 1.73%. A 0.25% increase in interest rates would not have a material impact on finance income. The Group's exposure to interest rate risk, which is the risk that the interest received will fluctuate as a result of changes in market interest rates on classes of financial assets and financial liabilities, was as follows:

       
  December 31, 2016   December 31, 2017
  Floating
interest
rate
  Fixed
Interest
rate
  Floating
interest
rate
  Fixed
Interest
rate
  £'000s   £'000s   £'000s   £'000s
Financial asset              
Cash deposits 11,338     28,447     25,720     5,723  
Short Term Investments             48,819  
Total 11,338     28,447     25,720     54,542  
                       

(e)           Liquidity risk

The Group prepares periodic working capital forecasts for the foreseeable future, allowing an assessment of the cash requirements of the Group, to manage liquidity risk. The following table provides an analysis of the Group's financial liabilities. The carrying value of all balances is equal to their fair value. The Group's maturity analysis for the derivative financial instrument from the issue of warrants is given in note 20.

  LESS THAN
1 YEAR
  BETWEEN
1 AND 2
YEARS
  BETWEEN
2 AND 5
YEARS
  OVER
5 YEARS(1)
  £'000s   £'000s   £'000s   £'000s
At December 31, 2016              
Trade payables 719              
Other payables 54              
Accruals 2,050              
Contingent obligation             1,807  
Total 2,823             1,807  

(1)   This table includes the undiscounted amount of the assumed contingent obligation. See note 19.

               
               
               
  LESS THAN
1 YEAR
  BETWEEN
1 AND 2
YEARS
  BETWEEN
2 AND 5
YEARS
  OVER
5 YEARS(1)
  £'000s   £'000s   £'000s   £'000s
At December 31, 2017              
Trade payables 1,214              
Other payables 74              
Accruals 5,866              
Contingent obligation             1,807  
Total 7,154             1,807  

(1)   This table includes the undiscounted amount of the assumed contingent obligation. See note 19.

3.2 Fair value estimation

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate to fair value due to their short-term nature. The carrying amount of the assumed contingent liability approximates to fair value as the underlying assumptions are currently similar. 

For financial instruments that are measured in the Consolidated Statement of Financial Position at fair value, IFRS 7 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

  • Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);

  • Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly (level 2); and

  • Inputs for the asset or liability that are not based on observable market data (level 3).

For the year ended December 31, 2017, and 2016, fair value adjustments to financial instruments through profit and loss resulted in the recognition of finance income of £6.7 million and £1.1 million respectively.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to ascertain the fair value of an instrument are observable, the instrument is included in level 2. If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3.

  Level 3   Total
  £'000s   £'000s
At December 31, 2017      
Derivative financial instrument 1,273     1,273  
Total 1,273     1,273  
           

Movements in Level 3 items during the years ended December 31, 2016, and 2017 are as follows:

Derivative financial instrument 2016   2017
  £'000s   £'000s
At January 1     7,923  
Initial recognition of derivative financial instrument 8,991      
Fair value adjustments recognized in profit and loss (1,068 )   (6,650 )
At December 31 7,923     1,273  
           

Further details relating to the derivative financial instrument are set out in notes 4 and 19 of these financial statements.

In determining the fair value of the derivative financial instrument, the Company applied the Black Scholes model; key inputs include the share price at reporting date, estimations on timelines, volatility and risk-free rates. These assumptions and the impact of changes in these assumptions, where material, are disclosed in note 20.

3.3 Change in liabilities arising from financing activities

The group has provided a reconciliation so that changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes can be evaluated.

  December
31, 2017
   
  Derivative
financial
instrument
  £'000s
At January 1 7,923        
Fair value adjustments – non-cash (6,650 )      
At December 31 1,273        

See note 20 for information relating to the derivative financial instrument.

4. Critical accounting estimates and judgments

The preparation of financial statements in conformity with IFRS requires the use of accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates. IFRS also requires management to exercise its judgment in the process of applying the Group's accounting policies.

The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are as follows:

(a)   Assumed contingent obligation

The Group has a material obligation for the future payment of royalties and milestones associated with contractual obligations on RPL554, a development product acquired as part of the acquisition of Rhinopharma. The estimation of the fair value of the assumed contingent obligation on acquisition requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen, the estimation of the likelihood that the regulatory approval milestone will be achieved and estimates of the future cash flows and their timing (for further detail see note 19). The estimates for the assumed contingent obligation are based on a discounted cash flow model. Key assessments and judgments included in the fair value calculation of deferred consideration are:

  • development, regulatory and marketing risks associated with progressing the product to market approval in key target territories;

  • market size and product acceptance by clinicians, patients and reimbursement bodies;

  • gross and net selling price;

  • costs of manufacturing, product distribution and marketing support;

  • launch of competitive products; and

  • discount rate and time to crystallization of contingent consideration.

In accordance with IAS 39 ("Financial Instruments Recognition and Measurement" (para AG8)), when there is a change in the expected cash flows, the assumed contingent obligation is re-measured with the change in value going through the Consolidated Statement of Comprehensive Income. Cash flow estimates are revised when the probability of success changes. The assumed contingent obligation is measured at amortized cost with the discount unwinding in the Consolidated Statement of Comprehensive Income throughout the year. Actual outcomes could differ significantly from the estimates made.

The value of the assumed contingent obligation as of December 31, 2017 amounts to £0.9 million. (2016: £0.8 million). The increase in value of the assumed contingent obligation during 2017 amounted to £0.1 million (2016: £0.2 million) and the movement relates to unwinding the discount on the liability and retranslating for changes in US$ exchange rates. The increase was recorded in finance expense. There was no change in the year to the probability of success and consequently cash flow estimates were not revised. The discount percentage applied is 12%.

(b)   Valuation of the July 2016 warrants

Pursuant to the July 2016 Placement, the Company issued 31,115,926 units to new and existing investors at the placing price of £1.4365 per unit. Each unit comprises one ordinary share and one warrant. The warrants entitle the investors to subscribe for in aggregate a maximum of 12,446,370 ordinary shares.

In accordance with IAS 32 and Group accounting policy, as disclosed in note 2.15, the Group classified the warrants as a derivative financial liability to be presented on the Group's Consolidated Statement of Financial Position.

The fair value of these warrants is determined by applying the Black-Scholes model. Assumptions are made on inputs such as time to maturity, the share price, volatility and risk free rate in order to determine the fair value per warrant. For further details see note 20.

Transaction costs arising on the issues of these shares and warrants are allocated to the equity and warrant liability components in proportion to the allocation of proceeds.

(c)   Recognition of research and development expenditure

The Group incurs research and development expenditure from third parties. The Group recognizes this expenditure in line with the management’s best estimation of the stage of completion of each research and development project. This includes the calculation of accrued costs at each period end to account for expenditure that has been incurred. This requires management to estimate full costs to complete for each project and also to estimate its current stage of completion. The costs related to these expenses in the year was £18.5 million. The related accruals and prepayments were £4.6 million and £0.5 million respectively.

(d)   Transaction costs related the Global Offering

The Group incurred various transaction costs relating to the Global Offering, including commissions, professional advisor fees, financial advice, listing fees and other costs.  When management judged them to be incremental costs directly attributable to the transaction they were accounted for as a deduction from equity.  Otherwise the costs were expensed to the consolidated income statement as incurred.

5. Earnings per share

Basic loss per ordinary share of 23.4p (2016: 15.0p) for the Group is calculated by dividing the loss for the year ended December 31, 2017 by the weighted average number of ordinary shares in issue of 87,748,031 as of December 31, 2017 (2016: 33,499,413). Potential ordinary shares are not treated as dilutive as the entity is loss making and such shares would be anti-dilutive.

6. Segmental reporting

The Group’s activities are covered by one operating and reporting segment: Drug Development. There have been no changes to management’s assessment of the operating and reporting segment of the Group during the period.

All non-current assets are based in the United Kingdom.

7. Operating loss

Group

  Year ended
December
31, 2016
  Year ended
December
31, 2017
  £'000s   £'000s
Operating Loss is stated after charging:      
Research and development costs:      
Employee benefits (note 8) 2,037     3,435  
Amortization of patents (note 12) 51     111  
Legal, professional consulting and listing fees     331  
Other research and development expenses 2,434     19,840  
Total research and development costs 4,522     23,717  
General and administrative costs:      
Employee benefits (note 8) 865     2,857  
Legal, professional consulting and listing fees 884     2,045  
Amortization of computer software (note 12) 1     5  
Loss on disposal of property, plant and equipment (note 13) 3      
Depreciation of property, plant and equipment (note 13) 10     7  
Operating lease charge — land and buildings 169     294  
Loss on variations in foreign exchange rate 139     36  
Other general and administrative expenses 427     795  
Total general and administrative costs 2,498     6,039  
Operating loss 7,020     29,756  

During the periods indicated, the Group obtained the services from and paid the fees of the Group's auditors and their associates as detailed below:

  Year ended
December
31, 2016
  Year ended
December
31, 2017
 
  £'000s   £'000s  
Audit of Verona Pharma plc and consolidated financial statements 80     117  
Audit related services 525     333  
Other services     150  
Total 605     600  
           

For the year ended December 31, 2017, audit related services include fees for quarterly interim reviews and assurance on information included in the Company's U.S. registration statement for the April 2017 Global Offering. For the year ended December 31, 2017 an amount of £256 thousand in relation to these services was offset against share premium on completion of the Global Offering.  For the year ended December 31, 2017, other services related to advice on compliance with Sarbanes-Oxley legislation.

For the year ended December 31, 2016, audit related services include assurance reporting on historical financial information included in the Company's U.S. registration statement for Global Offering. As at December 31, 2016 an amount of £466 thousand in relation to these services was booked in deferred IPO costs that was offset against share premium on completion of the Global Offering.

8. Directors' emoluments and staff costs

Group

  Year
ended
December
31, 2016

  Year ended
December
31, 2017

The average number of employees (excluding directors) of the Group during the year:              
Research and Development 5       7    
General and Administrative 2       5    
Total 7       12    
               
  Year
ended
December
31, 2016
      Year ended
December
31, 2017
   
  £'000s       £'000s    
Aggregate emoluments of directors:              
Salaries and other short-term employee benefits 951       897    
Social security costs 118       103    
Incremental payment for additional services 44          
Other pension costs 19       17    
Total directors' emoluments 1,132       1,017    
Share-based payment charge 257       1,037    
Directors' emoluments including share-based payment charge 1,389       2,054    
               
  Year
ended
December
31, 2016
      Year ended
December
31, 2017
   
  £'000s       £'000s    
Aggregate other staff costs:              
Wages and salaries 1,027       2,136    
Social security costs 98       182    
Incremental payment for additional services 58          
Share-based payment charge 319       1,882    
Other pension costs 11       38    
Total other staff costs 1,513       4,238    
               

The Group operates a defined contribution pension scheme for U.K. employees and executive directors. The total pension cost during the year ended December 31, 2017 was £55 thousand (2016: £30 thousand). There were no prepaid or accrued contributions to the scheme at December 31, 2017(2016: £nil).

Company

  Year ended
December
31, 2016

  Year ended
December
31, 2017

The average number of employees (excluding directors) of the Company during the year:              
Research and Development 2       4    
General and Administrative 2       4    
Total 4       8    
 
  Year ended
December
31, 2016
      Year ended
December
31, 2017
   
  £'000s       £'000s    
Aggregate emoluments of directors:              
Salaries and other short-term employee benefits 951       897    
Social security costs 118       103    
Incremental payment for additional services 44          
Other pension costs 19       17    
Total directors' emoluments 1,132       1,017    
Share-based payment charge 257       1,037    
Directors' emoluments including share-based payment charge 1,389       2,054    
 
  Year ended
December
31, 2016
      Year ended
December
31, 2017
   
  £'000s       £'000s    
Aggregate other staff costs:              
Wages and salaries 493       1,273    
Social security costs 61       162    
Incremental payment for additional services 58          
Share-based payment charge 156       1,248    
Other pension costs 11       38    
Total other staff costs 779       2,721    
               

The Company operates a defined contribution pension scheme for U.K. employees and executive directors. The total pension cost during the year ended December 31, 2017 was £55 thousand (2016: £30 thousand). There were no prepaid or accrued contributions to the scheme at December 31, 2017 (2016: £nil).

In respect of Directors’ remuneration, the Company has taken advantage of the permission in Paragraph 6(2) of Statutory Instrument 2008/410 to omit aggregate information that is capable of being ascertained from the detailed disclosures in the audited section of the Directors’ Remuneration Report which form part of these Consolidated Financial Statements.

9. Finance income and expense

Group

  Year ended
December
31, 2016
  Year ended
December
31, 2017
  £'000s   £'000s
Finance income:      
Interest received on cash balances 86   345
Foreign exchange gain on translating foreign currency denominated bank balances 687  
Fair value adjustment on derivative financial instruments (note 20) 1,068   6,650
Other Income   23
Total finance income 1,841   7,018
       
  Year ended
December
31, 2016
  Year ended
December
31, 2017
  £'000s   £'000s
Finance expense:      
Transaction costs allocated to the issue of warrants (note 20) 586  
Foreign exchange loss on translating foreign currency denominated balances   2,392
Remeasurement of assumed contingent arrangement (note 19) 122  
Unwinding of discount factor and foreign exchange movements related to the assumed contingent arrangement (note 19) 86   73
Total finance expense 794   2,465
       

10. Taxation

Group

  Year ended
December
31, 2016
  Year ended
December
31, 2017
  £'000s   £'000s
Analysis of tax credit for the year      
Current tax:      
UK tax credit (1,067 )   (5,006 )
US tax charge 129     306  
Adjustment in respect of prior periods (16 )   (6 )
Total tax credit (954 )   (4,706 )
Factors affecting the tax charge for the year      
Loss on ordinary activities (5,973 )   (25,203 )
Multiplied by standard rate of corporation tax of 19.25% (2016: 20%) (1,195 )   (4,852 )
Effects of:      
Non-deductible expenses 292     675  
Fair value adjustment on derivative financial instruments (214 )   (1,280 )
Research and development incentive (427 )   (2,116 )
Temporary differences not recognized (4 )   (2 )
Difference in overseas tax rates 56     136  
Tax losses carried forward not recognized 554     2,739  
Adjustment in respect of prior periods (16 )   (6 )
Total tax credit (954 )   (4,706 )
           

UK corporation tax is charged at 19.25% (2016: 20.00%) and U.S. federal tax at 35% (2016: 35%).

The following tables represent deferred tax balances recognized in the Consolidated Statement of Financial Position. There were no movements in either the deferred tax asset or the deferred tax liability.

           
  Year ended
December
31, 2016
  Year ended
December
31, 2017

  £'000s   £'000s
Deferred tax assets 250     250  
Deferred tax liabilities (250 )   (250 )
Net balances      

The deferred tax liability relates to the difference between the accounting and tax bases of the IP R&D intangible asset.  A deferred tax asset relating to UK tax losses has been recognized and offset against the liability.

Factors that may affect future tax charges

The Group has UK tax losses available for offset against future profits in the UK. However an additional deferred tax asset has not been recognized in respect of such items due to uncertainty of future profit streams. As of December 31, 2017, the unrecognized deferred tax asset at 17% is estimated to be £5.43 million (2016: £3.15 million at 17%).

11. Goodwill

Group and company

  As of
December 31,
2016
  As of
December 31,
2017
  £'000s   £'000s
Goodwill at January 1 and December 31 441   441
       

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in connection with the acquisition of Rhinopharma in September 2006. Goodwill is not amortized, but is tested annually for impairment. Annual impairment testing is performed by comparing the expected recoverable amount of the CGU to the carrying amount of the CGU to which goodwill has been allocated to the carrying amount of the CGU. See note 2.8 to the consolidated financial statements.

12. Intangible assets

Group and Company

  IP R&D   Computer
software
  Patents   Total
  £'000s   £'000s   £'000s   £'000s
Cost              
At January 1, 2016 1,469     25     482     1,976  
Additions     5     110     115  
Disposals     (24 )       (24 )
At December 31, 2016 1,469     6     592     2,067  
Accumulated amortization              
At January 1, 2016     24     138     162  
Charge for year     1     51     52  
Disposals     (24 )       (24 )
At December 31, 2016     1     189     190  
Net book value              
At December 31, 2016 1,469     5     403     1,877  
                       


  IP R&D   Computer
software
  Patents   Total
  £'000s   £'000s   £'000s   £'000s
Cost              
At January 1, 2017 1,469     6     592     2,067  
Additions     5     203     208  
Disposals         (68 )   (68 )
At December 31, 2017 1,469     11     727     2,207  
Accumulated amortization              
At January 1, 2017     1     189     190  
Charge for year     5     111     116  
Disposals         (68 )   (68 )
At December 31, 2017     6     232     238  
Net book value              
At December 31, 2017 1,469     5     495     1,969  
                       

Intangible assets comprise patents, computer software and an IP R&D asset that arose on the acquisition of Rhinopharma and investment in patents to protect RPL554.

IP R&D is currently not amortized and is reviewed for impairment on an annual basis or where there is an indication that the assets might be impaired until the asset is brought into use. Patents are amortized over a period of ten years and are regularly reviewed for impairment to ensure the carrying amount exceeds the recoverable amount in accordance with note 2.8.

Recognizing that the Group is still in its pre-revenue phase and that the research projects are not yet ready for commercial use, the Group assesses the recoverable amount of the CGU containing the IP R&D with reference to the Group's market capitalization as of December 31, 2017, the date of testing of goodwill impairment. The market capitalization of the Group was approximately £109.7 million as of December 31, 2017, (2016: £80.0 million) compared to the Group's net assets of £79.9 million (2016: £34.5 million). Therefore, no impairment was recognized.

The business within Rhinopharma was hived up to the Company immediately after the acquisition of Rhinopharma by the group. The hive up was accounted for in the Company's separate financial statements using the acquisition values for Rhinopharma.

13. Property, plant and equipment

Group and Company

  Computer
hardware
  Office
equipment
  Total
  £'000s   £'000s   £'000s
Cost          
At January 1, 2016 43     36     79  
Additions 13         13  
Disposals (39 )   (36 )   (75 )
At December 31, 2016 17         17  
Accumulated depreciation          
At January 1, 2016 39     27     66  
Charge for the year 3     7     10  
Disposals (39 )   (34 )   (73 )
At December 31, 2016 3         3  
Net book value          
At December 31, 2016 14         14  


  Computer
hardware
  Office
equipment
  Total
  £'000s   £'000s   £'000s
Cost          
At January 1, 2017 17         17  
Additions 9         9  
At December 31, 2017 26         26  
Accumulated depreciation          
At January 1, 2017 3         3  
Charge for the year 7         7  
At December 31, 2017 10         10  
Net book value          
At December 31, 2017 16         16  
                 

14. Prepayments and other receivables

Group

  As of
December 31,
2016
  As of
December 31,
2017
  £'000s   £'000s
Prepayments 1,361   1,138
Deferred IPO costs 1,527  
Other receivables 71   672
Total prepayments and other receivables 2,959   1,810
       

Deferred IPO costs related to the Global Offering. These costs were offset against share premium in 2017 when the Global Offering was completed.

The prepayments balance includes prepayments for insurance and clinical activities.

There are no impaired assets within prepayments and other receivables.

Company

  As of
December 31,
2016
  As of
December 31,
2017
  £'000s   £'000s
Prepayments 1,354   1,135
Deferred IPO costs 1,527  
Other receivables 71   663
Amounts due from group undertakings 1   172
Total prepayments and other receivables 2,953   1,970
       

Deferred IPO costs relate to the Global Offering. These costs were offset against share premium in 2017 when the Global Offering completed. Amounts due from subsidiary undertakings are unsecured, interest free and repayable on demand. The prepayments balance includes prepayments for insurance and clinical activities. There are no impaired assets within prepayments and other receivables.

15. Investment in subsidiaries

Company

The Company has two wholly owned subsidiaries, Rhinopharma Limited and Verona Pharma Inc.

  As of December
31, 2016
  As of December
31, 2017
  £'000s   £'000s
Net book value:      
At the start of the year 80   243
Capital contribution arising from share-based payments 163   634
Net book amount at the end of year 243   877
       

A capital contribution arises where share-based payments are provided to employees of the subsidiary undertaking, Verona Pharma Inc, settled with equity to be issued by the Company.

The Company’s investments comprise interests in Group undertakings, details of which are shown below:

Name of undertaking Verona Pharma Inc. Rhinopharma Limited
Country of incorporation Delaware British Columbia
  USA Canada
Description of shares held $0.001 Without Par Value
  Common stock Common shares
Proportion of shares held by the Company 100% 100%
     

Verona Pharma Inc. was incorporated on the 12 December 2014 under the laws of the State of Delaware, USA and has its registered office at 2711 Centerville Road, Suite 400, City of Wilmington 19808, County of New Castle, Delaware, United States of America.

Rhinopharma Limited is incorporated under the laws of the Province of British Columbia, Canada and has its registered office at Suite 700, 625 Howe Street, Vancouver, British Columbia, Canada V6C 2T6.  Rhinopharma Limited was a drug discovery and development company focused on developing proprietary drugs to treat allergic rhinitis and other respiratory diseases prior to its acquisition by the Company on September 18, 2006.

16. Share Capital

Group and Company

On February 8, 2017, the board of the Company approved a share consolidation where every 50 existing ordinary shares of £0.001 were consolidated into one ordinary share of £0.05.  The movements in the Company's share capital are summarized below:

Date   Description   Number of
shares
  Share Capital
amounts in
£'000
January 1, 2016       20,198,469   1,010
July 29, 2016   Issuance of shares   31,115,926   1,556
September 12, 2016   Exercise of options   3,334  
October 24, 2016   Exercise of options   3,334  
December 28, 2016   Exercise of options   40,000   2
As at December 31, 2016       51,361,063   2,568
May 2, 2017   Issuance of shares   47,653,100   2,383
May 18, 2017   Issuance of shares   5,539,080   277
May 26, 2017   Issuance of shares   330,824   17
September 13, 2017   Exercise of options   133,333   6
December 31, 2017       105,017,400   5,251
             

The total number of authorized ordinary shares, with a nominal value of £0.05 each, is 200,000,000 (share capital of £10,000,000). All 105,017,400 ordinary shares at December 31, 2017 are allotted, unrestricted, called up and fully paid.

On April 26, 2017, the Company announced the closing of its Global Offering of an aggregate of 47,399,001 new ordinary shares, comprising 5,768,000 American Depositary Shares (“ADSs”) at a price of $13.50 per ADS and 1,255,001 ordinary shares at a price of £1.32 per ordinary share. During May 2017 the underwriters purchased an additional 733,738 ADSs, representing 5,869,904 ordinary shares, at a price of $13.50 per ADS. The total gross proceeds in the Global Offering amounted to $89.9 million (£70.0million).

In addition, the Chairman of Verona Pharma’s board of directors, Dr David Ebsworth, and an existing shareholder agreed to subscribe for 254,099 new ordinary shares at a price of £1.32 per ordinary share in the Shareholder Private Placement, contingent on and concurrent with the Global Offering and generating gross proceeds of £0.3m.

Where there is a time and foreign exchange difference between proceeds from a share issue becoming due and being received, the movement is taken to Finance income or Finance expense as appropriate. In respect of the Global Offering and Shareholder Private Placement, the Company recorded a finance expense of £439 thousand arising from movements in exchange rates on funds receivable, offset by a saving on commission payable of £31 thousand, for a net finance expense of £408 thousand.

On September 13, 2017, the company issued 133,333 new shares upon exercise of share options at 110p per share, resulting in proceeds of £147 thousand to the Company.

On July 29, 2016, the Company issued 31,115,926 units to new and existing investors at the placing price of £1.4365 per unit. Each unit comprises one ordinary share and one warrant (see note 20).

During 2016, the Company issued 46,668 ordinary shares upon exercise of employee share options.

As at December 31, 2017, the number of ordinary shares in issue was 105,017,400.  All new ordinary shares rank pari passu with existing ordinary shares.

17. Share-based payments charge

Group and Company

In accordance with IFRS 2 "Share Based Payments," the cost of equity-settled transactions is measured by reference to their fair value at the date at which they are granted. Where equity-settled transactions were entered into with third party service providers, fair value is determined by reference to the value of the services provided. For other equity-settled transactions fair value is determined using the Black-Scholes model. The cost of equity-settled transactions is recognized over the period until the award vests. No expense is recognized for awards that do not ultimately vest. At each reporting date, the cumulative expense recognized for equity-based transactions reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the Directors at that date, will ultimately vest.

The costs of equity-settled share-based payments to employees are recognized in the Statement of Comprehensive Income, together with a corresponding increase in equity during the vesting period. During the twelve months ended December 31, 2017, the Group recognized a share-based payment expense of £2.92 million (2016: £0.58 million). The charge is included within both general and administrative costs as well as in research and development costs and represents the current year's allocation of the expense for relevant share options.

The Group grants share options under an Unapproved Share Option Scheme (the "Unapproved Scheme"). Under the Unapproved Scheme, options are granted to employees, directors and consultants to acquire shares at a price to be determined by the Directors. In general, options granted prior to December 31, 2016 were granted at a premium to the share price at the date of grant and vested over a period of three years from the date of grant, one third vesting on the first anniversary of grant, a further third vesting on the second anniversary of grant and the remainder vesting on the third anniversary of grant.

Options granted since January 1, 2017 generally vest over three or four years from the date of the grant using two different methods. The first method is one third vesting over one year, the second third vesting over two years and the final third vesting over three years. The second method is one quarter vesting over one year, the second quarter vesting over two years, the third quarter vesting over three years and the final quarter vesting over four years. The vesting period is defined as the period between the date of grant and the date when the options become exercisable. The options are exercisable during a period ending ten years after the date of grant.

Options are also issued to advisors under the Unapproved Scheme. Such options generally vest immediately and are exercisable between one and two years after grant.

In 2016 the Group issued options under its tax efficient EMI Option Scheme (the "EMI Scheme"). Under the EMI Scheme, options were granted to employees and directors who are contracted to work at least 25 hours a week for the Group or for at least 75% of their working time. The options granted under the EMI Scheme are exercisable at a price that is above the share price at the date of the grant and in accordance with a vesting schedule determined by the Directors at the time of grant and have an exercise period of ten years from the date of grant.

The Group grants Restricted Stock Units to employees and directors. The RSUs vest over a period of three or four years from the date of the grant using 2 different methods. The first method is one third vesting over one year, the second third vesting over two years and the final third vesting over three years. The second method is one quarter vesting over one year, the second quarter vesting over two years, the third quarter vesting over three years and the final quarter vesting over four years.

In the year ended December 31, 2017, the Group granted 4,656,828 (2016: 1,670,000) share options, nil (2016: 32,000) share options under the EMI Scheme and 1,052,236 Restricted Stock Units (“RSUs”) (2016: nil).  The total fair values of the Options and RSUs were estimated using the Black-Scholes option-pricing model for equity-settled transactions and amounted to £5.33 million (2016: £1.93 million). The cost is amortized over the vesting period of the options on a straight-line basis.

Prior to the July 2016 Placement in 2016, management determined to take an option's contractual maximum life as an input into the Black-Scholes option-pricing model. Starting from the July 2016 Placement and in line with the continued development of the Group's clinical trials, the Group determined the time to maturity to be used in the valuation model to be better represented by the weighted-average life of the options granted.

The following assumptions were used for the Black-Scholes valuation of share options granted in 2016 and 2017. For the options granted under the Unapproved Scheme the table indicates the ranges used in determining the fair-market values, aligning with the various dates of the underlying grants. The volatility is calculated using historic weekly averages of the Group's share price over a period that is in line with the expected life of the options.

               
Issued in 2016 EMI Scheme
  Unapproved
Scheme

Options granted 32,000       1,670,000    
Risk-free interest rate 1.42%       0.23% - 1.42%    
Expected life of options 10 years       5.5 - 10 years    
Annualized volatility 88.0%       74.3% - 88.0%    
Dividend rate 0.00%       0.00%    
Vesting period 3 years       3 years    
               
Issued in 2017 Unapproved
Scheme

      Restricted Stock
Units

   
Options granted 4,656,828       1,052,236    
Risk-free interest rate 0.29% - 0.62%       0.42% - 0.62%    
Expected life of options 5.5 - 7.0 years       5.5 - 7.0 years    
Annualized volatility 71.3% - 73.3%       71.3% - 73.3%    
Dividend rate 0.00%       0.00%    
Vesting period 3 and 4 years       3 and 4 years    
               

The Group had the following share options movements in the year ended December 31, 2017:

Year of issue   Exercise
price (£)
  At January
1, 2017
  Options
granted
  Options
exercised
  Options
forfeited
  Options
expired
  At December
31, 2017
  Expiry date  
2012   2.50 - 7.50     100,000                     100,000     June 1, 2022  
2013   2.00     100,000                     100,000     April 15, 2023  
2013   2.00     20,000                 (20,000 )       June 1, 2023 *
2013   2.00     160,000                     160,000     July 29, 2023  
2014   1.75     110,000                     110,000     May 15, 2024  
2014   1.75     63,333                 (13,333 )   50,000     May 15, 2024 *
2014   1.10 - 1.75     200,000         (133,333 )           66,667     August 6, 2018 ** 
2015   1.25     82,000                     82,000     January 29, 2025 *
2015   1.25     510,000                     510,000     January 29, 2025  
2016   2.00     260,000                     260,000     February 2, 2026  
2016   2.00     22,000                     22,000     February 2, 2026 *
2016   1.80     810,000                     810,000     August 3, 2026  
2016   1.89     300,000                     300,000     September 13, 2026  
2016   2.04     300,000                     300,000     September 16, 2026  
2017   1.32 - 1.525         4,656,828                 4,656,828     April 26, 2027  
Total       3,037,333     4,656,828     (133,333 )       (33,333 )   7,527,495        
                                                 
*    Options granted under the EMI Scheme.
**   Valued based on fair value of services received.
 

The Group had the following Restricted Share Units movements in the year ended December 31, 2017:

Year of issue   Exercise
price
(£)
  At January
1, 2017
  Units
granted
  Units
exercised
  Units
forfeited
  Units
expired
  At December
31, 2017
  Expiry date
2017           1,052,236                 1,052,236     April 26, 2027
Total           1,052,236                 1,052,236      
                                             

The average fair value at grant date, by year of grant and plan, of the exercisable options as per December 31, 2017 is presented in the below table.

Year of issue EMI Scheme (£)      Unapproved
Scheme (£)
 
    RSU (£)
2012 0.63 - 1.20              
2013 0.83       0.79 - 0.95          
2014 0.76       0.23 - 0.76          
2015 0.57       0.57          
2016 1.35       0.93 - 1.35          
2017       0.84       1.33  
                     

Outstanding and exercisable share options by scheme as of December 31, 2017:

Plan Outstanding   Exercisable   Weighted
average exercise
price in £ for
Outstanding
  Weighted
average exercise
price in £ for
Exercisable
Unapproved 7,313,473         773,333         1.50         1.64    
EMI 213,984         185,333         3.06         3.28    
Total 7,527,457         958,666         1.54         1.95    

As at December 31, 2017 there were no restricted share options exercisable (2016: nil) and there is no exercise price for restricted share options.

The options outstanding at December 31, 2017 had a weighted average remaining contractual life of 8.6 years (2016: 8.2 years). For 2016 and 2017, the number of options granted and expired and the weighted average exercise price of options were as follows:

         
    Number of
options
  Weighted average
exercise price
(£)
At January 1, 2016   1,792,000     1.78  
Options granted in 2016:        
Employees   1,002,000     1.92  
Directors   700,000     2.05  
Options exercised in the year   (46,666 )   1.12  
Options forfeited in the year   (150,001 )   1.24  
Options expired in the year   (260,000 )   2.46  
At December 31, 2016   3,037,333     1.87  
Exercisable at December 31, 2016   846,667     2.25  


    Number of
options
  Weighted average
exercise price
(£)
At January 1, 2017   3,037,333     1.87  
Options granted in 2017:        
Employees   3,150,846     1.32  
Directors   1,505,982     1.32  
Options exercised in the year   (133,333 )   1.10  
Options forfeited in the year        
Options expired in the year   (33,333 )   1.90  
At December 31, 2017   7,527,495     1.53  
Exercisable at December 31, 2017   797,333     2.04  
             

The following table shows the number of RSUs issued in 2017.  No RSUs were granted in 2016 and none of the RSUs granted in 2017 were forfeited, cancelled or vested in the year.  The fair value of each unvested RSU at grant date was £1.32.

    Number of
RSUs
At January 1, 2017    
Granted:    
Employees   705,841  
Directors   346,395  
At December 31, 2017   1,052,236  
       

The cost is amortized over the vesting period of the options on a straight-line basis. The expense for the Group during 2017 amounted to £2.3m and the balance of £0.6m is in relation to Verona Pharma Inc. and is held as an investment.

18. Trade and other payables

Group

  As of
December 31,
2016
  As of
December 31,
2017
  £'000s   £'000s
Trade payables 719     1,214  
Other payables 54     74  
Accruals 2,050     5,866  
Total trade and other payables 2,823     7,154  
           

As of December 31, 2016, accruals included £0.89 million related to expenses associated with the Global Offering which was fully paid during the year ended December 31, 2017.

Company

       
  As of
December 31,
2016
  As of
December 31,
2017
  £'000s   £'000s
Trade payables 719     1,213  
Other payables 54     74  
Amount due to group undertakings 461     1,044  
Accruals 1,916     5,729  
Total trade and other payables 3,150     8,060  
           

As of December 31, 2016, accruals included £0.89 million related to expenses associated with the Global Offering.  These were fully paid in 2017. Amounts due to subsidiary undertakings are unsecured, interest free and repayable on demand.

19. Assumed contingent obligation related to the business combination

Group and Company

The value of the assumed contingent obligation as of December 31, 2017 amounts to £875 thousand (2016: £802 thousand). The increase in value of the assumed contingent obligation during 2017 amounted to £73 thousand (2016: £208 thousand) and was recorded in finance expense as it related to the unwind of the discount on the liability and retranslation for changes in US$ exchange rates. Periodic re-measurement is triggered by changes in the probability of success. In 2016 the re-measurement was triggered by the success of the Company's Phase 2a clinical trial, presented in March 2016. The discount percentage applied is 12%. In 2017 there were no events that triggered re-measurement.

       
  2016   2017
  £'000s   £'000s
January 1 594     802  
Re-measurement of assumed contingent obligation 86      
Impact of changes in foreign exchange rates 37     (23 )
Unwinding of discount factor 85     96  
December 31 802     875  
           

The table below describes the reported change to the value of the liability during 2017 of £73 thousand (2016: £208 thousand) compared to what this number would be following the presented variations to the underlying assumptions (assuming the probability of success does not change):

  2016   2017
  £'000s   £'000s
Change in value of the assumed contingent obligation 208     73  
10% lower revenue assumption 202     72  
10% higher revenue assumption 215     73  
1% lower risk assumption 205     69  
1% higher risk assumption 211     76  
           

20. Warrants

Group and Company

Pursuant to the July 2016 Placement, on July 29, 2016 the Company issued 31,115,926 units to new and existing investors at the placing price of £1.4365 per unit. Each unit comprises one ordinary share and one warrant.

The warrant holders can subscribe for 0.4 of an ordinary share at a per share exercise price of 120% of the placing price or £1.7238. The warrant holders can opt for a cashless exercise of their warrants, whereby the warrant holders can choose to exchange the warrants held for reduced number of warrants exercisable at nil consideration. The reduced number of warrants is calculated based on a formula considering the share price and the exercise price of the warrants. The warrants are therefore classified as a derivative financial liability, since their exercise could result in a variable number of shares to be issued.

The warrants entitled the investors to subscribe for in aggregate a maximum of 12,446,370 shares. The warrants can be exercised on the earlier of the consummation of the Global Offering (being April 26, 2017) or the first anniversary of the grant, and the exercise period shall end on the fifth anniversary of the date of grant (being July 29, 2021).

The ordinary shares and warrants were accounted for as a compound financial instrument. The warrants component of the instrument issued at the July 2016 Placement was classified as a derivative financial liability and was initially measured at fair value of £9.0 million. The residual amount of proceeds totaling £35.7 million was recognized within equity. Subsequently the financial liability was re-measured at the reporting date at fair value through profit or loss.

The total of transaction costs the Company incurred for the above transactions amounted to £2.9 million of which £0.6 million was allocated to the warrants and the remaining £2.3 million was presented as a reduction to share premium, by reference to the proceeds allocated to each component. The amount assigned to the financial liability of the warrants was subsequently presented as finance expense in the Consolidated Statement of Comprehensive Income.

In the year ended 31 December 2017 warrants over 45,108 shares were forfeited (2016: nil).

The table below presents the assumptions in applying the Black-Scholes model to determine the fair value of the warrants.

  As of
December 31,
2016
  As of 
December 31,
2017
Shares available to be issued under warrants
  12,446,370       12,401,262  
Exercise price £ 1.7238     £ 1.7238  
Risk-free interest rate   0.088 %     0.420 %
Expected term to exercise   2.43 years       1.79 years  
Annualized volatility   73.53 %     47.35 %
Dividend rate   0.00 %     0.00 %
               

The figures disclosed above relating to the issue of the shares and warrants have been retrospectively adjusted to reflect the 50-for-1 share consolidation as described in note 1. The original number of units issued to new and existing investors was 1,555,796,345 units at a placing price of 2.873 pence per unit and an exercise price of 3.4476 pence per share. This entitled the investors to subscribe for in aggregate a maximum of 622,318,538 shares.

As per the reporting date the Company updated the underlying assumptions and calculated a fair value of these warrants amounting to £1.3 million. The variance of £6.7 million is recorded as finance income in the Consolidated Statement of Comprehensive Income.

       
  Derivative
financial
instrument
  Derivative
financial
instrument
  2016   2017
  £'000s   £'000s
At January 1     7,923  
On issuance of shares 8,991      
Fair value adjustments recognized in profit or loss (1,068 )   (6,650 )
At December 31 7,923     1,273  
           

For the amount recognized at December 31, 2017, the effect when some of these underlying parameters would deviate up or down is presented in the below table.

  Volatility
(up / down
10% pts)
  Time to
maturity
(up / down
6 months)
  £’000s   £’000s
Variable up 1,921     1,677  
Base case, reported fair value 1,273     1,273  
Variable down 694     843  
           

21. Financial commitments

Group

As of December 31, 2017, the Group was committed to making the following payments under non-cancellable operating leases related to its facilities.

       
  Land and
Buildings
  Land and
Buildings
  2016   2017
  £'000s   £'000s
Operating lease obligations:      
Within one year 270     291  
Between one and five years     277  
Total 270     568  
           

Company

As of December 31, 2017, the Company was committed to making the following payments under non-cancellable operating leases related to its facilities.

       
  Land and
Buildings
  Land and
Buildings
  2016   2017
  £'000s   £'000s
Operating lease obligations:      
Within one year 249     263  
Between one and five years     277  
Total 249     540  
           

22. Related parties transactions and other shareholder matters

(i)   Related party transactions

The Directors have authority and responsibility for planning, directing and controlling the activities of the Group. Remuneration of Directors is disclosed in the Directors' Remuneration Report.

(ii)   Other shareholder matters

The Company has entered into the following arrangements with parties who are significant shareholders of the Company, though they are not classed as related parties.

The Company entered into relationship agreements with Vivo Capital Fund VIII ("Vivo Capital"), OrbiMed Private Investments VI L.P. ("OrbiMed"), Abingworth Bioventures VI L.P. ("Abingworth"), and Arix Bioscience plc ("Arix") and Arthurian Life Sciences SPV GP Limited, ("Arthurian"). As agreed in these relationship agreements, the above parties invested in the Company as part of the July 2016 Placement, and the Company agreed to appoint representatives designated by Vivo Capital, OrbiMed, Abingworth, and Arix and Arthurian, to the board of directors, who are Dr. Mahendra Shah, Mr. Rishi Gupta, Dr. Andrew Sinclair and Dr. Ken Cunningham respectively.

The appointment rights within the relationship agreement with Arix and Arthurian terminated on closing of the Global Offering on April 26, 2017.  Dr Cunningham has agreed to continue to serve on the Company's board of directors as an independent director. The respective appointment rights under the remaining relationship agreements will automatically terminate upon (i) Vivo Capital, OrbiMed or Abingworth (or any of their associates), as applicable, ceasing to beneficially hold 6.5% of the issued ordinary shares, or (ii) the ordinary shares ceasing to be admitted to AIM.

The Company also entered into management rights agreements with Novo A/S and Aisling Capital under which Novo A/S and Aisling Capital were entitled to appoint an observer to the Board. The appointment rights within the management rights agreements terminated on closing of the Global Offering on April 26, 2017.

Primary Logo